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What is a confidentiality agreement and when do I need one?

What is a confidentiality agreement and when do I need one?

Posted 09 June 2022 by Daniel Kieltyka

Categories: IP Dispute Resolution & Litigation, Legal Project Management & Fixed Fees

A confidentiality agreement (sometimes also called a non-disclosure agreement or NDA) is a commercial contract, made between two or more parties, which protects confidential, sensitive or proprietary information from public disclosure. This article will detail the kind of information a confidentiality agreement protects, what confidentiality agreements typically include, and when you should consider using one.

What kind of information is protected by a confidentiality agreement?

A confidentiality agreement protects information which is confidential – in other words, information which is not publicly known or available. Provided that it is confidential, there is almost no limitation to the kind of information which can be protected by a confidentiality agreement. Any information which is of commercial value to the discloser, and which is not publicly known, could form the subject of such an agreement. Some common examples of confidential information which a confidentiality agreement might be used to protect include:

  1. business processes (for example, how a business manufactures its products);
  2. business strategies (for example, how a business plans to promote its products);
  3. designs and specifications (for example, manufacturing specifications for a new product);
  4. formulas and recipes (for example, the ingredients which go into a food or beverage product);
  5. customer lists; and/or
  6. supplier lists.

What does a confidentiality agreement typically include?

A confidentiality agreement, like any other contract, should be tailored to meet the needs of the parties which are entering into it. Key clauses in confidentiality agreements include clauses which:

1) Identify the confidential information

  • This must be specific enough to properly identify the confidential information, otherwise the confidentiality agreement may not be enforceable. However, it also should not disclose the confidential information itself, so this can be a delicate balancing act.

2) Set out clearly how the recipient can and cannot use the confidential information

  • Typically, a confidentiality agreement will allow the recipient to use the confidential information only for the purposes for which it was disclosed (for example, so the parties can discuss whether they want to enter into a commercial relationship, or for the manufacture of certain products).
  • Importantly, a confidentiality agreement should clearly set out that the recipient must not disclose the confidential information publicly or use it for reasons other than the permitted uses set out in the confidentiality agreement.

3) Detail the consequences for a breach

  • A confidentiality agreement should identify the remedies available to the discloser if the recipient discloses or uses the confidential information inappropriately. These remedies typically include injunctive relief (preventing the recipient from making further use of the confidential information) and financial compensation.

When should you use a confidentiality agreement?

You should use a confidentiality agreement whenever you will be disclosing confidential, sensitive or proprietary information to a third party (even if it is a commercial partner which you have a good relationship with). Some non-exhaustive common situations in which you should consider using a confidentiality agreement include:

  1. when you are seeking to commercialise a new invention and are entering into discussions with a third party (such as a manufacturer, investor or financier);
  2. when you are selling your business and are entering into discussions with a potential purchaser;
  3. when you engaging an external consulting or marketing agency; and
  4. when a new employee or contractor is being brought into your business.

NOTE: One situation where it is essential to use a confidentiality agreement is where you are seeking to commercialise a new invention which might be the subject of a patent or design application in the future. In order to be eligible for patent or registered design protection, the invention must be kept ‘novel’ before the filing date (known as the ‘priority date’). This novelty can be lost if the invention is disclosed without appropriate obligations in place. For further information about the novelty requirements for a patent application, see our article ‘Can I get a patent for my invention?’.

NOTE: While it is possible to have your employees enter into a separate confidentiality agreement, generally the employment agreement will itself deal with an employee’s confidentiality obligations.

Key takeaways

Your confidential information, whether it takes the form of a customer list or manufacturing specifications, is a valuable asset worth protecting. There are times, however, when you may need to disclose that information to third parties in order to use and commercialise your confidential information. A properly drafted confidentiality agreement can provide you reassurance that your sensitive and valuable information will be protected in such cases.

Actuate IP has a team of intellectual property experts who can assist with Protection of Confidential Information. If you require assistance, you can contact our team on 1300 851 138 or info@actuateip.com.au and our friendly staff will make sure you are directed to the best person to assist you with your matter.

FAQs

What is a confidentiality agreement used for?

A confidentiality agreement is used to protect confidential, sensitive or proprietary information from public disclosure. It can protect business processes, customer lists, manufacturing specifications, and more.

What terms need to be included in a confidentiality agreement?

A confidentiality agreement typically includes clauses which identify the protected information, set out clearly how the confidential information can and cannot be used by the recipient, and detail what happens if the information is disclosed or used inappropriately.

What are some situations in which a confidentially agreement would be used?

Confidentiality agreements are typically used where an entity is seeking to commercialise a new invention, selling a business, engaging an external consulting or marketing agency, and more.