There are times when a business or entrepreneur would benefit from sharing confidential and valuable information with a third party. Yet, some business owners and entrepreneurs hesitate because they are concerned about what the third party will do with the information. They do not want the confidential information shared with others or used by the third party for that party’s own benefit. The law recognizes the important business interest of keeping certain information confidential and the need to consult with third parties in order to make a business more profitable or to allow a new idea to be implemented. A confidentiality or nondisclosure agreement can allow the business or entrepreneur to share information with a third party and be confident that it the information will remain classified.
When to Use a Confidentiality Agreement or Nondisclosure Agreement
Confidentiality and nondisclosure agreements can be used in many business situations. Some common situations where these types of agreements may be useful include when:
- You are soliciting investors, partners or contractors for an invention or new business idea;
- You are negotiating with a potential buyer of your business, invention or idea; or
- A contractor or employee will have access to confidential data that could be financially detrimental to your business should it be disclosed.
What to Include in a Confidentiality or Nondisclosure Agreement
There are two types of confidentiality or nondisclosure agreements. One type is called a unilateral agreement where the party presenting the agreement is requesting that the other party keep the information confidential but does not require itself to maintain confidentiality. The other type is called a mutual agreement where both sides agree to maintain confidentiality.
In order to enforce a confidentiality or nondisclosure agreement it is important that the agreement be in writing. When you are drafting your agreement, it is useful to consider whether the following elements should be included:
- A description of the confidential information so that both parties understand the scope of the agreement;
- A description of why the confidential information is being shared in this case and how it may be used. Generally, parties receiving confidential information must use it only for the limited purpose of the contract and not in any other way;
- An agreement by the parties that the information will not be disclosed during the term of the contract; and
- Other provisions as are necessary to the needs of the parties to the confidentiality or nondisclosure agreement.
Most confidentiality and nondisclosure agreements are in writing, dated and signed by both parties. While state law may allow for oral contracts, it is important for business contracts to be in writing in case of a future dispute. It is particularly important in narrowly drafted confidentiality agreements.
Confidentiality and nondisclosure agreements fulfill an important business objective. They allow businesses to obtain financing, outsource certain jobs to experts and to pursue selling their business with the security that important business secrets will remain confidential and will not be used to compete with their own business interests.
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