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Confidentiality
Confidentiality refers to an agreement that one or more parties to a contract will not disclose certain specified information to third parties. In some instances, the parties’ confidentiality accord is documented in one clause in a larger contract. In other cases, an entire contract sets forth the parties’ agreement to maintain confidentiality. Parties have many reasons to protect the confidentiality of information. Below, we’ll list and discuss just a few examples where confidentiality clauses or agreements are used.
- Settlements – in many disputed or litigated cases, parties settle their differences and one party pays money to the other party. Examples include medical malpractice, automobile accidents, and business disputes. The parties paying the funds typically do not admit liability, but want to “buy their peace.” The party paying does not want to encourage additional litigation with other parties by having a large settlement payment publicized, and therefore conditions payment upon agreement of a confidentiality provision.
- Employment agreements – many employers disclose proprietary information regarding their products, processes, and customers to their employees. To protect their business employers, as a condition of employment, require employees to sign an agreement (sometimes called a “non-disclosure agreement” or “NDA”) promising to protect the secrecy of this information.
- Sharing information with a buyer or investor – before a buyer or large investor will commit to investing capital, they naturally need to review the books of the business. However, this information is not available to the public, and if it were it might put the business at a competitive disadvantage. Further, the potential investor or buyer is sometimes a competitor. Thus, before the sensitive information is revealed, the parties enter into a confidentiality agreement.
Frequently Asked Questions
What’s the difference between an NDA and a confidentiality clause?
There’s no real legal difference in effect, just in packaging. A confidentiality clause sits inside a larger agreement and covers information shared under that deal. An NDA is a standalone contract whose whole purpose is protecting information, often signed before the parties negotiate anything else. Both create the same kind of duty not to disclose.
How long should confidentiality obligations last?
It depends on how long the information stays valuable. Many commercial agreements set a fixed term of a few years after the deal ends, while trade secrets are often protected for as long as they remain secret. Settlement confidentiality is frequently permanent. Pick a term deliberately and say it plainly, because silence invites arguments later.
What information should a confidentiality clause exclude?
Standard carve-outs cover information that’s already public through no fault of the receiving party, information the recipient already had, information independently developed without using what was disclosed, and information lawfully received from a third party. Most clauses also allow disclosure required by law or court order, usually with notice to the other party first.
