Non-Disclosure Agreements – also called Confidentiality Agreements - have a place in many business transactions, yet few business owners use them on a regular basis. What is a non-disclosure agreement, and what’s so important about it?

Confidential Information

Businesses have confidential information of all sorts - names and contact information for clients, pricing information from suppliers, marketing plans for the upcoming quarter. Those with employees have human resource files with very sensitive information about their workers.

In the contracts that I draft for clients, the definition of confidential information often includes:

• Business and marketing strategies, plans, and budgets
• Financial records, loan documents, and accounts payable/receivable
• Names and contact information for clients, suppliers, and business partners
• Product costs and specifications, sales material or literature, inventories, and distribution methods
• Contracts, trade secrets, processes, and procedures
• Data, designs, drawings, work sheets, blueprints, concepts, samples, and inventions

That’s a lot of information. But it’s meant to cover all information that you, as a business owner, need to remain confidential.

Sharing Confidential Information

In the course of operating your business, however, there will be many occasions that you need to share this information. When you get an order, you need to inform your staff so they can deliver the products or services that your client just purchased. Your HR team and outside payroll and HR partners need the confidential information that your employees give you when they are hired. Your independent contractors need to know about your products and services, your pricing, and the methods you use to fulfill your orders and commitments. In short, confidential information is not necessarily “secret.”

Who is being restricted?

An NDA restricts one (unilateral) or both (bilateral) parties from disclosing the confidential information for any reason other than what is required for the business deal. If you are selling your business and must disclose your financial records to the potential buyer, that buyer may use your confidential records for its due diligence in determining if your purchase price is fair. But they cannot – if precluded by an NDA – share that financial information with your competitors, for example. Likewise, a confidentiality agreement with your employees may allow them to use your proprietary information to perform their duties, but not allow them to share it with any subsequent employers or outside third parties.

Often both parties are obligated to keep each other’s information private. Perhaps you are hiring a business consultant to work with your management team. The consultant will be prohibited from revealing any private information about your company and its employees, and you might be prohibited from using the consultant’s proprietary materials for any reason other than for working with your management team. 

What should be included? 

Arizona courts, and I assume courts in every state, recognize that a business has a legitimate interest in maintaining the confidentiality of its private information. For that reason, NDAs are generally held to be legally enforceable. 

But don’t make the terms of your NDA so all-encompassing that you risk it being deemed overbroad. Be as specific as you can regarding the:

• purpose of the NDA
• categories of confidential information that will be disclosed by one or both parties
• permitted uses for the confidential information
• time frame that the confidential information can be used
• time frame for either party to maintain the confidentiality of the information
• remedies for breaches

As an example, for the sale of your business, you may permit the potential buyer to use your confidential financial records only for its due diligence process, but not at any time after the sale has completed. On the other hand, if you hire a computer security consultant, you may permit them access to your confidential information on your systems indefinitely, or at least until your contract with them terminates.

If the confidential information that you share includes trade secrets, be sure to treat this information differently, by providing for ongoing confidentiality, at least as long as your company maintains its secrecy.

What happens if someone violates the terms?

Having your confidential information shared improperly can cause serious harm. For that reason, courts allow – and your NDA should include – provisions for an injunction to prevent future disclosure (if you believe the other party is going to violate the confidentiality) and for monetary damages to compensate for the financial harm the business may suffer.

How do I use a confidentiality agreement?

In many circumstances, a stand-alone NDA is appropriate. But confidentiality provisions are found in many other types of agreements where limitations on the use of confidential information are needed. Non-disclosure provisions can be used in employment and independent contractor agreements, business or asset purchase or merger agreements, consulting agreements, loan documents, severance and employment separation agreements, to name a few.

If you need to protect your company’s confidential information from unauthorized disclosure, schedule an appointment so we can discuss your specific situation, and make sure your company is protected with an NDA customized for your needs.

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
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