Confidentiality or Nondisclosure Agreements

What are confidentiality or nondisclosure agreements?

Confidentiality or nondisclosure agreements are either separate agreements or provisions in another agreement, such as an employment agreement, in which a person agrees to maintain the confidentiality and not to personally use or otherwise disclose any proprietary information he or she acquires during the course of or after his or her dealings with the business.

TIP: Such agreements are also found in buy-sell agreements to prevent the seller from using or disclosing information about the business.

When should these agreements be used?

Generally, you want all employees to sign a confidentiality agreement. Independent contractors and consultants should also be required to sign such an agreement. If you purchase a business, have the seller sign a confidentiality agreement. Others you may want to sign such an agreement include suppliers and subcontractors.

What if someone refuses to sign a confidentiality agreement?

If an employee, independent contractor, consultant or seller of a business refuses to sign a confidentiality agreement, seriously consider not hiring or purchasing the business.

In some cases, you may want to find out what the objection to signing the agreement is and modify the agreement to overcome the objections.

How broad should the agreement be?

When dealing with an employee, independent contractor, consultant or seller of a business, the agreement should be fairly broad and cover all confidential information that is or may be considered a trade secret. The level of detail and specificity of the agreement will vary.

Can I prohibit someone forever from disclosing or using trade secret information?

Ordinarily, you can only bar someone from using or disclosing trade secret information for a "reasonable" time. What is reasonable will vary case-by-case. A general rule of thumb is that you can only bar someone from using or disclosing confidential information for a period of time that it would take him or her to independently acquire the information.

Can I prohibit someone from disclosing or using trade secret information any place in the world?

Ordinarily, you can only prohibit someone from disclosing or using trade secret information in a geographical area where you do business. If you are a "national" business doing business in all 50 states, you may be able to prevent use or disclosure nationwide. On the other hand, if you are a local business with a local customer base, your geographical limit is much smaller, e.g., a city, county or state.

What if I extend my limit beyond what is considered by a court to be a reasonable time and place?

It depends on the state law. Most states apply what is called the "blue pencil" rule. States applying the blue pencil rule will enforce the agreement according to what the court determines is a reasonable time and geographical area. Other states will invalidate the confidentiality agreement entirely if the courts find that the time and/or place restrictions in the agreement are unreasonable.

TIP: Consult with an attorney regarding the laws in your state.

Should I hire an attorney to prepare a confidentiality agreement?

You can find confidentiality and nondisclosure agreements or provisions in business and legal publications. However, keep in mind that these are sample provisions that may or may not meet your particular needs and may or may not meet the legal requirements in your state.

You also need to keep in mind that ultimately the only way to enforce these agreements is by filing a lawsuit. A poorly drafted or unsuitable agreement may result in a court refusing to enforce the agreement.

TIP: Consider consulting with an attorney as these agreements touch on other legal issues beyond trade secrets law, such as contract and employment law.