Confidentiality agreement:a step well worth taking

A confidentiality agreement is smart business! Your ideas and your unique ways of doing business can be vital to you….just like money.

A “confidentiality” agreement, sometimes referred to as a non-disclosure agreement, allows your company to have viable dialog with suppliers, advisors, and even existing and prospective customers, with the clear understanding that they will not divulge your firm’s proprietary information (like trade secrets) to anyone else without your permission.

A prudent company will have a confidentiality agreement with each employee. Should a competitor lure away an employee, the former employee is still bound by the confidentiality agreement not to divulge your company’s unique business methods and ideas.

A confidentiality agreement is a legal contract. It can be as short as the “catch all” format on the back of visitor badges or on the sign-in forms used at high-tech Silicon Valley companies. A more specific, detailed confidentiality agreement can be used in discussing new ideas and/or yet-to-be-released products or services. Some other situations a firm should use a confidentiality agreement include the following:

* You have developed a prototype of a new product. Before you decide whether to go forward, you need cost estimates from several suppliers, and you don’t want them telling anyone about your new product. When suppliers sign your confidentiality agreement that describes your new product, they clearly understand that they could be liable for financial damages if they reveal your new product details to others.

* You have developed a new business product or service that you want to discuss with possible investors, but you don’t want them to use your ideas to develop the product or service on their own.

* Your company is for sale and a prospective buyer wants detailed financial and operational information. Obviously, if the sale doesn’t happen, you don’t want the prospective buyer to use your ideas and know-how or to disclose the information to others.

* You plan to bid on a city, township, county, state, or even federal project, but you need outside advice to help your firm prepare your proposed documents. The confidentiality agreement instructs the outsider not to share your pricing and proposal information with anyone.

The usual language of a confidentially agreement or non-disclosure agreement (NDA) requires the person signing the confidentially agreement with a firm not to divulge trade secrets or other proprietary information to anyone outside the company. Legally, if an individual or a company can prove a violation of a written confidentially agreement, the individual or company may be entitled to injunctive relief, damages, and compensation for lost profits.

A confidentiality agreement will cover whatever the individual or firm (the “owner” of the information) determines is confidential, be it business, technological, or personal information. A typical wording might be “All _____(Company’s) confidential ideas, designs, data, and other information, disclosed to ______ shall be held in strictest confidence. Designation by _____(Company) shall be conclusive but not required to be “confidential.”

As noted, employers often require new employees to sign a confidentiality agreement as a condition of employment. A regional restaurant chain even has one printed on the new employee application form to keep their unique recipes a secret. Employers can enforce a confidentiality agreement in an employment contract or even in an employee handbook.

How enforceable are they?

There has not been a significant increase in lawsuits enforcing the NDAs, which may imply that people are abiding by them (or companies are not enforcing them).

Based on case law to date, restrictive covenants, including confidentiality agreements or NDAs, are enforceable if they are reasonable in protecting a competitive interest, and reasonable in scope, duration, and geography. It must promote a legitimate business interest; an agreement covering general knowledge or skills is not enforceable.

Although the use of a confidentiality or NDA varies depending on the nature of the industry, a firm should be able to show an economic hardship if the agreement is violated.

These agreements are not foolproof. The ability to enforce them depends on the value of information in question, how the agreement was violated, and if the information was available from other sources.

Typically, a firm will utilize several formats depending on how the agreement is to be used, what’s valuable to the firm and what’s to be covered. The agreement should identify all parties to the agreement and include a starting date and length of non-disclosure.

The familiar expression”it’s too late to close the barn doors after the horse has escaped” certainly applies to having a confidentiality or non-disclosure agreement as a relatively easy, useful and effective way to have employees and others individuals keep your trade secrets, ideas, special operating methods, and other proprietary information CONFIDENTIAL.

Kathleen Shannon is a Traverse City attorney specializing in commercial law, small and mid-sized business law, wills and estate planning, and real estate law. She is also an adjunct professor teaching law and related courses at both the graduate and undergraduate level for several Michigan universities. This article is for information only and is not intended as legal advice; (231) 946-4600; shannon@torchlake.com.BN

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