“Good fences make good neighbors.” In the modern business environment, few commodities are more valuable than data, and setting boundaries around the data you collect and use is critical to your business. Data is sold not only for marketing and immediate monetary purposes, but also for pirating proprietary information that you need to protect. While a business confidentiality agreement cannot prevent someone from disclosing your information without authorization, a well-drafted and properly executed document can provide a strong disincentive against such unauthorized disclosure.
A business confidentiality agreement is an important mechanism by which you can protect your proprietary information from external threats, regardless of your industry. Originally most common in the technology sector, these documents are critical to any business with information that could be for sale. They set a foundation of trust between the parties involved in a business transaction.
Why a Business Confidentiality Agreement?
A business confidentiality agreement is the one piece of a negotiation that exists exclusively to define what information you exchange is confidential and to provide the boundaries for sharing and using that information.
These agreements clearly identify exactly what you need to protect and how that information can be shared and used.
With a properly executed business confidentiality agreement, you can mitigate the risk of leaks that could result in financial or intellectual property losses and lengthy legal proceedings.
A breach of a business confidentiality agreement can be remedied through the enforcement mechanisms included in the document itself. Any ambiguity in your definitions or methods of managing disputes can create serious complications. Further, any conflict with laws or regulations related to your industry or non-disclosure in general can leave you without any method of enforcement.
When properly drafted and executed, a business confidentiality agreement allows you to seek damages and injunctions as remedies. It is critical that your agreements with any third party (e.g., outside entities, employees) are properly scoped and generally reasonable so that courts will not find that the restrictions are overly burdensome on the signor. For example, a restriction that negatively impacts an employee’s ability to change jobs or prevents another business from its typical operations will be more likely to fail than one that takes those factors into consideration upon drafting.
What Should Be in a Business Confidentiality Agreement?
When determining how to structure a business confidentiality agreement, you need to consider how many parties will be involved. Structures for these agreements can be:
- Unilateral
- Bilateral
- Multilateral
Before deciding which structure to use, you also need to consider whether an outside entity with multiple employees counts as one party or if each employee counts as a separate party.
Once the structure of the agreement is set, it is important that the document include elements that clearly outline the terms, from defining the terms themselves to how and for how long the agreement is enforced. This includes ensuring the following are present:
- Definitions of parties to the agreement and the specific information that is considered confidential.
- Purpose of the business confidentiality agreement.
- Scope of the agreement includes an outline of permitted use of the otherwise confidential information.
- Scope of what is not considered confidential information to further reduce ambiguity and provide greater protection.
- Duration of the agreement, so all parties know whether there is a fixed term of confidentiality or indefinite protection.
- Enforcement mechanisms in case of a breach, including legal remedies.
- Identification of the jurisdiction that will evaluate any dispute so all parties know the applicable laws and regulations.
- Signatures from both parties that remain valid if a signatory departs.
Above all, precision matters when drafting and executing so the disincentive operates as intended, parties are clear as to what is confidential and for how long, and courts will uphold the agreement in case of a breach.
Details may include information about privacy and records requirements, along with the use of digital intellectual property. With today’s hybrid work environment across sectors, the agreement may need to include terms that cover permissible use of specific hardware or software. Further, transport of documents containing information from a home office to a headquarters may require terms to outline proper security in transit.
How Do You Draft a Business Confidentiality Agreement?
When drafting a business confidentiality agreement, it is critical to ensure all of the proper nuances are addressed through careful crafting based on the specific information that is to be protected. The first step, therefore, is to identify exactly what type of information you need to protect. Examples of information often protected in a business confidentiality agreement are data surrounding finances, trade secrets, proprietary technology, or customer lists.
After you have identified the type of information you are seeking to protect, you will be able to prevent avoidable breaches due to ambiguity and will be better positioned, in the case of a breach, because you have avoided excessive restrictions on a party to the agreement. The agreement must then be precise and clear in providing the terms applied in handling the protected information, including use limitations.
While in some circumstances, indefinite duration is appropriate, most agreements must include a reasonable time limit on the provisions.
It is important to negotiate the agreement by finding the appropriate balance between enforceability and feasibility. You do not want to make the agreement so restrictive that the other party cannot perform necessary actions in support of your business due to the restrictions you put in place. Liability is also a consideration, as you need to be sure there is clarity regarding the enforcement of the terms, which may include financial damages or injunctions.
How Can I Be Sure My Agreement Will Help?
When entering into a business confidentiality agreement, all parties must take care to review the definitions and terms and refine them based on the specific information to be protected and its intended use. When you have a carefully crafted and properly executed business confidentiality agreement in place, you can rest assured that you have built a foundation for trust in your transaction. Most importantly, you can proceed with your necessary transactions with the comfort that you are protecting your information. Contact experienced Houston business lawyers at Feldman & Feldman today to ensure your agreement protects your business and your staff.