When is a Confidentiality Agreement a Good Idea?

December 31st, 2015

Many business discussions begin with an interesting new idea. Whether it’s about a possible merger, a new way to run a process, or a new product, new ideas are what keep businesses moving forward. People and companies often start discussing new opportunities and ideas before they have been formally recorded or granted intellectual property protection, which leads to a great amount of exposure when sharing and discussing these ideas. Everyday, people and businesses are talking about their ideas with others in order to grow and develop their businesses. Confidentiality agreements are a necessary part of these discussions to ensure the long-term protection of high-value business information and insights.

Confidentiality and Nondisclosure Agreements, or CNDAs, are relatively commonplace for large corporations and businesses. Smaller businesses and individuals may be less familiar with these types of agreements. Regardless of the size and experience of your business, you should always have a signed CNDA in hand before beginning any important business discussions. Some people think it is strange to insist on signing a contract before even starting discussions with another party, but it is actually very beneficial for both sides. A well drafted CNDA will not only protect a list of items at the core of discussions defined as confidential, but will also protect items like business policies or product specifications that you may not otherwise think to include on the list. Even if these additional items don’t seem like they will come up in discussions, having this protection in place makes it possible for both parties to have open and well-rounded discussions without needing to pause and think about each piece of information they are sharing.

Small and independent businesses often work with CNDAs in three main situations: when they are having general business discussions with another company (business to business); when they are attempting to attract major investors, sell their business, or market a new invention to another company (inventor to business); and when they are bringing on a new employee (business to employee). Each of these situations will demand slightly different treatment in a CNDA, but there are many common themes or clauses you should be looking for in any CNDA. First, read the definition of confidential information very carefully—make sure you understand what information is and is not covered by the agreement for both parties. Even if your information is protected, you need to understand your own obligations after learning potentially confidential information from the other party. Second, find the time frame of the agreement. These agreements can last for years or even indefinitely, so don’t let that scare you away as long as you are comfortable and confident in the rest of the agreement. Third, read through what happens in the event of a breach. The nature of confidential information is such that it can be very hard to undo damage once the information has been released. Make sure that damages clauses are written broadly and allow you to recover damages for any harm that could come to your business due to a release of that information. Keep in mind that this clause will most likely be mutual, so take great care to avoid any breach of the agreement terms, or you may be stuck with the bill for all of the losses and expenses of the other party.

The ideas discussed above are very important in understanding the agreement at a high level, but there are many other underlying complexities that can influence a CNDA. If you are considering entering into a Confidentiality and Nondisclosure Agreement or are unsure whether a CNDA is necessary, you should work with an attorney to assess the situation for your business and to structure a contract to your unique situation. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.