What is a confidentiality agreement?
A confidentiality agreement (also sometimes called a non-disclosure agreement) is a contract between individuals or businesses to promise not to disclose certain agreed information.
They are used to protect sensitive information and ideas that are not yet in the public domain. They are often used to protect trade secrets and business ideas, among other things, and can cover and protect a wide range of information: verbal, written, pictures, ideas and designs. They are not limited to protecting discussions only.
There are different types of confidentiality agreements
1. Mutual or Two-way. This is where both parties receive information and agree to keep it secret.
2. Unilateral or One-way. This is where only one person receives confidential information and agrees to keep it secret.
When you need a confidentiality agreement
You need a confidentiality agreement anytime you have a business idea, concept or other valuable information you want kept confidential, and that you do not want others to use or misuse.
Generally, if you show your idea, material or information to anyone without a confidentiality agreement in place, it is then considered to be out in the public domain, and it is no longer protected. It also means you cannot register it for protection.
If you don’t have a confidentiality agreement in place when you decide to show your invention, idea or process to a potential investor or licensee (even just to determine if there is enough interest), Intellectual Property Australia (IP Australia) will deem it no longer new or eligible to be patented.
Want more articles like this? Check out the processes section.
A practical example
You have a great idea for a new business. Let’s say you’re developing a Back to the Future movie-style Hover Board (skateboard without wheels). You want to speak to a designer about how much it would cost to create.
You should have them agree to a confidentiality agreement before you start any discussions, or your idea is no longer able to be protected.
Even if the designer does not use the concept for themselves, it is still considered to be in the public domain if you do not have a confidentiality agreement in place.
You then decide to set up a website to sell the Hover Boards while they’re being designed and developed. You should have your website developer sign a confidentiality agreement before starting your website to protect both your Hover Board concept and your website design.
Any potential investors or funders you speak to should also be required to agree to a confidential arrangement.
You also may want to consider having your contractors or employees sign a confidentiality agreement when they are working for you. This can protect your client lists, your trade secrets and business processes, as well as your designs and other materials.
How do I know what to include?
- The most important item: ensure the other person is aware that you are providing confidential information and that it is to be kept confidential. If you don’t tell people the information is confidential (and that this is the only basis you are providing the information), they can do whatever they want with it.
- You need to clearly define the ‘Confidential Information’. The description must not be too broad and include information which may be in the public domain, and not too narrow that it does not include information you may need during discussions.
- You need to clearly define the purpose for which the confidential information is being provided. It can only be used for that specific purpose so it is critical to ensure it is well explained.
- The information must actually be confidential in the first place. You cannot ask someone to keep something confidential if it is not. If it is already in the public domain, it is too late. No matter what you make someone sign, the information must be confidential in the first place.
Do confidentiality agreements really work? What do they protect?
There is controversy in Australia about whether confidentiality agreements are effective.
In 2008, a breach of confidentiality cost Sears 25 million dollars, and in January 2013, Hallmark successfully sued one of its former employees for sharing trade secrets with a competitor. So they do work if well drafted and used in the right circumstances.
A confidentiality agreement does not necessarily compensate you if your idea or design is leaked into the public domain. If information is used or made public, you may claim for losses that flow from the breach, but in many cases, the compensation may not be equivalent to the loss of the idea or information. You need to ensure that your agreement is strong and makes clear the potential losses that may be suffered so that you are adequately compensated.
What if they won’t sign my confidentiality agreement?
Don’t deal with people who are not respectful of your right to protect your trade secret. Walk away and don’t divulge any information.
As you can see, confidentiality agreements are important. Go to every meeting armed with a few, just in case.
What are your thoughts on confidentiality agreements? Do you have any questions?