Should We Routinely Sign Confidentiality Agreements?

Short answer “NO”. As with any legal document, have your attorney look over each and every Confidentiality Agreement before you let anyone sign it. If a Confidentiality Agreement is presented as a surprise when you enter someone’s facility for a planned meeting, end the meeting immediately. Better to postpone or cancel the meeting than to enter into an agreement which will cause long-term problems later. Planning for any meeting must include an exchange of ideas regarding how confidential information will be treated. You do yourself a favor by asking in advance whether any documents need to be signed before you start the meeting. If there is any chance you will be disclosing any confidential information, it is wise to be proactive by sending the other participants the agreement you want them to sign, well in advance of the meeting date. This is, of course, an agreement you have had prepared by your attorney.


At least, ask if any of the other participants will be asking you to sign a confidentiality agreement, and if so, to forward you a copy in time for your lawyer to review it, and get details worked out, before the meeting.


Long answer, there is no such thing as a “standard” confidentiality agreement. These agreements are also known as “Non-Disclosure Agreements” and “Secrecy Agreements”. All such names generally pertain to an agreement where at least one party agrees to hold in confidence certain information which will be, or has been, received from another party.


Not long ago, I reviewed a Confidentiality Agreement for a client who was beginning discussions with a prospective customer to sell them certain customized machines. Their prospective customer asked our client to sign their “standard” confidentiality agreement. Among other things, that agreement said that any intellectual property which might be developed by our client in the process of responding to the prospective customer’s needs, that intellectual property belonged to, was owned by, was transferred to, the customer purchasing the machines. Namely, for the price of the machines, the customer was claiming ownership of not only the expertise to design and build the machines, to set them up and make them run, they were also claiming all rights in any new intellectual property in those machines. The problems here were many.


Our client was giving up the right to sell that type of machine to any other customer, even if the prospective customer did not buy any machines.


The customer would have the right to shop around for the lowest bidder, using our client’s specifications, once they received the specifications from our client.


The prospective customer would have the right to sell that intellectual property to anyone of their choosing, thus gaining further financial advantage from our client’s ingenuity.


In a similar case, the customer’s confidentiality agreement said the customer had the “right to use” any new intellectual property. In this case, the customer would have the right to shop around for the lowest bidder, using our client’s specifications, once they received our client’s price quote.


These are probably the most egregious situations I have seen recently. Confidentiality Agreements should contain certain rather “standard” terms. Some agreements omit one or more essential terms. Some agreements present one or more standard terms in modified format which can make those terms unacceptable. Many such agreements also contain other items, for example the above-recited intellectual property-transfer terms, which the party being asked to sign the agreement would not agree to if they understood what they were being asked to agree to.


There are two basic problems here.


1. If standard terms are missing, the obligations agreed to may be unclear or otherwise defective under the law, or terms which would be unwise to agree to, whereby a court may interpret the agreement different from the original intent of the parties, or a court may find the agreement totally invalid, or the court may impose its own content with respect to the missing terms, or an unwise term may impose an unintended consequence, any of which may be different from what a signing party initially intended.


2. If non-standard terms are used, the signing party may belatedly discover that they agreed to something they wish they had not agreed to.




So what types of problems can come up in a Confidentiality Agreement that cannot be corrected later? Let me list a few.


a. The parties are not properly identified, such that an offending party can later say they are not bound by the agreement, or a party critical to the business deal has not been included in the agreement.


b. The subject matter to be discussed between the parties has not been clearly described and limited. That leaves the door open for one party to allege breach of the agreement where the activity being complained about is substantially different from the expectations of the party being accused.


c. The agreement does not provide any mechanism whereby a party receiving confidential information knows which information is confidential and which information is not confidential.


d. No distinction is made between “trade secret” information and otherwise “confidential” information. This can result in the Confidentiality Agreement eventually giving away “trade secret” information which, absent the agreement, could be kept confidential indefinitely.


e. The agreement has no expiration date.


f. The agreement effectively transfers partial or total ownership in certain intellectual property from one of the parties to the other party.


g. The agreement may impose obligations of confidentiality on only one party where both parties should be obligated, or may impose obligations of confidentiality on both parties where only one party should be obligated.


h. There is no provision for re-capturing, retrieving confidential information which has been inappropriately disclosed.


i. The statements of obligation do not include appropriate provisions for information which should be excluded, or which should become excluded in the future.
Attorney Thomas D. Wilhelm


Because each person’s legal issue is unique, the information presented here is intended to inform and not to advise. Accordingly, the reader is advised to seek legal counsel for their particular legal matter.

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