Confidentiality Agreements 101: The Importance of Wording

Trust is vital for the foundation of a successful relationship.  Notwithstanding the nature of the relationship, trust builds confidence between the involved parties. When there is genuine trust between those involved, the content of the information exchanged reaches a level of strict confidentiality. It is far easier to maintain secrecy in personal relationships, due to the established trust that has developed over time. Professional relationships however, widely differ.  Sometimes, in professional relationships, knowing a person for any amount of time will not warrant the privilege of secrecy. In fact, businesses have a difficult time building a sense of trust comparable to “personal trust”, and are not always able to assure that their employees or partners will not reveal delicate information during or after their professional relationship. Due to the risks and vulnerabilities associated with leaks and exposure, businesses created confidentiality agreements, in order to serve as a form of legal accountability.

Most people have agreed to and/or signed a confidentiality agreement at least once in their lifetime, whether it was through a business agreement or papers signed in the hiring process.  Even when we mindlessly click “I agree” to the terms and conditions of certain software, we are signing a type of agreement. Most people sign these agreements without even reading the document, or understanding its implications.

Functions of a Confidentiality Agreement

So, what is a confidentiality agreement? Essentially, a confidentiality agreement, also known as a non-disclosure agreement, or an NDA, is a legally binding contract. This contract is one in which a person or a business pledges to handle certain information, such as trade secrets, and pledges to not disclose said secrets to anyone else, without authorization. Non-disclosure agreements are usually made in order to serve three specific functions:

1. Protect Delicate Information – Participants who sign these agreements promise not to release information shared with them by the other parties involved. In the event that this information is divulged, the injured party can claim a breach in the contract, and sue for damages in civil court.
2. Preservation of Creator’s Rights – As I discussed in a previous article, involving patents, patent rights are of great significance in the realms of innovation and creation. Inventors depend greatly on NDAs. They ensure their new inventions and creations secret from potential competitors who wish to feed off of their life’s work. The public release of a brand new invention can potentially void the creator’s patent rights. NDAs, if properly written, help to protect these vital rights and avoid the risk of exposure.
3. NDA’s Definition of Exclusive Information – NDAs clearly outline within the contract what information is considered private and what information is not. The type of information that is usually considered private is often some kind of trade secret, or other types of information such as schematics, client information, marketing plans, etc. It could also be as simple as test results, passwords, or any other data. In fact, any knowledge that is exchanged between involved parties can be considered confidential.

Punishing Restrictive Agreements: The SEC and KBR

In the beginning of April 2015, the Securities and Exchange Commission (SEC) took the first step in enforcing federal regulations by charging KBR, an engineering and construction company based in Houston. KBR was in violation of federal regulations due to the use of specific language in their confidentiality agreements which would essentially prevent whistleblowing.

The confidentiality agreement between KBR and its employees resulted in severe consequences, such as termination and legal suits, in the event employees divulged any confidential information to outside sources. This alone seems understandable, but the real issue involved what employers classified as confidential information. These same severe consequences, according to KBR’s confidentiality agreements, would apply towards employees who revealed information regarding illegal activities and violations to government authorities, before informing their own legal department. This event poses significant implications not only towards KBR and future violators, but rather the nature of confidentiality agreements as a whole.

This wording poses potential threats to the whistleblowing process; a process protected by the SEC, because   it is a method by which the SEC can be informed of unlawful business practices taking place within an organization. The SEC does not wish to endorse the leaking of critical information. Their intention is merely to encourage the reporting of illegal activity, so as to uphold the dignity of employees and stockholders alike. Had the SEC not responded to the KBR’s violation, it would have set the precedent for other businesses to use similar language, in order to stifle whistleblowers.

Conclusion

Confidentiality agreements play a crucial role for businesses, inventors, and in many other professional relationships. They act as agents of accountability, preserving the bond of trust and integrity between parties, while protecting the secrets exchanged between them. It is always important for involved parties to consider the wording and conditions presented in the document before agreeing to or signing any NDA.

There are specific elements that must be present in order for a document to satisfy the conditions of an effectual NDA. If you are interested in forming an effective and operational NDA, and/or require legal advice, please contact the Law Office of Mark Smith, PLLC here.