Keep the Barn Door Closed

Copyright 2020

You spend a great deal of time and money developing unique ideas, products and services. But the more people who know about your plans, the more you risk losing your secrets. To help protect vital intellectual property assets, it's important to require confidentiality agreements. 

The Basics

Sometimes referred to as "nondisclosure agreements," confidentiality agreements let you talk more freely with suppliers, advisers, customers and employees. It creates a clear understanding that these outsiders won't talk about what's happening inside your company to anyone without your permission.

Confidentiality agreements come in all shapes and sizes: In some cases, they involve a short "catch all" paragraph on the back of a visitor badge or sign-in form. More detailed agreements are also included in employee contracts or handbooks.

Alternatively, one restaurant chain prints a statement on its employee application form. Prospective employees agree that if they're hired, they'll keep the restaurant's recipes a secret.

Confidentiality agreements can even involve a document discussing new ideas or yet-to-be-released products or services. Whatever the format, if your company can prove a violation of a confidentially agreement, they may be entitled to injunctive relief, damages and compensation for lost profits.

Common Uses

Four situations where a confidentiality agreement should be considered include:

1. Developing a prototype. Before you decide whether to move forward with a new product, you'll need cost estimates from several suppliers. A confidentiality agreement makes them liable for financial damages if they reveal the details to others.

2. Seeking investment. Potential investors who sign a confidentiality agreement are liable if they develop the product or service on their own.

3. Selling your company. Prior to making an offer, a prospective buyer will want to review detailed financial and operational information. If the sale falls through, you don't want them using your ideas or disclosing the information to someone else. Prospective buyers often include competitors or supply chain partners that could use the information obtained during M&A due diligence to their advantage. 

4. Bidding on a project. You look for outside advice to help prepare the documents. A confidentiality agreement tells the outsider not to share your pricing and proposal information with anyone.

Drafting an Enforceable Agreement

Confidentiality agreements are legally enforceable if they are reasonable in scope, duration and geography. They must also document a legitimate business interest — not just general knowledge or skills. If an agreement is violated and you decide to take legal action, your company must show economic hardship.

However, confidentiality agreements aren't foolproof. Generally, the ability to enforce them depends on:

  • The value of the information,

  • How the agreement was violated, and

  • If the information was available from another source.

Protect Your Assets

There's an old saying that applies here: "It's too late to close the barn door after the cows have escaped." A confidentiality agreement is an easy, effective way to make sure your employees and other contacts keep your trade secrets, ideas and other information confidential. Contact your financial and legal advisors for more information.