Why It’s So Important to Define ‘Confidential Information’ in Your NDA Correctly
Don’t let the wrong definition make your NDA unenforceable.
Non-Disclosure Agreements (NDAs) are widely used to protect confidential information. Businesses typically use NDAs when selling products, sharing information with prospective buyers/partners, and hiring employees. Having an NDA in place provides legal protection against disclosure of your information to third parties. However, it is always critical to clearly define what is ‘confidential’. There have been instances where an NDA has been unenforced because of how ‘confidential information’ was defined in the original agreement.
Here, we will provide some guidance on how specific your definition needs to be and what could happen if you don’t define confidential information properly.
Scope of ‘confidentiality’
It is necessary to clearly outline the scope and correctly define the term ‘confidential information’ in your non-disclosure agreement (NDA). The information you are aiming to protect in your contract must be clearly specified. A large scope may actually result in the NDA being unreasonable or even invalidate its enforceability. You must also be clear as to whom you are disclosing this information.
There are similar issues in having a broad definition. The more parties that are privy to the information, the harder it will be to monitor its use.
Another issue is whether oral or written information is defined as ‘confidential’. Oral information can be confidential, but the disclosing party must indicate what oral statements are confidential.
Examples of confidential information that NDAs can protect
NDAs are commonly used to protect confidential information in the following circumstances:
- Pitching an invention or business idea to potential partners, investors or distributors;
- Exposing employees to information;
- Providing information to a prospective buyer of your business.
In each of these situations it is important to be precise as to what product or information is confidential and tailor your definition accordingly.
Mistakes in your definition that could invalidate your NDA
Even if your ‘confidential information’ definition is clearly established, the wording may mean it’s unenforceable. It may be unenforceable if it is unreasonable or inconveniences the contracting party. One example of ‘unreasonableness’ could be that the confidentiality remains indefinitely.
Another common issue arises when applying confidentiality to information that is already known by the public or easily obtainable. This ensures the correct and appropriate shaping of your definition of ‘confidential information’ by assessing relevant factors of availability, sensitivity and surety of your information.
Finally, be cognisant of who has signed the NDA. No matter how clearly your definition of ‘confidential information’ is, NDAs are only enforceable against signatories to the agreement. It is also important to look to the future and draft the NDA in accordance with any potential organisational changes in the contracting business or parties arrangement to continue to be binding.
In order to correctly protect your confidential information you must be specific in your NDA. Avoid broad descriptions and take care in factoring external circumstances in your drafting.
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Jakub is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws at Macquarie University. His main interest is on the integration of legal and technological services.