Confidentiality agreements

What is a confidentiality agreement?

A confidentiality agreement is a legally binding contract. If you disclose confidential information to another person under a confidentiality agreement, they are required to keep that information secret and confidential, and not misuse it.

The table below includes some examples of the types of confidential information that you can protect through a confidentiality agreement, the consequences of not having a confidentiality agreement, and the advantages of a confidentiality agreement to your business.

Type of confidential information Consequences of disclosure without a confidentiality agreement Advantages to your business of having a confidentiality agreement
New product process, process or invention (disclosed before you file a patent application) The novelty or newness of your innovation is destroyed, and you become ineligible to be granted a patent Your innovation can be disclosed without risking the novelty or newness of your innovation, so that you remain eligible for a patent
New product, process or invention (disclosed after you file a patent application) Novelty or newness is no longer at risk, nor is ineligibility for a patent at risk, unless your patent application lapses and you intend to file a second later application. In relation to the second application, novelty or newness may be destroyed and you may be ineligible for the patent You remain eligible for a patent even with your second application
New product, process or invention (disclosed after the patent application process has begun) The person to whom you have made a disclosure may become equipped to reverse engineer or even work around your innovation much earlier than otherwise. Without a confidentiality agreement there may be little you can do about this If this occurs, the confidentiality agreement enables you to stop that reverse engineering or work around, and because you can, it also deters this from occurring
New design to be applied to a product (disclosed before you file a design application) The novelty or newness of your design may be destroyed, and you would become ineligible for a registered design Your design can be disclosed without risking the novelty of the design, so that you remain eligible for a registered design
Communicating trade secrets and know-how to employees If there are no confidentiality provisions in the employment agreement, the employee may be able to use trade secrets and know-how for their own benefit, or for the benefit of their next employer, who may be your competitor. It is possible that a civil action could be brought against them, depending on the circumstances Confidentiality provisions in an employment agreement prevent this from taking place
Communicating trade secrets and know-how to contractors or consultants The contractors or consultants can use your confidential information for their own benefit The contractors or consultants cannot do so

What should a confidentiality agreement cover?

The following checklist will help you understand the different parts of a confidentiality agreement.

Checklist Description
Caution The list below identifies the most common issues that need to be considered in relation to a confidentiality agreement.

The description below is not necessarily the 'standard' way in which to deal with every issue, nor is this list of issues intended to be exhaustive.

There will always be agreements or occasions where there is a different or unusual provision, or a common provision that operates in an unusual way.

The list is not intended to be a substitute for legal advice, which should always be taken in relation to any confidentiality agreement.
One-way or two-way? Will there be disclosures by one party only to the other? If so, an agreement that operates in a one-way direction will be suitable.

Is there a possibility that there may be mutual disclosure, with each party making disclosures to the other? If so, the agreement will need to be a two-way agreement, operating for each party as disclosers, as well as recipients.
Parties Are the full correct legal names of the parties recorded?

For example, a business name or a division of a company are not legal entities, and are unsuitable to use to describe a party to an agreement. The legal name of the party needs to be recorded.
Addresses Is each party's address correctly recorded?
ACN If any party is a company its ACN should be recorded.
Definition of confidential information Is 'confidential information' adequately defined?

The definition needs to be precise enough to be able to identify the confidential information. If it is too broad it may be meaningless.

Is the confidential information only related to intellectual property or other things as well?

For example, if business related information will be subject to disclosure it needs to be precisely identified.
Obligation to keep secret Is there a clearly expressed obligation to keep the confidential information secret and confidential, and not to disclose it?
Obligation to use only in accordance with specified purpose The agreement should identify the purpose to which the recipient can put the confidential information.

All other uses of the confidential information should be prohibited.
No licence Sometimes a confidentiality agreement states that no rights are licensed by the confidentiality agreement.

This is stating the obvious. It is not always necessary, but it causes no harm either.
Disclosure to employees and directors This can be permitted.

This is the only effective way in which a recipient that is a company can consider the confidential information.

A recipient that is a company will be liable for the acts of its directors and employees, so there is no need for the directors and employees to personally be parties as well.
Oral disclosures Sometimes a confidentiality agreement will operate only in relation to written disclosures, and will not operate in relation to oral disclosures, unless the oral disclosure is confirmed in writing.

This ensures that only something that can be proven by a written record can be subject to obligations of confidentiality, and reduces the risk of arguments about oral disclosures that may not have occurred.

It is important that oral disclosures are therefore promptly confirmed in writing, and in any event, within any time limit set by the confidentiality agreement.
Exception to confidentiality

Obligations of confidentiality will normally end in relation to:

  • information that the recipient already knows
  • information that enters the public domain otherwise than by a breach of the agreement
  • information that is independently developed by staff of the recipient with no access to the confidential information
  • information otherwise disclosed to the recipient without any obligation of confidentiality, by another person who is entitled to disclose it (the onus again lying on the recipient to demonstrate this).
Information required to be disclosed pursuant to a legal obligation to do so

Examples of a legal obligation to disclose are:

  • a court order
  • a subpoena.
Information required to be disclosed pursuant to a legal obligation to do so is not an exception to the obligation to maintain confidentiality.

If it was, then the obligation of confidentiality would cease completely in relation to information required to be legally disclosed.

Instead, the obligation should be expressed to be relaxed to the extent of the legal obligation to disclose.
Duration of obligations of confidentiality It is not unusual for obligations of confidentiality and non-use to last for a fixed period of time only.

A judgement needs to be made whether it is appropriate to fix a confidentiality period, or whether the obligations should be indefinite, until the information enters the public domain (other than by a breach of the agreement). In some industry sectors where the pace of technology change is fast (for example biotechnology), a fixed duration of obligations of confidentiality of 5 years is not unusual.

In other industry sectors, the obligations of confidentiality might last for as long as the confidential information is outside the public domain.
Acknowledgement that damages are inadequate Sometimes a confidentiality agreement will state that damages are not an adequate remedy, and that injunctive relief may therefore be the appropriate remedy.

This is a largely a re-statement of the law, and is not uncommon.
Notify misuse of confidential information It is not unusual for a confidentiality agreement to require a recipient to notify the discloser of any misuse of the discloser's confidential information that comes to the recipient's attention.
Return / deletion of confidential information Customarily, a confidentiality agreement provides that the recipient must return confidential information to the discloser upon demand.

Where confidential information is provided or stored electronically, it is also customary for the confidentiality agreement to require the deletion of electronically stored files.
Retaining an archival copy It is customary for a recipient to be permitted to retain one copy of the confidential information for archival and evidentiary purposes.

If a recipient was not permitted to do this, the recipient would have no record of the information about which obligations of confidentiality and non-use continued.