When it comes to legal contracts, the verbiage you use is critical — a few wrong (or missing) words can render a whole agreement unenforceable. But before you dig too deep into the language, you first need to be sure you’re using the most appropriate legal document.
When it comes to protecting confidentiality, two common documents are the nondisclosure agreement (NDA) and the confidentiality agreement. What are the differences between them, and which one should you use? We explore the answers below.
Breakdown: Confidentiality agreement vs NDA
A confidentiality agreement is a legal tool that “binds one or more parties to non-disclosure of confidential or proprietary information.” An NDA is actually a type of confidentiality agreement that establishes a confidential relationship and legally binds any signed parties to that relationship.
“Both NDAs and confidentiality agreements are meant to keep someone from improperly disclosing confidential information,” says Stephen Kontos, intellectual property attorney and owner of PatentXP, an intellectual property law firm.
An NDA is typically more appropriate when there’s a one-way exchange of confidential information. Meanwhile, a confidentiality agreement is more appropriate during collaborations, such as when two parties are working together on a project that will involve sharing confidential information or creating intellectual property.
To clarify, both NDAs and confidentiality agreements are useful for collaborative purposes, but Kontos finds the latter to be generally more suitable.
Kontos says that what you call the document is less important than its terms, especially given the overlap in the content of confidentiality agreements and NDAs. For instance, both documents might include sections requiring that confidential information be marked as such, defining who can receive confidential information, instructing the parties on how to destroy confidential documents and other materials, defining the time frame for keeping information confidential, and so on.
“That being said, there are subtle differences between the two types of documents,” Kontos explains. For example, a confidentiality agreement might define ownership of any intellectual property resulting from the collaboration. “If you’re using an NDA, however, the question of intellectual property ownership has most likely already been settled.”
When to use NDAs and confidentiality agreements
Kontos says that NDAs are often used by inventors who are trying to maintain confidentiality before formally protecting their rights with a patent application. A public disclosure of a patentable concept can waive patent rights in the United States and elsewhere.
“An NDA is a common tool used to prevent such an occurrence until the inventor is able to file a patent application,” Kontos explains.
Also, a business might require new employees to sign NDAs as a condition of employment to protect confidential business information and trade secrets. Here are some examples:
- A restaurant may require employees to sign an NDA before it discloses award-winning recipes to cooks.
- A tech startup may require employees to sign an NDA to protect proprietary software code and algorithms.
- A manufacturer may require employees to sign an NDA to safeguard unique fabrication processes that result in industry-leading cost efficiencies.
- A marketing firm may require employees to sign an NDA to prevent their client contact list and service fees from leaking to competitors.
“Confidentiality agreements are common at the start of a joint venture or other business arrangement where both parties are likely to exchange confidential information,” Kontos says.
For example, you typically see confidentiality agreements used between an original equipment manufacturer (OEM) and a supplier. The confidentiality agreement permits the OEM to provide confidential specifications to the supplier and the supplier to disclose details about its proprietary manufacturing process to the OEM. Both parties are disclosing information that, if leaked, could be detrimental to their businesses.
Whether you’re a small business owner or run a department in a larger company, both confidentiality agreements and NDAs are essential to keeping your organization’s sensitive or proprietary information safe.
Want the full rundown on NDAs? Check out this complete guide on the topic.