Understanding confidentiality agreements in commercial relationships

What does a confidentiality agreement actually do?

A confidentiality agreement creates a contractual promise by the receiving party to use the disclosing party's information only for an agreed purpose and not to disclose it to others. If that promise is broken, the disclosing party can bring a claim for breach of contract, in addition to any rights it has under trade secret law.

That second point matters. The Illinois Trade Secrets Act and the federal Defend Trade Secrets Act protect information that qualifies as a trade secret, but they require the owner to take reasonable measures to keep it secret. A signed NDA is one of the most common ways to show those measures were taken.

An NDA is most useful before sensitive discussions begin: evaluating a partnership, sharing pricing with a prospective supplier, or giving a potential buyer access to company information.

Should you use a one-way or mutual NDA?

Use a one-way NDA when only one party will share sensitive information, and a mutual NDA when both will. A one-way agreement protects the discloser without binding it to obligations it does not need, while a mutual agreement applies the same rules to both sides.

Mutual NDAs are often proposed as the neutral choice, but they bind a party that may never receive anything sensitive. If you are mainly receiving information, a one-way agreement may give you more room. If you are mainly disclosing, check that a mutual form does not water down the protection you need.

Either way, the obligations should match the real flow of information. A discussion that starts one-way can become mutual later, and the agreement can be amended when it does.

What counts as confidential information under an NDA?

Whatever the agreement's definition says. Definitions range from everything disclosed in connection with the purpose to only information that is marked confidential at the time it is shared.

A marking requirement gives the recipient clarity, but it is easy to forget in practice. Information shared in a meeting, on a call or during a site visit is often never marked. Many agreements address this by requiring oral disclosures to be confirmed in writing within a set number of days, a step that is frequently missed.

A broad definition protects the discloser but may be harder to enforce if it sweeps in information that is plainly public. A balanced definition usually covers information marked confidential and information a reasonable person would understand to be confidential from its nature and the circumstances of disclosure.

How long should confidentiality obligations last?

Confidentiality obligations commonly last two to five years from disclosure or from the end of the relationship, but the right term depends on how long the information stays valuable. Pricing and business plans may lose sensitivity quickly, while trade secrets can retain value for as long as they stay secret.

A fixed term can work against trade secret protection. If an agreement allows the recipient to use or disclose a trade secret after three years, the owner may struggle to argue it took reasonable measures to protect it. A common approach is a fixed term for general confidential information and a separate obligation for trade secrets that lasts while the information remains a trade secret under applicable law.

Also check what happens at the end: whether the recipient must return or destroy materials, and whether it may keep archival copies.

What are the standard exceptions in an NDA?

Most NDAs exclude information the recipient can show it obtained legitimately without the agreement. These exclusions are standard, and a disclosing party should expect to accept them.

The recipient usually bears the burden of showing an exception applies, so the wording matters. Exceptions that apply only where the recipient can show them with written records give the discloser more protection. The usual exceptions cover information that:

• Is or becomes public through no fault of the recipient
• The recipient already knew before disclosure, as shown by its records
• The recipient receives from a third party with no duty of confidentiality
• The recipient develops independently without using the disclosed information
• Must be disclosed by law or court order, usually with prompt notice to the discloser where permitted

What should you check before signing the other party's NDA?

Check that the agreement matches how information will actually flow, and that you can comply with it in practice. Many NDAs are signed from the other side's template, and its default terms favor whoever drafted it.

A short review usually covers:

• Whether it is one-way or mutual, and whether that fits the discussion
• The definition of confidential information and any marking requirement
• The permitted purpose, stated narrowly enough to limit use
• Who may receive the information, such as employees, advisers and affiliates
• The duration, including any separate term for trade secrets
• Return or destruction obligations at the end
• Any extra terms, such as non-solicitation or non-compete clauses, that do not belong in an NDA

What can an NDA not do?

An NDA cannot transfer ownership of information or intellectual property, and it usually does not prevent the other party from building something similar on its own. If you need ownership of work product or a restriction on competition, those need separate terms that meet their own legal requirements.

An NDA also cannot lawfully prevent someone from reporting possible violations of law to government agencies. The Defend Trade Secrets Act provides immunity for confidential disclosures of trade secrets to government officials or an attorney for the purpose of reporting suspected violations of law, and agreements with employees and contractors should include notice of that immunity.

Confidentiality terms in the employment context face additional limits. In Illinois, the Workplace Transparency Act restricts agreements that would prevent employees from reporting or discussing unlawful employment practices. Other states have similar rules.

From our practice

In our work, we often review NDAs that were signed from the other party's template early in a promising conversation, before anyone checked which way the information was flowing. The recurring issues are a marking requirement nobody followed, a short fixed term covering information meant to stay secret indefinitely, and an assumption that the NDA gave ownership of ideas discussed. A few minutes on those three points before signing usually addresses them.