Non-disclosure agreements (NDAs) have become instrumental tools for protecting confidential information. However, understanding what can be considered “confidential information” under an NDA is sometimes not as easy as it may seem. What does “confidential information” mean, and why is it essential to distinguish it?
Our guide explores the broad spectrum of confidential information that an NDA can cover, provides examples and case studies, and demystifies what doesn’t fall into the “confidential” category.
- What Is Confidential Information?
- The Importance of Distinguishing Confidential Information
- What CAN Be Considered Confidential Information
- What CAN NOT Be Considered Confidential Information
- What Is Everyone Protecting?
- How the Court Sees It: A Case Study
- Understanding Your Confidentiality Obligations
What Is Confidential Information?
Confidential information generally refers to sensitive information intended to remain secret and not be disclosed to unauthorized individuals or entities.
When one party (the disclosing party) shares confidential information with the other (the receiving party), it’s typically done with a specific intention or common objective.
Confidential information can take various forms – verbal communication, written documents, observed processes, or electronically transmitted files. Examples of confidential information include:
- A company’s future merger plans discussed between a manager and a key employee;
- Documents containing proprietary formulas for a new product line;
- A unique manufacturing process observed by an employee visiting a company’s plant;
- An email containing sensitive financial statements (i.e., sales reports) sent to an authorized employee.
The Importance of Distinguishing Confidential Information
Understanding what can be legally defined as confidential information in an NDA is crucial for both the disclosing and receiving parties.
As the disclosing party in an NDA, you must be aware of the information that can (and can’t) be safeguarded under the law or an NDA. This knowledge allows you to uphold your rights and ward off situations that may render your NDA unenforceable.
Conversely, as the receiving party in an NDA, knowing what qualifies as confidential information helps prevent accidental breaches, which could bring serious consequences, including legal liabilities and criminal charges.
If you are not sure whether to cover certain information in your NDA as confidential, try to answer the questions below:
- Does the information reflect originality and ingenuity?
- Is the information difficult to obtain or copy?
- Does the information have commercial value to your business/other businesses?
- Would disclosure of this information potentially harm your business or benefit a competitor?
- Is the information exclusive and inaccessible to the public?
- Are there security measures to protect the information?
The more yeses you have for the information, the more likely it should be considered confidential. Still unsure? Check our list of examples below.
What CAN Be Considered Confidential Information
Various kinds of information can be covered as confidential information by an NDA. Some of them include:
- Business Strategies and Methods: Marketing plans, advertising strategies, product launch announcements, and other business information;
- Designs and Specifications: Blueprints, drawings, and documents for machines, buildings, products, inventions, and patent applications;
- Digital Assets: Source code, algorithms, proprietary software applications, and any unique software techniques or technical methods;
- Formulas: Chemical compositions, recipes for food and drink products (i.e., ingredients that give Coca-Cola its distinct taste);
- Physical Devices: Machines, objects, devices, and hardware configurations, as well as prototypes or samples;
- Processes: Manufacturing, chemical, and engineering processes;
- Vendor & Customer Lists: Contact lists of suppliers and customers, purchasing histories, pricing agreements, and customer preferences.
Confidential information in an NDA should be defined elaborately to align with the scope and purpose of the agreement.
For example, “confidential information” may concern the design, specifications, and manufacturing process of a newly invented electronic device in an invention NDA. In the case of an interview, an interviewer may define information related to discussions on company strategies and proprietary processes as confidential information.
What CAN NOT Be Considered Confidential Information
Instances in which information disclosed can’t be deemed confidential include:
- Public knowledge: Information that is already in the public domain, like on the Internet (i.e., the location of Apple headquarters)
- Prior Knowledge: Information each party already knows before entering the NDA (i.e., the name of a new project the parties will work together for)
- Independent Development: Information independently developed by each party (including information obtained through reverse engineering if there is proof)
- Permitted Disclosure: The NDA can permit the receiving party to disclose information to certain third parties (i.e., CPAs or attorneys)
- Compelled Disclosure: When a court order or government agency requires the disclosure of information (i.e., testifying against a crime)
A Crime Is NOT Confidential Information
There has been unethical use of NDAs that attempted to cover up illegal activities (i.e., sexual harassment) under various circumstances. Victims and witnesses were reluctant to report such misconduct to authorities for fear of bearing the consequences of an NDA breach.
However, common law generally finds that any act resulting in a crime will not be afforded protection. Although this can vary on the specific situation, an individual who discloses information to law enforcement in an official capacity during illegal activity will likely not face any consequences.
If you are aware of specific misconduct but fail to report it to authorities, you could also face legal action for not disclosing such information.
What Is Everyone Protecting?
Let’s explore some enlightening statistics that reveal the diversity and shifts in trends of information listed as confidential in NDAs created in 2021 and 2022.
Confidential Information in 2021
Interestingly, only 18.9% of NDAs protected computer and software information. A likely explanation is that much of this data falls under specific categories, such as proprietary rights (including intellectual property) and product information, which are more frequently covered under NDAs.
Also, many companies might rely on software licensing agreements or source code escrow agreements to protect such technical information instead of general NDAs.
Looking closely at 2021’s word cloud for the words used in defining confidential information within NDAs, the term “personal” emerged as the most frequently used keyword. This indicates a strong emphasis on safeguarding personal data, likely related to employee information, customer details, and potential personal relationships.
The term “business” was also frequently mentioned underscoring businesses’ significance in securing their commercial operations and proprietary strategies.
Other frequently used terms like “financial” and “investor” suggest a high priority given to the confidentiality of financial information and investment details.
Interestingly, terms like “media,” “videos,” “content,” and “pictures” appeared quite often, potentially highlighting the increasing concern about digital media, creative assets, and intellectual property.
Confidential Information in 2022
In 2022, 24.5% of NDAs drafted sought protection for computer and software information among the information deemed confidential, up 5.4% from 2021.
With the rapid advancements in computer technology and increased accessibility to advanced software solutions like OpenAI, it’s no surprise that companies and individuals are seeking to protect the computer and software solutions that they have been able to develop.
There is also a noticeable rise in NDAs that cover customer information. This trend might be attributed to heightened regulations around data privacy, such as GDPR, which have made companies more cautious about handling and protecting information relating to customers.
The choice of words to define confidential information in NDAs created in 2022 also shows interesting patterns and shifts in emphasis. “Personal” remains the most common word used; terms like “business” and “financial” continue to be top priorities for protection.
Interestingly, “videos” saw a significant rise, suggesting a growing concern around digital assets. Music-related terms like “music,” “song,” “lyrics,” and “mixes” also appeared surprisingly often, hinting at a trend in the music industry or creative fields to secure intellectual property rights.
The keywords “mental,” “health,” and “medical” likely reflect the growing awareness and concern around health information, particularly in the context of recent global health crises.
How the Court Sees It: A Case Study
Understanding what counts as confidential information can be complex, particularly in implied situations where interpretation often lies in the hands of the courts. This interpretation may vary significantly based on several factors and circumstances.
Take the case of Lincoln Towers Ins. Agency v. Farrell, 1981, where the court decided that an automobile list containing customer information did not qualify as a trade secret.
The court found that the information was already known to other competitors as the customers do business frequently with more than one company or otherwise changed businesses often. This showcases that courts might not regard information as confidential if readily accessible elsewhere.
In the contrasting case of Courtesy Temporary Serv., Inc. v. Camacho, 1990, the court ruled in favor of preventing an ex-employee from using a list, finding the “work effort” expended to acquire and retain customers to be a “protectable trade secret” because the “nature and character” of the customer information was “irrefutably of commercial value,” even if customer names could be found elsewhere.
Thus, courts may deem information confidential when it’s unique or contains sensitive information related to the entity involved.
Understanding Your Confidentiality Obligations
In conclusion, confidential information is a nuanced concept in non-disclosure agreements. From delineating what falls under confidentiality to examining cases, we’ve navigated the complexities to bring you clarity. E
quipped with this knowledge, you now know how to identify and handle confidential information in the context of a non-disclosure agreement in the future.