When Confidentiality Clauses Go Too Far

Confidentiality clauses and non-disclosure agreements have become ubiquitous in modern business. While protecting genuinely sensitive information serves legitimate purposes, many confidentiality provisions go far beyond what is necessary or reasonable. These overreaching clauses can restrict your ability to do business, create ongoing compliance burdens, and expose you to liability for activities that should be perfectly acceptable.

The Purpose of Confidentiality Protection

Legitimate confidentiality provisions protect information that has genuine competitive value and is not publicly available. This includes trade secrets and proprietary processes, customer lists and pricing information, business strategies and plans, technical specifications and designs, and financial data and projections.

When confidentiality provisions are properly scoped to protect such information, they serve both parties' interests by enabling information sharing that would otherwise be too risky.

Where Confidentiality Clauses Overreach

Overly Broad Definitions

The most common form of overreach is defining confidential information too broadly. Some agreements define virtually everything as confidential, including publicly available information, general industry knowledge, skills and expertise you develop, and information you already knew.

A definition that includes all information disclosed in connection with this agreement or any information the disclosing party considers confidential can encompass far more than genuine trade secrets.

Lack of Marking Requirements

Reasonable confidentiality provisions require confidential information to be marked or identified as such. Provisions that treat all information as confidential regardless of marking make compliance nearly impossible. How can you protect information as confidential when you do not know what qualifies?

Perpetual Duration

Some confidentiality obligations last forever. While trade secrets may warrant extended protection, most business information loses its sensitivity over time. Perpetual confidentiality obligations create indefinite compliance burdens and litigation risk.

Restrictions on Residual Knowledge

Some agreements attempt to restrict the use of residual knowledge, the skills, ideas, and general know-how that naturally remain in someone's mind after exposure to information. These provisions can effectively prevent you from using your own expertise and experience.

The Intersection with Intellectual Property Rights

Conflating Confidentiality and IP

Overreaching confidentiality provisions sometimes blur the line between protecting confidential information and granting intellectual property rights. A confidentiality clause should not transfer ownership of ipr rights or prevent you from developing similar ideas independently.

Non-Compete by Another Name

Extremely broad confidentiality provisions can function as non-compete agreements. If you cannot use anything learned during a business relationship, you may be effectively barred from working in your field. Some jurisdictions scrutinize such provisions as disguised non-competes.

IP Rights Protection Overreach

While ip rights protection is legitimate, confidentiality clauses that extend intellectual property concepts beyond their proper scope create unreasonable restrictions. General concepts and ideas are not protectable as trade secrets regardless of what a contract says.

One-Sided Confidentiality

Unilateral Obligations

Many confidentiality provisions impose obligations only on one party. While this may be appropriate in some contexts, such as when only one party shares sensitive information, it is often used to create imbalanced relationships.

Differential Treatment

Even when obligations are nominally mutual, the definitions and restrictions may effectively burden one party more than the other. The party with more diverse operations or more employees faces greater compliance challenges.

Inadequate Exceptions

Standard Carve-Outs

Reasonable confidentiality provisions include standard exceptions for information that is or becomes publicly available, was known before disclosure, is independently developed, or is received from third parties without restriction.

Missing Legal Process Exception

Some agreements fail to include adequate provisions for legally compelled disclosure. Without proper carve-outs, you may be forced to choose between violating a court order and breaching the confidentiality agreement.

No Residual Knowledge Exception

The absence of a residual knowledge exception, allowing general skills and know-how to be used freely, can unreasonably restrict future employment and business activities.

Enforcement Overreach

Injunctive Relief Presumptions

Many confidentiality provisions include statements that breach will cause irreparable harm entitling the disclosing party to injunctive relief. While courts make this determination independently, such provisions can increase litigation pressure.

Excessive Remedies

Some agreements specify liquidated damages or other remedies for confidentiality breaches that far exceed any realistic measure of harm. These provisions function more as penalties than compensation.

Audit Rights

Provisions allowing the disclosing party to audit the recipient's compliance can create significant burdens and effectively give one party oversight into the other's operations.

Industry-Specific Concerns

Employment Context

Confidentiality provisions in employment agreements can restrict future career options. Employees should carefully evaluate what information they can and cannot use in future positions.

Venture Capital and Investment

NDAs in investment contexts can prevent founders from sharing information with other potential investors, effectively locking them into negotiations with a single party.

Technology and Development

Software developers and technology professionals face particular challenges when broad confidentiality provisions restrict their ability to use skills and knowledge in future projects.

Negotiating Reasonable Confidentiality Terms

Limit Definitions

Push for confidentiality definitions that specifically describe protected information rather than encompassing everything. Require marking or designation for information to receive protection.

Time Limits

Negotiate reasonable time limits on confidentiality obligations. Two to five years is typical for most business information. Only genuinely trade secret material warrants longer protection.

Standard Exceptions

Ensure the agreement includes standard exceptions for public information, prior knowledge, independent development, and third-party receipt. Add a residual knowledge exception if your ability to use general skills and experience is important.

Mutual Obligations

When both parties share information, insist on mutual confidentiality obligations with equivalent definitions and restrictions.

Legal Process Provisions

Ensure adequate provisions for legally compelled disclosure, including notice to the disclosing party and cooperation in seeking protective orders.

Red Flags in Confidentiality Provisions

Watch for these warning signs of overreaching confidentiality clauses. All information is confidential regardless of nature or marking creates impossible compliance. Perpetual or unreasonably long duration extends obligations indefinitely. No standard exceptions exist for public information or prior knowledge. Restrictions on residual knowledge limit use of your own expertise. One-sided obligations favor only one party. Excessive remedies or presumed injunctive relief create disproportionate penalties. Broad audit rights allow intrusion into your operations.

When to Walk Away

Some confidentiality provisions are so overreaching that they warrant declining the relationship entirely. Consider walking away when the scope would effectively prevent you from working in your field, when there is no reasonable way to comply with the restrictions, when the remedies are disproportionate to any realistic harm, or when the obligations far outlast any legitimate need for protection.

Practical Compliance Strategies

Information Management

When subject to confidentiality obligations, implement systems to identify and track confidential information, limit access to those with need to know, maintain secure storage and transmission, and document compliance efforts.

Training and Awareness

Ensure employees understand what information is confidential and how it must be handled. Regular training reduces inadvertent breaches.

Exit Procedures

When relationships end, follow return and destruction requirements carefully. Document compliance to defend against future claims.

Conclusion

Confidentiality provisions serve legitimate purposes when properly scoped to protect genuinely sensitive information. However, many agreements contain overreaching provisions that go far beyond reasonable protection.

Before agreeing to confidentiality obligations, carefully evaluate the scope of what is covered, the duration of restrictions, the adequacy of standard exceptions, and the reasonableness of enforcement provisions. Push back on terms that would unreasonably restrict your business activities or create impossible compliance burdens.

Protecting intellectual property rights and genuine trade secrets is appropriate. Signing agreements that restrict your future far beyond what any legitimate interest requires is not. Know the difference, and negotiate accordingly.