NDAs versus Confidentiality Clauses: What You Need to Know

Every business has secrets it wants to protect. Trade secrets have value and no one wants dirty laundry aired by business partners. But how should secrets be kept? To the uninitiated, the two main methods—confidentiality clauses and non-disclosure agreements (NDAs)—seem like a belt and suspenders: overlapping contract language protecting the same secrets. But they serve very different functions.

This post breaks down the purposes of both NDAs and confidentiality clauses, how they differ, and what businesses can do to better protect themselves and their secrets.

1. Defining Terms

An NDA is largely what it says it is—an agreement to prevent unauthorized disclosure of confidential information. The main function of an NDA is to enable the exchange of information for initial commercial discussions, while restricting its use or disclosure. A standard NDA features several key provisions:

• Purpose: use of confidential information is generally limited to evaluating the commercial opportunity. This does not permit actual commercial use.
• No License: most NDAs include language specifying that no license to the other party’s IP rights (typically including trade secrets) is granted. The ‘no license’ clause is generally coupled with a ‘non-use’ clause that prevents the counterparty from exploiting the confidential information for any purpose other than evaluation.
• No Warranties: NDAs typically include a “no warranties” clause, clarifying that neither party is making any promises about the information it is sharing.
• Term Limit: a key function of NDAs is a time limit. No one wants to be on the hook for keeping secrets indefinitely, so NDAs are typically term-limited (generally at 1-2 years), with a secrecy period after the term (usually 2-3 years).

Most NDAs are designed to get discussions started. There are a few exceptions, such as special-purpose NDAs for product-launch embargoes, litigation settlement discussions, or need-to-know sharing of sensitive information. As a general matter, however, NDAs are not made for the give-and-take of a long-term commercial relationship. That is the function of a confidentiality clause.

Confidentiality clauses are built for the long haul. They’re typically embedded in definitive commercial agreements—often appearing after representations and warranties—to protect confidential information during the relationship. Their purpose is to protect confidential information during the commercial relationship. While shorter than an NDA, a confidentiality clause covers a greater number of scenarios. Confidentiality clauses apply not just to initial disclosures, but to ongoing exchanges of data, designs, or proprietary processes necessary to perform the agreement.

Whereas NDAs are designed for a limited purpose, a confidentiality clause is designed to cover any sharing of secrets over the life of a commercial relationship. Confidentiality clauses are generally not time-limited (and may survive the agreement’s termination) and lack “no license” or “no warranties” clauses. Unlike most NDAs, confidentiality clauses often survive indefinitely for trade secrets, aligning with state laws that protects them so long as secrecy is maintained.

In sum, NDAs and confidentiality clauses serve different commercial purposes and are thus drafted differently. Texas courts routinely enforce NDAs and confidentiality clauses when their terms are clear and reasonable in scope. In Guy Carpenter & Co. v. Provenzale, 334 F.3d 459 (5th Cir. 2003), for example, the Fifth Circuit upheld a confidentiality provision that was narrowly tailored to protect legitimate business interests.

Together, NDAs and confidentiality clauses ensure that information is protected both before and after the deal is inked. Once the distinction between the two is clear, the next question is when to use both in practice.

2. Why Use Both

Why should businesses use both an NDA and confidentiality clauses? There are three main reasons:

1. Timing. NDAs should be signed before any commercial discussions. This prevents a party from accidentally sharing confidential information without protection in place. By contrast, definitive agreements can take weeks, months or even years to negotiate, or never get signed at all. Not having an NDA in place during negotiations can leave a company vulnerable to having their secrets misappropriated or exploited. An NDA bridges that gap by ensuring both sides can explore opportunities safely and freely before formal agreements exist.
2. Content Differences. NDAs are designed for early-stage negotiations. Thus, they prevent parties from using confidential information in ways that are standard once a commercial relationship has started. Almost by definition, doing business means using the other party’s proprietary knowledge. A contractor can’t build a building without the architect’s blueprints.
3. Future-Proofing. Commercial relationships can last indefinitely. Almost every NDA features a term limit. By incorporating a non-term-limited confidentiality clause, companies avoid having to renew their NDAs and keep track of what was signed when. It is right there in the agreement.

Given these key differences, companies should be signing both NDAs and confidentiality clauses. The next question is how to incorporate both into the workflow, to which we turn now.

3. Practical Takeaways

Businesses can take a few concrete steps to manage confidentiality more effectively:

1.  Incorporate NDA-signing into workflows. Use standardized templates, automate signatures where possible, and track expiration dates to prevent coverage gaps.
2. Supersede NDAs with confidentiality clauses. Once a definitive agreement is executed, its confidentiality clause should expressly supersede prior NDAs to avoid conflicting obligations.
3. Refine Language. Align definitions of “Confidential Information,” duration, and exclusions across both documents to ensure consistency and avoid loopholes.

Used together, these provisions close the confidentiality gap between negotiation and execution. Handled consistently, NDAs and confidentiality clauses form a continuum, protecting secrets from the first conversation to the final deliverable.

Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.