Restricts the use of confidential information exclusively to the stated business purpose defined in the agreement.
⚠ High Risk
📚
Plain English Explanation
A purpose limitation clause restricts how the receiving party can use confidential information. It's not enough to just keep the information secret - you can only use it for the specific purpose stated in the NDA, typically called the "Purpose" or "Permitted Purpose."
For example, if the NDA's purpose is "evaluating a potential business partnership," you cannot use the confidential information to compete with the other party, develop similar products, or make investment decisions about third parties. Even if you never disclose the information to anyone, using it for unauthorized purposes is a breach.
This clause is particularly important because the most common way confidential information causes harm isn't through public disclosure - it's through unauthorized internal use that gives the receiving party an unfair competitive advantage.
⚠
Why This Clause Matters
Beyond Non-Disclosure: Many people focus on disclosure restrictions, but purpose limitation is equally important. You can breach an NDA without telling anyone anything.
Competitive Protection: Prevents competitors from using NDA discussions as intelligence-gathering exercises, learning your secrets under the guise of potential partnerships.
Investment Implications: Could you use financial projections you learned in an acquisition discussion to trade in the company's stock? Purpose limitations address these risks.
Scope Creep: Business relationships evolve. A narrow purpose limitation may restrict legitimate future uses as the relationship expands.
Enforcement Challenges: Proving someone used information for an improper purpose (versus merely knowing it) can be very difficult.
🎯
Risk Factors
Purpose Definition: Is the purpose stated broadly ("exploring potential business relationship") or narrowly ("evaluating acquisition of the Company's Widget Division")? Narrow definitions create more restrictions.
Amendment Provisions: Can the purpose be expanded by mutual written agreement, or is it locked in? Business needs change.
Internal Use Controls: Does your organization have processes to ensure information is only used for the stated purpose across different teams?
Knowledge Spillover: If your team learns something valuable, can they really compartmentalize it and not apply that knowledge elsewhere?
Derivative Works: Does the limitation extend to analyses, summaries, or conclusions derived from the information?
📄
Clause Versions
Use of Confidential Information
The Receiving Party shall use Confidential Information solely for the Purpose stated in this Agreement and for no other purpose whatsoever. Without limiting the foregoing, the Receiving Party shall not use Confidential Information to:
(a) Compete with the Disclosing Party or develop competing products or services;
(b) Gain any commercial advantage over the Disclosing Party, except as contemplated by the Purpose;
(c) Reverse engineer, decompile, or otherwise derive the composition or underlying information of the Disclosing Party's products or processes; or
(d) Make any investment decisions or provide investment advice to third parties regarding the Disclosing Party or its affiliates.
The Purpose may be amended or expanded only by mutual written agreement of both parties.
Nothing in this clause shall prevent the Receiving Party from:
(i) Using general skills and experience developed during the course of the relationship, provided such use does not involve the disclosure or direct application of specific Confidential Information;
(ii) Developing products or services independently without reference to Confidential Information, provided the Receiving Party can demonstrate such independent development through contemporaneous documentation; or
(iii) Using information for compliance with applicable laws and regulations after notifying the Disclosing Party when permitted.
Note: This balanced version clearly restricts competitive use while preserving reasonable freedoms for independent development and general skill building.
Use of Confidential Information
The Receiving Party agrees to use Confidential Information for the Purpose or purposes reasonably related thereto. The Purpose shall be interpreted broadly to include any use that:
(a) Furthers the business relationship between the parties;
(b) Is necessary to evaluate the potential transaction or relationship;
(c) Relates to the subject matter of discussions between the parties; or
(d) Is otherwise consistent with the intent of this Agreement.
The parties acknowledge that in the course of evaluating a potential relationship, the Receiving Party may need to share Confidential Information internally across various departments and with external advisors for purposes including financial analysis, technical evaluation, legal review, and strategic assessment.
This clause shall not restrict the Receiving Party from:
(i) Using knowledge and experience gained through exposure to Confidential Information for any purpose, provided the specific contents of Confidential Information are not disclosed;
(ii) Developing products, services, or strategies that may be similar to or competitive with those of the Disclosing Party, provided such development does not directly incorporate Confidential Information;
(iii) Making investment or business decisions based on the Receiving Party's overall assessment of its relationship with the Disclosing Party; or
(iv) Any use that would be permissible under a reasonably understood interpretation of the Purpose.
Why this favors you: Broad interpretation of purpose, includes "reasonably related" uses, permits extensive internal sharing, allows competitive development if not directly incorporating confidential information, and preserves investment decision rights.
Strict Purpose Limitation
The Receiving Party shall use Confidential Information SOLELY and EXCLUSIVELY for the specific Purpose set forth in the recitals of this Agreement and for no other purpose, directly or indirectly.
Without limiting the generality of the foregoing, the Receiving Party expressly agrees that it shall NOT use Confidential Information for:
(a) Any commercial purpose other than the specific Purpose;
(b) Developing, designing, manufacturing, marketing, or selling any product or service, regardless of similarity to the Disclosing Party's offerings;
(c) Making any business, investment, financial, or strategic decisions;
(d) Informing negotiations with third parties;
(e) Training artificial intelligence, machine learning, or other automated systems;
(f) Benchmarking, competitive analysis, or market research;
(g) Any purpose that provides any direct or indirect benefit to the Receiving Party beyond evaluating the specific transaction contemplated by the Purpose; or
(h) Internal research, development, or planning activities.
The Receiving Party shall maintain contemporaneous documentation demonstrating that all use of Confidential Information was limited to the Purpose. Upon request, the Receiving Party shall provide a written certification, signed by an officer, attesting to compliance with this section.
The Purpose cannot be expanded or modified under any circumstances without a formal amendment to this Agreement executed by authorized officers of both parties.
Warning - Extremely restrictive: Prohibits virtually all use beyond the narrow stated purpose, extensive list of prohibited uses, requires contemporaneous documentation, officer certifications on demand, and no informal modifications allowed. May be impractical to comply with.
💡
Negotiation Tips
1
Draft the Purpose Statement Carefully: The purpose statement is often in the recitals and easily overlooked. Negotiate for broader language like "exploring potential commercial relationship" rather than narrow definitions.
2
Add "Reasonably Related" Language: Push for language allowing uses "reasonably related to" or "in furtherance of" the stated purpose, giving flexibility for legitimate adjacent uses.
3
Preserve Independent Development Rights: Explicitly carve out the right to independently develop similar products or services without using confidential information, especially in technology contexts.
4
Consider Departmental Access: If you need input from legal, finance, or technical teams, ensure the purpose definition is broad enough to permit these internal consultations.
5
Address Future Expansion: Include a simple mechanism to expand the purpose by mutual written agreement if the relationship evolves.
6
Watch for Documentation Requirements: Avoid agreeing to maintain contemporaneous logs of all uses - this is burdensome and creates litigation risk.