Nondisclosure agreements, or NDAs, protect confidential business information from being prematurely disclosed to the public or falling into the hands of competitors.
Here's what you should know about them.
What is a nondisclosure agreement (NDA)?
A nondisclosure agreement, or NDA, creates a confidential relationship between a person or business that has confidential or trade secret information and another person who has access to that information. The NDA protects these business secrets by limiting the way they can be used or disclosed.
A trade secret is any type of information that a business wants to keep private so it can enjoy an economic advantage over its competitors. The term “trade secret" may sound high-tech—and in fact, technology companies often do have trade secrets—but trade secrets aren't relegated to any one industry. Examples include:
- Customer lists
- Expansion plans
- Information about new products or developments
- Details about pending litigation
- Data about a company's clients
What's included in a nondisclosure agreement?
A nondisclosure agreement may be a stand-alone document or in confidentiality clauses in another document such as an employment agreement, an independent contractor agreement, or a contract that establishes a business relationship. A standard nondisclosure agreement or confidentiality agreement includes the following:
- Explanation: This is a definition of the information that is considered confidential.
- Exclusion: This is a description of any information that is excluded from confidentiality. For example, confidential information may be disclosed if required for legal or accounting purposes. Information is usually not considered confidential if it has already been publicly released.
- Obligations: This is a description of the receiving party's obligations. In addition to keeping the information confidential, the receiving party may be required to destroy or return confidential information when they're finished with it.
- Time periods: A nondisclosure agreement may limit the amount of time the information is considered confidential.
- Miscellaneous terms: Like most contracts, an NDA may contain standard contract terms at the end, including terms related to modifications, choice of law, choice of venue, arbitration, and attorney fees.
What happens if an NDA is breached?
It depends on the terms of the NDA. Breaching or violating an NDA is a serious offense and can result in one of several courses of action. Here are some actions that can come from NDA violations:
- Termination: The person can be terminated from their position.
- Fines: They can be mandated to pay back what was lost due to their actions.
- Court action: They may be the subject of a lawsuit.
Types of nondisclosure agreements: MNDA vs. NDA
Depending on the situation, there can be different types of nondisclosure agreements to consider. Some are one-sided, while others contain restrictions on both sides. Here are the two types of NDAs to choose from:
1. Unilateral (NDA)
Unilateral nondisclosure agreements are the most common NDAs available. They act as a one-way contract, as only one party discloses information to another party. Some common examples of unilateral NDAs include:
- Employer-employee NDA: Restricts employees from revealing trade secrets and business information
- Company-contractor NDA: Restricts hired contractors from taking business information and sharing it with competitors or using it for themselves
- Inventor-evaluator NDA: Restricts evaluators from stealing someone's invention and patenting it as their own
2. Mutual (MNDA)
Mutual nondisclosure agreements (MNDA), also known as bilateral agreements, are used when two parties disclose confidential information to each other. Each party can then decide how their information is restricted and used.
For example, a company contemplating a merger or joint venture with another company may enter into a mutual nondisclosure agreement. This way, they're both able to share private company information without fear of it being used against them.
Use cases for nondisclosure agreement
Nondisclosure agreements have become increasingly common in various situations. Here are a few examples:
Employee nondisclosure agreements
If your business deals with sensitive information, inventions, research, or product development, you'll want to make sure your employees don't divulge company information to outsiders. Even if you just have ordinary business information such as sales data and customer lists, an employee nondisclosure agreement can help keep that information out of the hands of competitors.
Independent contractor agreements
Whether it's your virtual assistant, your part-time bookkeeper, or the person you hired to help with a special project, independent contractors may have access to information that you don't want to be made public. Like an employee NDA, an independent contractor NDA can help keep business information private.
Agreements with people from whom you're seeking funding
If you approach venture capitalists or other investors for funding, you'll likely need to divulge information about your products, your finances, and your business plans. An NDA can help ensure that they don't share your ideas with a competing business.
Agreements with the people with whom you do business
Lawyers are obligated to keep their clients' information confidential, but that's not true of most other businesspeople. If the people with whom you do business receive or have access to your confidential business information, you may want them to sign an NDA.
Agreements in litigation or arbitration
When two parties are in a dispute, there is a formal process for exchanging information. Both parties must sign confidentiality agreements that prohibit disclosure or use of the information outside of the litigation. This prevents competition and theft.
Parameters and limitations of NDAs
Nondisclosure agreements may act as a safety net for your business information, but they're not a catchall. NDAs possess certain limitations when it comes to protecting your ideas. These limitations include:
- Existing ideas: If an idea builds upon prior knowledge or existing ideas that are already public, it'll be hard to make an NDA stick legally.
- Proof of breach: Most breaches of confidentiality are by word of mouth, which is hard to prove without tangible evidence like a recording.
- Litigation cost: Odds are a government agency won't assist you in enforcing your NDA. You'll have to hire a lawyer and pony up for court costs. In the end, it may not be worth the cost to pursue legal action.
Nondisclosure agreements: FAQ
Keep reading for answers to some exploratory questions regarding NDAs.
When can a nondisclosure agreement be broken?
Within a nondisclosure agreement, there is an exclusions clause containing information that is omitted from the agreement. On the other hand, if an agreement is too vague or tries to include nonconfidential information, it can be legally challenged.
How enforceable is a nondisclosure agreement?
Nondisclosure agreements are legally binding contracts and are therefore legally enforceable.
What to do if you're asked to sign an NDA form
During the course of your business or employment, it's likely that you will be asked to sign a nondisclosure agreement. Remember that nondisclosure agreements can be contained in other documents, so you should look for headings such as "Confidentiality," "Confidential Information," or "Nondisclosure."
Also pay attention to the amount of time the NDA will remain in effect for, as some NDAs can remain in effect past the term of employment. Look for the information that is deemed confidential to ensure it's not too vague or overreaching.
Finally, make sure what's considered a breach of contract is included in the NDA.
Protecting your business with an NDA
Nondisclosure agreements are protective measures to safeguard your business. But if they're not handled properly, you could leave yourself vulnerable.
Be sure to have a strong nondisclosure agreement in place that's signed by all employees. Remember to be considerate of your wording to clearly define what is and isn't confidential information.
Whether you draft one from scratch or use a nondisclosure agreement template, an NDA is a great way to protect sensitive business information from being disclosed to others. If you routinely receive confidential information from others, you'll probably also be asked to sign their NDAs. Just be sure you read them first and understand your legal obligations.
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