Understanding Non-Disclosure Agreements

Understanding Non-Disclosure Agreements

by Jane Haskins, Esq., June 2015

If you’ve ever been asked to keep a secret, then you already understand the basic concept behind non-disclosure agreements.

A non-disclosure agreement, or “NDA,” creates a confidential relationship between a person or business that has confidential or trade secret information and a person that has access to that information. The NDA agreement protects these business secrets by limiting the way they can be used or disclosed.

The term “trade secret” sounds very high-tech, and in fact technology companies often do have trade secrets. But confidential information can be any type of information that a business wants to keep secret so it can enjoy an economic advantage over its competitors. It may include customer lists, expansion plans, information about new products being developed, information about pending litigation, or data about a company’s clients or customers.

Sometimes, the parties will sign a mutual non-disclosure agreement in which they agree not to disclose confidential information about each other. A mutual NDA is useful if two businesses need to exchange information, such as when they’re contemplating a merger or joint business venture.

What’s in a Non-Disclosure Agreement?

A standard non-disclosure agreement or confidentiality agreement includes the following:

  • A definition of the information that is considered confidential.
  • A description of any information that is excluded from confidentiality. For example, confidential information may typically be disclosed if it is required for legal or accounting purposes, and information is usually not considered confidential if it has already been publicly released.
  • 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 he or she is finished with it.
  • Time periods. A non-disclosure 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 attorneys’ fees.

A nondisclosure agreement may be a stand-alone document, or confidentiality clauses may be included in another document such as an employment agreement, an independent contractor agreement or a contract that establishes a business relationship.

What Are Some Uses for Non-Disclosure Agreements?

Non-disclosure agreements have become increasingly common. Here are a few of the common ways they come up:

  • Employee non-disclosure agreements. If your business deals in 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 secret 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 frequently have access to information that you don’t want made public.
  • Agreements with people from whom you are seeking funding. If you approach venture capitalists or local investors, you’ll need to divulge information about your products, your finances and your plans. An NDA can help ensure that they don’t share your ideas with a competing startup.
  • Agreements with the people with whom you do business. Doctors and lawyers are obligated to keep their patients’ and clients’ information confidential, but that’s not true of most other businesspeople. If the people you do business with receive or have access to your confidential information, you may want them to sign an NDA. Examples include the company you hire to manufacture your new product and the cleaning service whose workers are alone in your office at night.
  • Agreements in litigation or arbitration. When two parties are in a dispute, there is a formal process for exchanging information. Parties routinely require one another to sign confidentiality agreements that prohibit disclosure or use of the information outside of the litigation.

What to Do if You Are Asked to Sign an NDA Form

During the course of your business or employment, it’s likely that you will be asked to sign someone’s non-disclosure agreement. Remember that non-disclosure agreements can be contained in other documents, so you should look for headings such as “Confidentiality,” “Confidential Information,” or “Non-Disclosure.”

You should start by reading the agreement. Most NDAs are prepared from some sort of NDA template or form, and they can be long and include things that don’t seem to apply to your situation. After reading it, ask yourself whether it creates any obligations that you will have trouble fulfilling. If so, discuss these with the person who asked you to sign the NDA and see if you can renegotiate the terms.

If you have confidential information, beware of a confidentiality statement that might look like an NDA but has just the opposite effect. This sort of clause will typically say that the agreement does not create a confidential relationship or does not create any obligation of secrecy or confidentiality. That means that the other party has no obligation to keep any of your confidential information secret.

Whether you draft one from scratch or use a non-disclosure agreement form, an NDA is a great way to protect sensitive business information from being disclosed to the public before you’re ready. 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 obligations.

Download a nondisclosure agreement online with LegalZoom. LegalZoom offers several types of nondisclosure agreements to serve a variety of purposes.