A non-disclosure agreement is a legally enforceable contract entered by two or more parties that prohibits one party from disclosing information that they may come across deemed confidential. The contract creates confidentiality between the owner of the information and the receiving party. An NDA defines confidential information and any other details that should be kept confidential. Check out this 3-minute overview of this very important document by e-Forms.
An NDA is very important to all types of businesses. Any business operating will have confidential information that would be detrimental to its interests if it were to be shared with other parties. This information could be trade secrets, customer lists, email lists, financials, processes, formulas, etc. The list here is endless. Some people may come across this privileged information, such as employees, subcontractors, consultants, suppliers, etc. An NDA helps to protect the information from getting to unauthorized entities.
If you are running a business, it is good practice to sign an NDA with the various persons or entities you interact with and who may come across your confidential business information. Small businesses are especially vulnerable to unfair business practices. A competitor might lure some of your employees with the hope of gaining some confidential information they might hold. Without an NDA, you will feel powerless in this situation. However, as we'll be seeing in a later chapter, an NDA is not limited to employees only, there are other vital instances where it comes in handy for business, for example in service agreement contracts. In this video guide by Benjamin Wright learn the importance of NDAs and when to sign them specifically in the technology industry where confidentiality is key to maintaining a competitive advantage.
This guide covers the following topics on NDAs;
Types of NDAs
Before we go into a discussion of an NDA that would be best suited for your business' needs, it must be noted that there are three types of NDAs. They are classified based on the flow of information between the parties involved.
Unilateral NDA-this involves one party disclosing confidential information to another party.
Bilateral NDA- also referred to as a mutual NDA. It involves two parties disclosing confidential information to each other.
Multilateral NDA- one party discloses confidential information to two or more parties.
Key Clauses of an NDA
Just like other contracts, an NDA should have some important clauses that clearly outline what the document is all about. These clauses are:
Parties to the NDA
The parties involved in an NDA are normally the disclosing party and the receiving party for non-mutual NDAs or two disclosing parties for a mutual NDA. These parties should be adequately described in a manner that fully identifies them. If these parties are going to share confidential information with any third parties, the third parties should be identified.
Definition of Confidential information
These are the clauses that define what the NDA seeks to protect from being disclosed to other parties. This clause should be as detailed as possible since confidential information can mean so many things. It is tempting for the disclosing party to make this clause as broad as possible. This is often a big mistake because if there ever arose a dispute, the courts will want this clause to be as specific as possible to be enforceable.
However, you should not disclose the secrets or confidential information in the NDA. Instead you should describe what it entails and the type of information i.e. financials, process, methods, patents, software, etc.
The obligations of the receiving party
This clause sets out what the receiving party’s obligations are under the agreement. The receiving party has an obligation to keep the information secret and also can’t use the information themselves for their benefit, financial or otherwise.
The exclusion clauses determine the instances when the receiving party has no duty of secrecy to the confidential information. A well-drafted NDA should anticipate such instances and clearly define them. The most common instance is if confidential information is already public. Other instances include:
1. The receiving party already had this information prior to the NDA.
2. The information is common knowledge.
3. The information had already been disclosed to the receiving party by another party or through other means.
4. The receiving party is forced through a legal process to disclose such information.
5. Confidential information can be independently developed by the recipient.
6. Any information that the parties may agree is not confidential.
This is a clause that is often contentious in most NDAs. The disclosing party would want the receiving party to be bound forever from disclosing the confidential information. The receiving party may feel that this is an excessive obligation placed on them. Courts have been known to take a dim view of ‘eternal vigilance’ clauses in contracts.
The best practice is to have a definite timeline when the agreements start and end. If need be, the agreement can be renewed for further duration. In some cases, the confidentiality of the information becomes irrelevant over time.
What Constitutes Confidential Information?
Basically, anything you envisage as information that is unique to you or proprietary information can be described as confidential information. If the disclosure of such information can be detrimental to your interests, then an NDA should be used to protect it. Many NDAs are drafted and signed in the following areas:
- Financial information
- Marketing information (email lists, sales leads, customer data, pricing structure)
- Trade secrets
- Intellectual property
- Product ideas
- Original research
- Technical data
- Original designs
- Business plans/records
For these types of information to meet the confidentiality test, it must confer on the disclosing party some competitive advantage. To determine if any information has a competitive advantage, the information has to meet the following criteria:
- The information is not in the public domain
- The information has potential commercial value
- The information is reasonably protected and not easily accessible
- The information is communicated to the receiving party in private
Instances when you might need an NDA
There are many instances within the course of doing business that you may require an NDA. Some of these instances are straightforward, like when dealing with employees, while others are more complicated. Let’s look at some common instances where an NDA will help protect your confidential information. Evan Carmichael discusses these situations in this 5-minute video.
- Engaging employees, subcontractors, consultant, or freelancer who may come across confidential information
- Sharing financial, marketing, and other business records with a prospective buyer, partner, licensee, lender, etc.
- Sharing product ideas, inventions, trade secrets, processes, methodology, formulas with any third party such as potential buyer, investor, distributor, etc.
- Entering into business with another entity through which certain proprietary information may be exchanged
- During mergers and acquisitions
Enforcing an NDA
Having an NDA in place to protect your confidential information is only half the journey. You may need to go ahead and enforce it if you suspect there is a breach of confidentiality. Enforcing an NDA is often a lengthy and messy affair, as both parties may disagree on various issues covered by the document. Often, it ends up in court where a determination is made on the legality of the NDA and whether any relief is warranted.
Generally speaking, a court will check if the NDA is drafted properly, is signed, and passes the test of reasonableness for it to be enforceable. If it passes these tests, the court will look at the confidential information's nature and the alleged breach. Then it will determine if confidentiality was breached and lastly determine what the appropriate relief is. You may get an injunction against further breach or even damages in the form of financial compensation.
Enforcing an NDA can be a challenging task for an individual or a small business. Before proceeding on any enforcement actions, be sure about the breach. In some instances, it is inevitable you’ll end up in court despite your best efforts to protect your data.
Some of the claims you can file in a court regarding a breach in an NDA depend on the confidential information's nature and can include:
- Trade secret misappropriation
- Copyright infringement
- Unfair competition
The burden of proving that a breach of confidentiality occurred lies with the disclosing party. They must also prove how the breach caused the damages claimed. Before we look at the most common factors that limit the enforceability of an NDA, here is a short video guide by DocStoc TV's Matthew Neco to give you some insight on what to do when you suspect that the part you disclosed important information to is about to breach your NDA.
The NDA is not specific
Courts want your NDA to be as specific as possible. A broad NDA is likely to fail the test of reasonableness in many jurisdictions. A broad NDA is likely to place an unreasonable burden on the receiving party. Still, on the issue of being specific, the courts will be interested in the duration in which the receiving party must keep the information confidential. A long duration of say more than five years may be viewed to be unreasonable.
The key takeaway here is to make the clauses in the NDA dealing with the nature of the confidential information as specific as possible to avoid vagueness and being too broad.
The NDA doesn’t offer the receiving party any consideration.
Like other contracts, an NDA must offer consideration to the receiving party. The disclosing party and the receiving party must have some inducement for entering into the NDA.
Information is not considered confidential or is not valuable
Courts will shy away from enforcing an NDA if it deems that the information disclosed is not confidential or doesn’t hold any value. This is mostly information that is already in the public domain or information that the receiving party had gathered prior to entering the NDA.
Disclosing party has not taken steps to keep information secret
The disclosing party must take demonstrable steps to keep all confidential information subject to an NDA secret and limited to only those who need it. In lieu of this, the disclosing party cannot then purport to transfer the burden to the receiving party.
These factors that limit the enforceability of an NDA show how important it is to properly draft and execute the document. An NDA is often enough deterrence to mitigate against loss or use of confidential information to the detriment of the business.
The best protection of your valuable confidential data is by being proactive about protecting it even with confidentiality agreements. Some of the ways you can do this are:
- Storing your confidential data in a secure location
- Limiting access to confidential information on a need to know basis
- Giving access to only the part of the data each party requires
- Keeping a log of anybody who gets access to confidential data and what the accessed
- Regularly reviewing access protocols and auditing what is out there
- Taking action through a cease and desist letter immediately, you notice a leak
However, in some cases, even with the best protocols, a breach of the confidential information will occur. In most cases, the breach induces an economic value to another entity to the loss of the owner of the confidential information. In such a case, enforcing the NDA is the only logical step to take.
Non-Disclosure Agreements FAQs
Do I need an NDA?
This is a question that many entrepreneurs grapple with. They wonder if they should have confidentiality agreements with their employees, business partners. The answer is that you most likely need one. The reason you are in business is that you have something unique that you offer to the market. The idea behind your product/service being unique is your trade secret. This is confidential information that you need to protect. Besides this, you have other information that is valuable to your business. This includes marketing information, email lists, pricing strategy, list of suppliers, R&D data, product development data, etc.
Will my NDA be enforceable if the other party is overseas?
In this age, where the world is becoming smaller thanks to technology, many businesses will deal with people and other entities located in different jurisdictions. The best practice is to draft an NDA that clearly states where the coverage applies and which governing law should be used in case of a breach.
I found out one of my subcontractors was breaching an NDA. What should I do?
The best course of action in such a case would be to first send them a cease and desist letter clearly outlining their actions and demanding they stop them forthwith.
If this doesn’t not work, and you feel the breach is causing loss to your business, you should proceed to file a lawsuit against them.
I am in talks to sell my business. Should I demand every prospective buyer to sign an NDA before I give them any information?
This is a good question. It is good practice to have an NDA before you disclose any information that exposes your business. When talking to prospective buyers, they will demand this information. Have in place a Business sale NDA for each of them. We have a comprehensive guide on how to sell your business that answers this question in greater detail.
I already shared confidential information, can I enter an NDA retroactively
This is a tricky subject. Entering into NDAs retroactively is usually frowned upon by the courts and may be unenforceable. However, all is not lost, you can still enter into an NDA to protect any future disclosures. You can also apply other mechanisms to protect your confidential information.
Can I terminate an existing NDA
Mostly, many NDAs run their course within the time frame specified. In other cases, the confidentiality of the information becomes irrelevant. However, an NDA can have termination clauses and stipulate how to go about it.
Your business’ need for an NDA is dependent on the value of information in your industry. Determine how essential it is to be a trailblazer in your field and how being the early bird affects the demand for your product or service. Once you find that there is a need for an NDA, fill out this sample template and edit it to fit your needs. Make sure that you and the party to whom you will be disclosing information to know that keeping things under wraps are key to your success.