Non-disclosure Agreement (NDA)

What Is an NDA?

An NDA, meaning “non-disclosure agreement,” is a contract between one person or group with sensitive information and another person who could potentially gain access to that information. Also known as a confidentiality disclosure agreement or non-disclosure contract, this document promises confidentiality, obligating one or both parties to refrain from sharing that sensitive information with others.

Have you found yourself wondering, “What is an NDA form good for?” Non-disclosure agreements are usually signed at the beginning of a business relationship in which the revelation of sensitive information could jeopardize the business, a transaction, or the people involved.

For example, someone stepping into an executive role might have access to trade secrets that a competing corporation can use to its advantage. To keep them from sharing those secrets, the new executive may be asked to sign an NDA.

What Does NDA Stand For?

NDA stands for “non-disclosure agreement.” As the name suggests, these contracts focus on information privacy rather than the terms of a sale or a service the organization provides.

What Is an NDA Used For?

Non-disclosure agreements may be used in a variety of situations where protecting sensitive information is crucial:

• Proprietary product or technology sales or licensing
• Employees with access to trade secrets or sensitive data
• Presentations or negotiation talks with potential partners or investors
• Contracts with vendors that may be exposed to sensitive information
• New clients who need to share sensitive information with your organization
• Protection of data shared with entities, intermediaries, and brokers during a merger or acquisition

An NDA can protect many types of sensitive information and data:

• Information, contact details, and conversations with major customers
• Pricing strategies or other marketing processes or techniques
• Operational information, including supplier, employee, and internal cost data
• Financial information that doesn’t require public disclosure, including the financial details of current or former customers
• Intellectual property that gives a company a competitive advantage, such as copyrights, trade secrets, and product or technology patents

As a binding and enforceable legal framework, an NDA serves several purposes for the organizations that use it.

Identify Protected Information

By nature, NDAs classify information into protected and non-protected categories. They identify what each party can share and what should remain confidential, giving everyone the freedom to work within these boundaries.

Prevent Sensitive Information Leaks

An NDA protects sensitive information by creating a legal obligation to keep the information private. If either party leaks sensitive information that was supposed to remain confidential, it’s considered a breach of contract and can result in criminal charges, lawsuits, and financial penalties.

Protect Patent Rights

If your ideas are publicly disclosed before you file a patent application, it can void your right to a patent. In this way, NDAs can protect companies and inventors with proprietary products and software during a product’s ideation and development phases.

The Elements of an Effective Non-Disclosure Agreement

All NDAs should cover several critical elements to ensure the confidentiality agreement is enforceable in court.

Identification of Parties and Participants

A non-disclosure agreement must indicate who is viewed as a party to the agreement and name the people and entities involved. It should be clear which party is disclosing the sensitive information and which is receiving it, either of which may be one person or a group of people.

This part of the contract can get complex for companies with multiple legal entities under one umbrella of ownership. In these cases, companies must define which entity owns the information and can act as the disclosing party.

Confidential Information Definitions and Scope

NDA contracts should avoid the use of vague language like “proprietary information,” as not everyone will know or agree on what this means. Instead, effective agreements must define exactly what information should be kept confidential.

However, it’s important to do this without unintentionally disclosing confidential information in the contract. To avoid this scenario, list the different types of confidential information the NDA will cover (such as financial statements or research and development data) and create rules and boundaries around how each type of information should be handled.

Confidentiality Exclusions

Some types of information need not be kept confidential, such as publicly available knowledge or information discussed or disclosed prior to signing the agreement. An NDA should either list these exclusions or simplify the agreement by stating that all information must be protected except what’s categorized as an exclusion.

Appropriate Uses of Information

Even if your company doesn’t need to keep information completely confidential, you may want to limit how and with whom that information is shared. For example, you might allow a party to share information with anyone or any entity except competitors in your sector. You may also indicate that they may not use proprietary information to develop a similar process or product.

Obligations and Remedies for Each Party

This section outlines specific behavior expectations for each party and the consequences for disclosing proprietary information. If confidential information is shared, the party who breached the contract may face a restraining order or be required to pay for damages. These consequences should be clearly stated in the contract.

Time Frame

In many cases, information is only considered sensitive for a period of time. For example, if you’re developing a product, there’s less of a need to worry about disclosing details once it’s available to the public for purchase. It’s important to specify how long each party is expected to comply with non-disclosure terms.

Return of Information

The disclosing party may provide confidential documents to the receiving party. If this is the case, the contract should state whether a party is required to return or destroy that information, when that should happen, and how to confirm these actions.

Common Limitations of NDAs

NDAs often face significant legal challenges and limitations. For instance, an NDA might deal with legal enforcement issues if it’s broad in scope, includes previously disclosed information, or results in provable damages.

Also, the public can sometimes be wary of NDAs that appear to cover up illegal or questionable activity, which can damage a company’s reputation.

Moreover, enforcement can prove difficult in cases where the disclosing and receiving parties are in different jurisdictions. This is because the same laws may not apply in both locations.

In terms of limitations, remember that NDAs only protect information specifically defined in the contract and only for the specified period of time.

Additionally, NDAs cannot be used to hide information that’s in the public interest, including the following:

• Criminal activity
• Information that impacts public health
• Information that clouds government transparency

Not all information can be or remain protected at all times. If protected information is revealed in a court proceeding, the NDA becomes void. Information that companies are required to make public (such as SEC filings) can’t be covered by an NDA either.

The Different Types of NDAs Employers Use

There are several types of NDAs a company can use to protect proprietary information. The NDA you select depends heavily on the type of business you’re conducting, expectations of reciprocity, and the number of parties to the agreement.

Bilateral (Mutual) NDA

In this type of agreement, two parties agree that neither will disclose confidential information. These agreements are often used when business teams are considering entering into a partnership, merger, or acquisition deal and need to reveal sensitive information to evaluate the viability of a strategic move.

Unilateral (Non-Mutual) NDA

In this agreement, only one party agrees not to disclose sensitive or proprietary information, such as a new employee signing a contract not to share any of the sensitive information they’ve just gained access to. The company doesn’t sign the contract, which means only the receiving party is bound to confidentiality.

Multilateral (Multi-Party) NDA

These agreements are in place between three or more parties where at least one party needs to share sensitive and protected information. When signing this contract, all parties are obligated to protect sensitive information. These agreements simplify the NDA process and eliminate the need for multiple bilateral NDAs between involved parties.

Disclosure NDA

Instead of outlining which information should not be disclosed, a disclosure NDA highlights what, how, and with whom information can be shared. This agreement allows one party to share specific information without being sued or otherwise penalized. These contracts are often seen in medical treatment, where doctors need to share information with insurers to get a patient’s treatment covered.

Tips for Creating NDAs

If you’re creating an NDA for the first time, there are a few best practices to keep in mind:

• Use specific language and definitions instead of vague or broad terms.
• Avoid disclosing the sensitive information before the contract is signed.
• Create a standard NDA and use electronic signature and storage to ease the process.
• Consider having the contract reviewed by an attorney.
• Keep the NDA focused on the information that should be kept private.
• Avoid non-solicitation and non-compete clauses to ensure the contract is fair.
• Keep the NDA to no more than one page to avoid overly complex language.
• If you use templates, take care to ensure each NDA is unique to your situation.
• Actively manage all NDA contracts, keeping up with signatures, time frames, etc.

Following these tips will help you create more effective agreements that increase your chances of success with enforcement.

What Happens if an NDA Is Breached?

What happens if an NDA is breached depends on the terms of the initial agreement and the laws of the jurisdiction in which a party wants to enforce the contract. Several outcomes are possible when an NDA is violated.

For instance, the party that incurred damages may take legal action to recover them. This might include filing a lawsuit, seeking alternative dispute resolution, or pursuing injunctive relief.

Additionally, the party that breached the contract may have to pay financial penalties outlined in the agreement or determined by a judge. Similarly, a company may experience a loss of revenue or opportunities due to a damaged reputation.

On an individual level, an employee may be terminated by their employer for breaching an NDA, especially if the NDA was a condition of employment. The consequences of a breached NDA may even rise to the filing of criminal charges if the contract involves information that could threaten national security.

Those who find themselves in a situation where an NDA is breached by another party should take steps to enforce the contract:

1. Identify and document the breach.
2. Send a cease and desist letter with a compliance deadline.
3. Seek injunction relief to prevent further disclosures.
4. Pursue monetary damages through a lawsuit or alternative dispute resolution.

Note that the specific steps a party takes will depend on the terms of their contract and the laws in the jurisdiction where the party is seeking enforcement.