NDAs, or non-disclosure agreements, are legally enforceable contracts that create a “confidential relationship” between a person who has sensitive information and a person who will gain access to that information. A confidential agreement means one or more parties have a duty not to share that information.
The purpose of a Non-Disclosure Agreement
The purpose of a non-disclosure agreement is twofold: confidentiality and protection. Information protected by a confidentiality agreement can include everything from product specs to client rosters.
An NDA creates the legal framework to protect ideas and information from being stolen or shared with competitors or third parties. Breaking an NDA agreement triggers a host of legal ramifications, including lawsuits, financial penalties, and even criminal charges. NDAs offer a level of protection to your business so that even accidental breaches are covered.
Parts of a Non-Disclosure Agreement
When you go through an NDA, you should find these specific elements:
- 🧑🤝🧑 Identification of Parties: Also known as “parties to the agreement”, the purpose of this section is to identify the people and/or entities involved in the non-disclosure contract. It explains who the disclosing party and recipient are, using names and addresses. Relevant parties such as attorneys, accountants, or business partners may also be included.
- 📖 Definitions: This section of the NDA lays out the different types of information covered by the agreement and establishes rules regarding how it is handled. It answers the question of what information is confidential.
- 📜 Obligations: What happens if protected information is shared? An NDA not only sets out the specific behavior expected from each signatory, but it also lays out the consequences of breaching the agreement.
- 🔎 Scope: A clearly defined scope ensures an NDA’s enforceability. Using general terms like “proprietary information” isn’t specific enough and won’t hold up in a legal setting. Scope should lay out what specific information the NDA covers e.g. drawings, magnetic media, prototypes and technical resources.
- 📅 Time frame: Most NDAs don’t last forever, and many confidentiality agreements explicitly state the number of years that sensitive information must be kept secret. Even those with an indefinite time frame will often indicate when information is no longer protected by the agreement.
- 🔙 Return of Information: After the conclusion of business between the parties, an NDA may require that the recipient confirm that sensitive information has been returned or destroyed.
- 🗣️ Exclusions: These are the types of information which do not need to be kept confidential. This might include public knowledge, previously disclosed details, or information someone knew before entering a business or financial relationship with a company or firm.
- ❤️🩹 Remedies: If there’s a breach of the confidentiality agreement, what happens? There are many possible courses of action, or remedies. These may include a restraining order, payment for damages, and other actions for breach of fiduciary duty and copyright, patent, or trademark infringement.
Limitations of NDAs
Of course, not all information is protected by a non-disclosure contract. Public records, including SEC filings or company addresses, are not covered by these confidentiality agreements. The courts can also interpret the scope of an NDA in ways that one or more participants may not have initially expected. If the information covered in an NDA is revealed in another way—like through a court proceeding or subpoena—then the NDA no longer applies.
Additionally, managing multiple NDAs as an organization quickly becomes untenable without standardized language. When the number of NDAs starts reaching into the hundreds, reviewing, negotiating, and concluding unique contracts manually is extremely demanding and time-consuming. A standard, adaptable confidentiality agreement addresses this issue, but only if the organization takes the time or consults with experts to create a standard NDA that meets all its needs.
Signing an NDA
There are many situations in which you may be asked to sign an NDA, including:
- Starting a new job with an employer
- Beginning a work contract with a new client
- Exploring an investment opportunity
- Negotiating a business partnership or joint venture
- Merging with or acquiring a business
It is normal to be asked to sign a non-disclosure agreement in these situations or any others where you’ll be given access to sensitive information. When that happens, it’s important to know what to look for in an NDA.
Expect to see the parts of an NDA listed above, including the identification of parties, definitions, obligations, scope, time frame, return of information, exclusions, and remedies. There may also be clauses about mutual non-disclosure or non-solicitation, as well as one stating the jurisdiction for handling disputes.
Before signing an NDA, take time to read it carefully and ensure you understand the contract. If you find broad or vague language that unreasonably restricts you, it may make sense to refuse to sign until that is resolved. Specific examples of this may include statements that you can’t divulge information that is public, knowledge that you already possess, or information received from a third party.
The Journal of Private Equity analyzed 47 NDAs throughout the years (2007-2014) and found that 60.8% were exact carbon copies of the respective companies’ NDAs in the research sample of 2007. Although the business world has evolved and document sharing methods, and subsequently all related risks, have increased exponentially the past seven years, clearly not all companies feel the need to adopt their NDAs to the current business climate.
If you have received an NDA and you are asking yourself, is it a standard one? Is it favorable to the other party? Should I accept it?
You may want to check SpeedLegal comparison with standard - which will give you an overview of the main risks in the contract.
You can try it for free at speedlegal.io.