Non Disclosure Agreements (NDAs)
A Non-Disclosure Agreement (also called a “Confidentiality Agreement”) is a legal contract that is used to protect trade secrets and confidential information from being shared with third (3rd) parties. Often used in business situations, the agreement is a safeguard that allows business owners, inventors, and other parties to share secret information with one another without fear that the other party will use the information in damaging ways, such as the copying of a formula or business plan.
Templates by State
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
The following is a guide to understanding Non-Disclosure Agreements:
Types of NDAs
Generally speaking, there are two common types of NDA’s. They are as follows:
Unilateral Agreement – In this method, only one (1) party discloses secret information (typically called the “Disclosing Party”) and the other individual or company (the “Receiving Party”) will be learning it. This is the most popular type of agreement and is used when companies hire new employees, for companies sharing their business plans, for doctors protecting their patient’s information, and many more.
Bilateral Agreement – Here, both parties receive and disclose confidential information to each other. While less common than a Unilateral Agreement, it is most commonly used in the business world, for situations such as mergers or for fostering trust between two companies conducting business.
What is a Trade Secret?
A Trade Secret is a form of “intellectual property,” owned by an individual or company that can be in the form of a method, device, technique, formula, pattern, compilation, or other means that gives the party that created or discovered it a competitive advantage. One famous example of a trade secret is the recipe for the soft drink Coca Cola, which since 1891 has been guarded by extreme measures. However, it’s worth mentioning that the company has relied on far more than just an NDA to keep the formula out of competitor’s hands.
When to sign an NDA?
Although NDA’s may appear as a document only used for specific scenarios, they are prevalent in several industries and fields in the world today. For companies in the modern age, preventing confidential information is a must for staying competitive, avoiding lengthy court battles, and keeping their focus on the things that matter most. The following are situations which are commonly protected by the binding contracts:
- Hiring a Freelancer – Freelancers allow startups and established companies to engage in both short and long-term projects that don’t warrant (or need) to involve the hiring of a full-time, salaried employee. Additionally, the specialized skills found in freelancers, the ease in which they can be hired (and fired), and their general flexibility make them incredible additions to teams. However, with their convenience comes the fact that they are ready to work for what is essentially the highest bidder means their loyalty to a single employer is questionable. Because foregoing the use of skilled freelancers for secretive projects due to the risk of information being leaked is impractical, employers can (and should) require their employees to sign an employment NDA.
- Mergers, Sales, and Acquisitions – When one company is planning on selling or merging their company with another, everything regarding the selling company’s structure, financial state, assets, client relationships, and every bit of confidential information that lead to the business’ success has to be shared to give the acquiring or merging company sufficient information on whether or not the decision is wise. An NDA provides a contractual barrier that restricts the illegal use of learned information from being used against them. However, companies that are considering using an NDA should use common sense before disclosing secrets, as well as properly vet the potential company, as the cost of proving breach of an NDA is not only costly, but can take an exceptional amount of time as well.
- Potential Investors – This one is tricky, as the majority of investors will not sign an NDA for the simple reason that they may be listening to several business pitches a day, and signing every NDA that comes there way would be impractical. However, in the technology industry, having an investor sign an NDA is more common, as the technology can be so damaging if landed in the wrong hands that they won’t pitch unless one is signed. In short, it can’t hurt to ask investors to sign an NDA – especially if the information is exceptionally ground-breaking or damaging. Having said, expect the majority of responses to be a “no”.
- Hiring new employees – One of the most common situations in which NDAs are signed is during the hiring of a new employee that will have access to confidential information. This is especially so in a startup environment where ideas are new, competition is high, and the potential for employees striking it out on their own is a real threat. If there is even a minor risk of an employee learning a Trade Secret, when in doubt, have them sign an NDA. Doing so not only gives the company a means of suing for breach of contract – it ensures the employee knows exactly what they can and can’t share, and its a strong psychological deterrent for even contemplating the stealing of information.
The above are only a few of the situations in which signing an NDA is wise. From medical practitioners to librarians, the applications of Non-Disclosure Agreements are widespread.
Frequently Asked Questions
The following are the answers to questions commonly asked regarding NDA’s:
Is it possible to get around an NDA?
In short, yes, it’s possible to get around a Non-Disclosure Agreement, but ONLY if there is a justifiable, defensible reason for doing so. For those that are trying to get out of an NDA, start by going through the following points step-by-step; if any hold true, there is a good chance the NDA can be exited legally:
In contract law, consideration can be thought of as the “benefit” each party receives for upholding their end of the contract. For a contract to be valid, each party’s consideration must be clear. In the majority of cases in which an NDA is used, such as for the sharing of business-related confidential information, the consideration for the receiving party is that they are learning information they otherwise would not have had access to. For the disclosing party, the consideration is that they are getting a contractual guarantee that the information they share will not be disclosed to any third party not clearly declared in the agreement. In situations such as these, consideration between the parties is clear and does not leave justifiable room for exiting an NDA.
What if the information learned by the receiving party is not, in fact, beneficial to learn? For example, say a high-profile celebrity or politician was caught by a bypasser performing an activity that would significantly hamper their social credibility if made public. They want to prevent the bypasser from disclosing the situation which was observed by any means necessary. In this situation, they can request the observer to sign an NDA which legally restricts them from sharing what they saw. However, unlike a business NDA, what consideration does the witnessing entity have? Observing what occurred does not necessarily mean it holds value. To counteract this, the high profile individual will typically offer the observer value in some form, such as money, a possession, or a comparable item of similar value. So long the exchange of value is clearly stated in the NDA and the witness signs it, the contract is fair. What if the receiver of the information does not have consideration? Say, the high profile individual pressured the witness to sign the document and they did in the heat of the moment – in this case, the contract is not binding, meaning the witness can exit the contract legally.
Breach of Contract
Without being apparent at first, the other party to the agreement may have already broken the contract themselves. For one-way NDAs that involve one party paying another a sum of money to keep quiet, the disclosing party cannot really “break” the NDA so long the money they paid is clear and in-full. However, for mutual NDAs (also called “bilateral” NDAs), in which both parties agreed to keep information they learned from each other private, if one party breaches the contract by unduly sharing said information with an outside party, it can be reasonable to assume the other party can now share the learned information.
For unilateral (one-way) NDAs, the disclosing entity cannot use the agreement to restrict the receiving party’s ability to find work with a new employer. For example, say a company requires a freelancer or salaried employee to sign an NDA when first hired, and the contract includes clauses that are exceptionally broad and all-encompassing. When the employee goes to work for a different employer that has better pay (or another reasonable motive), the previous employer threatens to sue based upon a breach of contract. This is not legal for at least two (2) reasons: 1) contracts that include broad, vague terms rarely hold up in a court of law, and 2), NDAs solely focus on restricting information from being shared with third parties – they do NOT operate as Non-Compete Agreements, which are contracts used for preventing employees from being employed with companies in the same field for a certain number of years.
The best-case scenario is that an NDA contains a clause that states the contract’s end-date (often called the “Term of Confidentiality” or “Early-Termination”). The clause is a short paragraph that states what necessitates the parties to terminate the contract and/or the length of time (typically 1 to 5 years) that is required to pass before the NDA is terminated automatically. An example of an early-termination clause is the following:
“Termination. This Agreement shall come into force when duly signed by both parties and shall continue for a period of five (5) years. If either party decides not to continue to be involved in the purpose with the other party it shall notify the other party in writing and this agreement will terminate with immediate effect.”
On the agreement’s expiration, it will be assumed that the receiving party no longer has an obligation to keep their learned information, and can share at their will. As a general rule, when the parties sit down to negotiate the contract, the disclosing party will fight for getting the longest duration on the contract as possible (to ensure the secret(s) remain confidential), and the receiving party will vie for having as short of a term as feasible.
What Happens if an NDA is Broken?
Breach of contract may or may not bring about serious financial and legal consequences depending on the severity of the breach, the leniency of the other party(s), whether there was actual misappropriation, and/or if the party that breached the contract was intent on causing harm. The best-case scenario (for the party learning the confidential information) is that the other party acknowledges that the information is no longer a threat if publicized, and agrees to dissolve the contract.
The worst-case? The party that breaches the contract can face being sued, being arrested if the trade secrets were stolen maliciously, faced with copyright infringement, and other serious repercussions. When drafting an NDA, it’s important that the parties include a remedies clause in the agreement that covers indemnification (a fancy word for receiving compensation) that results in the case misappropriation were to occur. An example of a remedies clause is the following:
Remedies. Each party recognizes and agrees that in the event of a breach or threatened breach of a party’s obligations, irreparable damage may be caused to the non-breaching party for which monetary damages alone would not adequately compensate such party. Therefore, each party agrees that, in addition to all other remedies available at law or in equity, the non-breaching party is entitled to seek an injunction or other equitable relief for the enforcement of any such obligation.
Note: The above clause is only a sample of what one should look like – hiring a qualified attorney to create a remedies clause for the specific situation surrounding the NDA is highly recommended.
What if the Learned Trade Secrets are Illegal?
NDAs cannot be used to cover-up illegal activities. For example, suppose an individual “Party A” is required to sign an NDA that restricts them from sharing information regarding the manufacturing or assembling of a line of children’s toys. However, after a year of working for the company manufacturing the toys, “Party A” discovers that the toys contain several ingredients that are illegal due to their cancerous properties. “Party A” wants to disclose said information, but fear they will be sued for breach of contract.
In this situation, “Party A” has immunity from liability so long they 1) disclose the illegal information in secret to a government official or a licensed attorney, 2) seal the official complaint in a lawsuit or other similar proceeding, or 3) are arguing the fraudulent company committed retaliation, and are disclosing the information to an attorney or while in court-proceedings. A common theme is that “Party A” must make a valid effort of protecting the company’s trade secrets while disclosing the suspected illegality of the situation. The law that protects those bound by an NDA that blow the whistle on illegal activity is the Defend Trade Secrets Act (DTSA) that was signed into law in 2016.
Section-by-Section Breakdown of an NDA
Before going about editing or drafting an NDA from scratch, it’s important to have a clear understanding of all the terms and conditions that are both required and optional. It’s important to note that the key to a good Non-Disclosure Agreement does not depend on the document’s length, moreover, on the quality of the terms and conditions within it. However, remaining legally binding and descriptive enough to hold up in court is equally paramount. The following sections are important pieces of an NDA:
“…the key to a good Non-Disclosure Agreement does not depend on the document’s length, moreover, on the quality of the terms and conditions within it.”
Names & Addresses of the Parties
This section establishes who the entities exchanging information are. Any third (3rd) parties should be included here as well. This can include coworkers, organizations, freelancers, or any other person or group who may be authorized to learn the information.
Definition of what constitutes as “Confidential Information”
A fine line separates what can be deemed as too definitive or too broad when specifying what is to be kept secret in the agreement. The party sharing the information (called the “Disclosing Party”) will frequently lean towards making the conditions as wide-ranging as possible to prevent the other party(s) from finding an alternative method of wrongly sharing the information. Contrarily, the party learning the information (the “Receiving Party”), prefers information that is precise and defined as to ensure they understand what can be shared and what can’t.
Information that cannot be deemed as confidential
Includes any info that cannot be restricted in the agreement, such as knowledge learned prior to the signing of the contract, info that is publicly available (or becomes publicly available), knowledge that is shared by a third (3rd) party not bound by a contractual agreement, or insight that was developed independently without the use of confidential information.
The Requirements of the Receiving Party (learning the Confidential Information)
What the party learning the information is required to keep secret, how they are supposed to keep it secret, and actions the party is required to take during the agreement or at the termination of thereof.
Term (duration) of the Agreement
The length of the agreement can vary from one (1) year to indefinitely. The length of the term is dependant on several factors, which include the field in which the secrets are shared, the type of information, the number of individuals or companies bound by the agreement, and the cost of preserving the trade secrets.
A general statement that specifies that if any provision of the agreement is unenforceable or does not apply to the situation in which the agreement is being used, the inapplicable provision does not affect the validity of the rest of the agreement.
States the parties bound by the contract are in no way partners, existing as a joint venture, or an employee(s) of each other.
Asserts that the agreement overrules any and all other agreements entered into by the parties. This cannot be changed unless the parties unanimously sign to terminate the clause/agreement.
The purpose of the waiver clause is to protect a party’s right to continue enforcing the agreement if they failed to enforce it at a prior point in time. For example, if the receiving party shares information wrongly and the disclosing party lets it slide (or doesn’t realize it happened), the waiver clause ensures the disclosing party can take action if the information is wrongly released again.
The state laws in which the contract is regulated by.
Signatures of the Parties
The part of the agreement that makes the parties obligated to adhere to the terms and conditions contained within it. All involved parties are required to sign the contract. It is highly recommended that the agreement is signed within the presence of a notary to ensure it is legally enforceable.