What is a Non-Disclosure Agreement (NDA)?

Non-disclosure agreements, or NDAs, are contractual confidentiality agreements. In these contracts, the parties to the contract promise to protect the confidentiality of information that is disclosed either during an employment or another type of business relationship or transaction. If you enter into an NDA with somebody who uses your secrets without authorization, you can go to court and request the court to stop the violating party from making any further disclosures or you can even sue for damages if a party of the NDA has been proven to have caused you damage. The use of NDAs has become ubiquitous in the tech industry. NDAs are used all the time, every day, particularly for internet and technology companies. For example, Severe Bhatia, who was the founder of Hotmail, made sure that everyone who knew about his startup company signed a nondisclosure agreement. In fact, over a two-year period, he collected over 400 NDAs from employees, friends, and roommates. He believes that his secrecy efforts gave him a crucial six-month lead on the market. Eventually, he sold Hotmail to Microsoft for a reported $400 million in Microsoft stock.

NDAs are used to protect any type of trade secret, meaning, any information that’s not generally known to the public and gives you or your business a competitive advantage in the marketplace. For example, by using an NDA, you can prohibit somebody from disclosing a secret invention, design, or something as simple as an idea for a new website or confidential material contained in copyrighted software programs that you’ve written. But the real purpose of NDAs is to create a legally binding confidential relationship between someone who has the trade secret and someone to whom you’re going to disclose that secret. People who have that confidential relationship are legally bound under this agreement to keep it confidential. A lot of people get really excited about the things that they’ve done or want to do and when this happens, people will often want to show people. But before you start showing people, you want to make sure that those you tell have signed an NDA.

People can be reluctant to sign NDAs, particularly people who fund ventures such as venture capitalists and professional investors. They may see something that looks a lot like yours and if they signed your non-disclosure agreement and it looks a lot like what somebody else showed them, there may be an exception to the NDA. For example, an inventor created this neat ratchet and brought it to the attention of an independent dealer for Snap-On Tools company. Later the inventor submitted the tool suggestion form to Snap-On’s corporate headquarters without having an NDA. The inventor never requested the confidentiality agreement for his idea which allowed Snap-On Tools to sell the tool suggestion without paying the inventor. The inventor tried to sue Snap-On Tools, but the court ruled against him because he didn’t have a binding nondisclosure agreement.

There are two basic types of NDAs. One is known as a mutual NDA where there are two parties who agree to disclose confidential information about each other to the other party and both are bound by the nondisclosure agreement. The parties in a mutual NDA exchange confidential information by providing secret information for a company to evaluate and in exchange they provide you with secret information. The other is a one-way NDA where only one party is sharing a secret with another, for example, when you explain your secret to a contractor or maybe to an investor.

NDAs have a few key components. Big companies who have the bargaining power in a relationship will often want you to sign their own NDA as opposed to signing your version. The first, and probably the most important element in an NDA is defining the confidential information you want to protect. Every nondisclosure agreement provides a list of the types of information to be protected and this will establish boundaries as to the subject matter of the nondisclosure, including, for example, programming code, financial information, and customer information. When reviewing your agreement, make sure whatever it is that you’re disclosing is listed as something that will be worthy of confidentiality. So, if you’re disclosing financial information, make sure it’s listed as confidential information in the agreement. The agreement also may protect any design, trade secret, invention, financial plan, marketing information, or business plan, but then there may be exclusions from the definition of confidential information.

Every NDA typically excludes certain information. An important exclusion is that information is not protected if it was created or discovered by the receiving party or made available to them independent of any involvement of the disclosing party. For example, if somebody develops an invention with similar trade secret information before being exposed to your secrets, then that other person is still free to use that similar information.

Obligations under NDA’s are also important. Whoever receives the information must hold and maintain that information in confidence and limit its use. Under most state laws, the receiving party cannot breach this relationship or induce others to do so. Importantly, the recipient should not be permitted to use confidential information for any purpose other than what is expressly permitted under the agreement.

Another key component is defining the time period the agreement covers. You may say that you only want the receiving party to be limited to using or disclosing the secret for a period of say five years from signing the agreement. Five years may be enough time because in five-year’s time there may be new technologies that are developed in this area that won’t make your secret sauce secret anymore or special. The discloser may want a longer period or an indefinite time period, without any limitations whatsoever. Ultimately, the length of the nondisclosure period may depend on the relative bargaining power of the parties involved.

Other important provisions may include what state law applies in the event the agreement is breached, what remedies are available to the parties if there’s ever a dispute or suspected breach, and whether attorney’s fees are recoverable or awarded to whoever prevails in any dispute.

Always remember to read your NDA carefully before you sign it, because, like any other agreement, no two agreements are alike. If the contract is drafted in a particularly clever manner, you can lose important rights if you sign it without review or negotiation. Watch out for language that may inadvertently waive your rights as the discloser of the confidential information.

Related Posts
  • Does My Business Need a Management Succession Plan? Read More
  • Who Can Sign a Contract on Behalf of Your Company? Read More
  • Corporate Transparency Act Update CTA Update! Read More