Non-Disclosure Agreement (NDA)

This article covers:

• Information Protected by NDAs
• NDA Requirements
• Pros and Cons of an NDA
• Breaking an NDA
• NDA Templates

A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship between two parties. These are also known as confidentiality agreements, confidential disclosure agreements, and proprietary information agreements. This legally enforceable agreement states that the parties will not share any sensitive, proprietary, personal information or trade secrets, especially in the hands of competitors.

Signing an NDA is common among businesses entering into partnerships or negotiations with other companies and for employers issuing this agreement before onboarding a new employee.

There are two types of NDAs:

• Mutual non-disclosure agreement - Multiple parties agree not to disclose information
• Non-mutual non-disclosure agreement - The agreement applies to only one party, for instance, the one who is receiving or will be privy to sensitive information (e.g., an employee)

These documents are enforceable if the agreement is drafted and executed correctly.

In the case of non-mutual types, some considerations must support the non-disclosure agreement, i.e., what does the other party (in most cases, an employee) get in return? In most cases, at-will employment is sufficient enough to uphold the agreement.

An NDA can be unenforceable: if the language used is too broad; the information is widely disclosed or is public knowledge; or if the issuing party is requesting the other to refrain from revealing illegal activities or any information that a person has a legal duty to report.

Information Protected by NDAs

What classifies as confidential or proprietary information will vary depending on the company type and individuals signing the NDA.

Information that an NDA can protect includes:

• Customer information
• Financial information
• Intellectual property
• Marketing information, strategies
• Operating information
• Business plans
• Sales plans

Information considered as common knowledge or that exists in the public domain cannot be covered by NDAs.

NDA Requirements

A non-disclosure agreement may be customized according to the organization’s needs.

Here are some standard components of an NDA:

1. Participants in the agreement
   1. Who are the people involved
2. Definitions of confidential information
   1. What types of information are considered confidential and proprietary
   2. Can include general information or department-specific ones (e.g., from Research and Development or Marketing)
   3. Do not assume that anyone will understand what is private information or not
3. Exclusions of confidentiality
   1. Include exceptions to the rule
4. Appropriate uses of information
   1. Details on how an external party uses the information given during the partnership
      1. In some cases, a company may be okay with the other party disclosing specific processes of the company as long as the other party does not use this for financial benefit.
   2. Return of proprietary information, including the destruction of same, if applicable
5. Time period
   1. How long is the NDA valid (or how long will the confidential information remain undisclosed)
   2. It depends on the agreement, but it can also be indefinite
6. Other provisions
   1. Dependent on the industry, type of business, or company executing the agreement
   2. Details on the course of action and consequences if the party fails to comply with the terms
   3. Any applicable state or federal laws

Pros and Cons of an NDA

Advantages

• Legal protection
• Parties can protect sensitive or private information before becoming public
• NDAs can clarify what can and cannot be shared, giving freedom to discuss any policies or information.
• NDAs are a cost-effective way to maintain confidentiality.
• Parties can maintain comfort and trust in a relationship/partnership through an NDA. It can be seen as a sign of respect if both mutually agree to an NDA.

Disadvantages

• NDAs can also create an atmosphere of mistrust.
• NDAs might also deter talent from joining a company.

Breaking an NDA

A well-crafted NDA will have the legal recourse of breaking the agreement laid out. It will again depend on the business or industry the parties are in, but some expected consequences include:

• Monetary fine
• Lawsuits (e.g., Filing a case on intellectual property violations), including applicable law and jurisdiction(s)
• Termination of employment or partnership

NDA Templates

Below are samples and templates you can review to draft your NDA:

• From the US Securities and Exchange Commission
• From the UK Government