Many businesses have proprietary information that they rely on to stay competitive. However, there are many instances where information has to be shared in order to accomplish an objective or simply to have a candid discussion that will not come back to bite the parties to that discussion. Using a non-disclosure or confidentiality agreement has become common, and many businesses require outside parties to sign one before any form of interaction.
So, what is a non-disclosure agreement, and when would you need one for your business? Here is a brief guide to what you need to know about an NDA.
What is an NDA?
A non-disclosure agreement is a legal contract designed to facilitate confidentiality between two parties. The contract obliges the involved parties to keep certain information confidential. This is any information that is considered valuable, such as a business idea or a trade secret. Breaking an NDA gives rise to a legal claim against the offending party.
What Else is in an NDA
Often, parties are asked not to disclose or use information that is covered by the agreement. Prohibiting the use of information is where an NDA can have unexpected consequences. As a general rule, we advise clients to be careful about provisions that are overly broad and could result in their agreeing not to use information that they need to conduct their business.
Generally, an NDA should not apply to:
- Information that is already public or generally known;
- Information that a party obtained independently; and
- Information that is already in a party’s possession.
If a party to an NDA has a conflict of interest that arises from being exposed to certain information, that conflict should be disclosed and waived. For example, if a consultant gives a client an NDA, and the consultant already represents another client that competes directly, it may be necessary to build information walls within the consultant’s operation to avoid inadvertent use (or the appearance of use) of the other party’s information.
If a consultant uses proprietary techniques to perform services for clients, and the consultant is presented with an overly broad NDA, the consultant may inadvertently entangle their proprietary techniques in the agreement not to disclose or use information. When we represent consultants, we make sure that they are able to sell their services while reserving their proprietary information and techniques for use with other clients.
Types of NDAs
NDAs come in different forms depending on the nature of the relationship or transaction. However, all NDAs can be categorized into three types:
- Unilateral Confidentiality Agreement
A unilateral confidentiality agreement imposes information-sharing restrictions on one of the parties. This is usually the secondary party receiving sensitive information from the primary party. It is especially common in employer-employee relationships or for the discussions that may precede the acquisition of a business. In a business acquisition, generally only the seller is providing proprietary information.
- Mutual Confidentiality Agreement
A mutual confidentiality agreement imposes the same information-sharing restrictions on all parties to the NDA. The contract treats each party as a giver and recipient of information. The non-disclosure obligations usually are identical for both parties, as are the penalties for breaking the contract. Mutual NDAs are especially common between collaborating parties or when there are impending merger discussions between two companies and both participants are doing due diligence on the other party.
- Reciprocal Confidentiality Agreement
A reciprocal NDA is like a mutual one except that the scope of the information-sharing restrictions varies between parties. Reciprocal confidentiality agreements are especially common between collaborating businesses with different types of confidential information or where they have very different roles in the relationship.
Why & When Would You Need an NDA?
Why would a small business need a non-disclosure agreement? the answer is whenever you want to share information that you want to remain confidential or that should not be exploited.
Here are three instances that may necessitate an NDA. There are others.
- Hiring an Employee
Your employees are privy to many aspects of your business’s operations, including sensitive trade secrets. They can sell or give this information to third parties or use it to set up their businesses. Consequently, many employers tend to ask new employees to sign NDAs before hiring them or as part of an employment agreement. This is especially advisable for high-level employees with access to the company’s most sensitive information. However, don’t get carried away. Low level employees (the guy making sandwiches) may think these agreements are over-reaching. A court or an attorney General might think the same thing. (Jimmy Johns Sandwiches was such a case discussed further in our article about non-compete agreements.)
- Collaborating with another Business
Businesses collaborate in any number of ways that include sharing sensitive information. The other party may leverage this information against you if the collaboration effort fails. It is important to have both parties sign NDAs before negotiations and that the NDA restrict both the dissemination and use of the confidential information.
- Hiring a Consultant
Businesses often hire consultants to carry out discrete tasks, provide advice and fix systems. For example, many small businesses outsource their marketing, IT, billing, and accounting to independent agencies. These functions expose the consultant to sensitive information which evolves over time. In other words, you may not be thinking about confidentiality six months after engaging a consultant. If you have an NDA in place, you do not have to.
Another consideration is that consultants may also represent your direct or indirect competitors.
- Don’t hesitate to ask a consultant who they represent or, if they do not want to disclose that information, whether they represent a competitor.
- Be specific about when you are trying to protect. “Kitchen sink” style provisions may be hard to enforce if what you are really trying to protect are discrete items that are baked into the broad categories of information listed in the definition of “Confidential Information.”
- Pay attention to the choice of law and venue for disputes. We are “big” on venue. Why? Because it is a psychological factor at the outset of any dispute. If the lawsuit has to be commenced in a court that is convenient to you, it becomes more onerous to the other side.
- Make sure you have a “specific performance” clause that enables you to get an injunction against breaches. It is not helpful to get a judgment against a breaching party after litigating for a year or more. You need to be able to seek a court order prohibiting the breach.
Elements of a Non-Disclosure Agreement
Your NDA should contain certain standard elements. These include:
- Information about the parties to the agreement
- The confidential information to be protected (be detailed to avoid loopholes)
- Exclusions from the NDA (acceptable causes for disclosing the confidential information)
- The disclosure period (essentially how long the NDA will be enforceable)
- Provisions for the transfer of this confidential information
- Guidelines on what to do with the confidential information after the NDA expires
- The second party’s obligations in protecting the confidential information
The standard disclosure time for NDAs is 3-5 years. However, you can increase this period by as many years as the parties agree. Additionally, you can include guidelines mandating the destruction of confidential information upon the NDA’s expiry.
It may be difficult to prove that the second party has breached the NDA agreement, unfortunately. What’s more, confidential information loses its value once shared (regardless of the subsequent legal consequences). As a result, an NDA should be as detailed and clear as possible.
Creating a Non-Disclosure Agreement
Confidentiality agreements have become so common that there are hundreds of NDA templates available online. However, generic NDAs may lack critical clauses or create conflicting or confusing rights. If the matter is important, it deserves personal attention.