A Non-Disclosure Agreement (which is also sometimes known as a Confidentiality Agreement) is an absolute necessity in many business relationships. In fact, it is one of the key protective measures you can take when entering into new business relationships, especially when you have valuable information you'd like to protect.
Unfortunately, sometimes small business owners aren't fully aware of how beneficial a Non-Disclosure Agreement can be. This may be because state laws vary on Non-Disclosure Agreements, but it also may just be because it is tough to be a small business owner and have the resources available for having an attorney on retainer to help explain these things.
In this guide, we'll go over everything you need to know about Non-Disclosure Agreements, including what they are, what circumstances they are used in, and what the most important provisions of the document are (and aren't).
As mentioned above, the laws surrounding Non-Disclosure Agreements can vary by state, so it is certainly a good idea to touch base with an attorney licensed where you live for specific questions about your contract. Either way, here we'll help you understand the Non-Disclosure Agreement in-depth, so you can be ready with the specific questions you need answered when you do go chat with a lawyer.
Please be advised nothing in this document constitutes legal advice and everything here should be taken as informational only.
First thing's first: what exactly is this document called a Non-Disclosure Agreement, or NDA for short?
An NDA is a document in which a person or business asks the subject of the NDA (another person or business) not to share confidential information that was shared with them. Besides being called a Non-Disclosure Agreement, NDA, or Confidentiality Agreement, an NDA can also be called a Confidential Disclosure Agreement, a Business Disclosure Agreement, a Proprietary Information Agreement, or a Business Secrecy Agreement. No matter what it is called, it means basically the same thing: a written, executed document where one or both parties are agreeing to keep certain information confidential.
For more information on how an NDA is distinct from a Non-Compete Agreement, which is another common business document, check out our guide, "What's the Difference Between a Non-Compete Agreement and a Non-Disclosure Agreement?"
Final takeaway: NDAs protect commercially valuable, non-public business information.
The definition of an NDA seems simple enough, but when are these documents primarily used? Well, the answer is that they are used very frequently in all different types of business relationships! In fact, for a business relationship where the parties are exchanging information, it's nearly always a good idea to have an NDA.
Here, we'll discuss a few specific circumstances where NDAs are very common.
You may have been asked by a former employer to sign an NDA at the start of your employment. Conversely, you may have asked an employee of yours to sign an NDA on the advice of an attorney.
The truth is, the employment relationship is certainly one where the employer will be sharing confidential information with their new employee, especially in the case of high-level, C-suite employees. Even for general staff, their day-to-day duties will almost certainly involve being privy to non-public information. This is why many employers issue a requirement that new employees sign an NDA before they start working.
One important point, however: Non-Disclosure Agreements, especially in the context of employment relationships, can be treated very differently by different states. Therefore, if you plan on asking an employee to sign one, it's imperative to talk to a licensed lawyer in your state before you do so.
When two businesses are considering entering into a joint venture, they usually sign a mutual NDA at the start of their discussions. A mutual NDA means that both parties are agreeing to keep certain information secret. A unilateral NDA, by contrast, is the type of NDA that would get signed in an employment relationship, where only one party (the employee) is agreeing to keep the information confidential.
Businesses might also sign NDAs in the context of any other commercial agreement. Even if it is not a full joint venture, before businesses choose to work together, they may have to exchange information, such as their finances or future development plans. Since that information is still non-public and highly secret, the business sharing it will want assurance that it will not go beyond the planned negotiations. In this case, an NDA is essential.
When someone signs on to work with a large national franchise, they will likely receive a lot of non-public information about how the franchise does business. In this case, an NDA will almost certainly be part of the package of agreements the new franchise owner signs.
Many people choose to start their journey into business by working with a well-known franchise. It's a good idea to understand what type of documents you may be asked to sign if you do so.
If you are not a business, but an individual that wishes to work with a commercial service provider, you might still wish to have that commercial service provider sign an NDA. For example, if you are a social media influencer that has hired a service to help you grow your following. This may be an instance where you will be providing that business with information that you want to remain confidential.
Another example is if you are a freelance consultant for any type of service. You may be providing your clients with certain tips, tricks, and tools that you don't want them sharing publicly. An NDA would help protect you in this case.
When a business is up for sale, the potential buyer will need to understand everything about how the business operates and how the business has been doing before they make the decision to purchase. The business that is up for sale will likely require an NDA in this case, so that they can safely share information relevant to the sale without worrying about it leaking.
Final takeaway: NDAs are used all across the business world. They are most common in employment relationships, as well as when two businesses want to work together.
Now that you know what an NDA is and what circumstances it is usually used in, let's discuss the two most important terms within the agreement.
The most important term in an NDA will be the definition of the information that is to be considered confidential. After all, this makes sense, as the reason why you would be asking someone to sign an NDA is because you want to keep specific information protected. Some common examples of confidential information including customer lists, development plans, financial information, and internal forecasting reports.
Too often, people will use template NDAs without reading what it is that they are meant to protect. A well-written NDA should cover all possible versions of confidential information that could be shared.
In some cases, the business might already have specific information labeled as confidential. This is fairly common and makes sense for any commercial enterprise. However, it is unlikely that a business will be able to anticipate all of the various information that could be shared by their staff, so it makes sense to have the NDA drafted broadly to cover anything that may come up.
Even in states where NDAs are explicitly allowed, they are usually not permitted to last indefinitely. What is reasonable for the term of an NDA will be dependent on the context of the business relationship and the specific information being shared. This is one of the reasons why it is a great idea to talk to a licensed attorney when you need an NDA drafted for a specific business circumstance. A year may be the limit of reasonable in some circumstances, while two or three years might be more reasonable in other circumstances.
Final takeaway: Pay close attention to the definition of confidential information, as well as the term of the NDA.
An NDA is only meant to be protective of commercially valuable, non-public business information that one party received from another. In other words, if the information does not meet all of those conditions (commercially valuable, non-public, that one party received from another), it usually won't be covered in an NDA.
The main categories of information that an NDA will not cover are:
Information that was already publicly and easily discoverable by anyone will not be within the scope of an NDA.
If the party receiving the confidential information already knew about it prior to the business relationship, or independently developed such information (and that can be shown), this also will not be within the scope of an NDA. As an example, if the definition of confidential information includes a specific chemical formula to help grow plants faster, but the other party to the contract can show that they developed the same formula on their own, without using any of the confidential materials, then that would not be considered confidential information.
Information belonging to or lawfully received by third parties (people or businesses that are not parties to the NDA) will not be covered by the NDA.
Final takeaway: NDAs won't cover information that is already public, known, independently discovered, or that belongs to a third party.
It's never a good feeling to find yourself in the position of worrying about your confidential business information. Usually, if one party breaches an NDA, the main concern will be protecting the information. The secondary concern may be getting compensation for anything that might have occurred as a result of the breach.
The best thing to do if someone has breached an NDA you asked them to sign is to contact an attorney. Additionally, this should be done as soon as you are made aware of the breach. The more time that goes on, the more likely it is that confidential, non-public information belonging to you will leak, harming your business.
An attorney who practices business law or intellectual property law in your state can help you immediately come up with a plan of action, including protecting the security of the information and deciding whether there are any other potential claims against the breaching party.
Final takeaway: If someone has breached your signed NDA, contact an attorney as soon as you can.
Non-Disclosure Agreements are vital documents in the life of any business. In fact, it could be said that since much of the business in the United States runs based on intellectual property, also known as creative information, NDAs are among the most important documents overall.
Even if you aren't sure if your business could use an NDA, it's still a great idea to contact a licensed attorney in your state. They will be able to help you decide what information is valuable and how important an NDA will be for you.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.