The Key Elements of Non-Disclosure Agreements

What Exactly Is a Non-Disclosure Agreement (NDA)?

 A non-disclosure agreement (NDA) is a legally binding contract establishing a confidential relationship between two parties. The signing party or parties agree that any sensitive information obtained will not be shared with anyone else.

When should you compel another party to sign a Non-Disclosure Agreement?

There are almost certainly numerous instances where it would be appropriate. However, the most common situations are when you want to convey something valuable about your company or idea while also ensuring that the other party does not steal or use the information without your permission.

Here are some common scenarios in which a Non-Disclosure Agreement may preserve your intellectual property and trade secrets:

• Presenting an invention or business idea to a potential partner, investor, or distributor
• Providing financial, marketing, and other information to a prospective buyer of your company
• Showing a potential buyer or licensee a new product or technology.
• Obtaining services from a company or individual who, in the course of providing those services, may have access to sensitive information
• Giving employees on-the-job access to your company’s confidential and proprietary information.

 Non-Disclosure Agreements are unlikely to be useful for start-ups seeking venture capital funding because most venture capitalists will refuse to sign them.

Mutual vs. Non-Mutual NDAs

There are two kinds of non-disclosure agreements: mutual agreements and one-sided agreements. When you think of a one-sided agreement, you’re thinking of only one party sharing confidential information with the other. On the other hand, the mutual NDA form is ideal for situations where both parties may potentially share confidential information.

Although there is always some appeal in using a mutual form of NDA, many avoid using it if they are not expecting confidential information from the other side. One way to decide this early on is to notify the other party that you do not wish to receive any of their confidential information and, as a result, do not see the need for a mutual form if they request one.

Employees are not restricted by confidentiality agreements, which protect businesses.

A confidentiality agreement, in particular, is an agreement that prohibits a person from disclosing certain information that a business wishes to keep private. For example, a confidentiality agreement can prevent an employee from disclosing confidential information about a company both during and after the employment relationship ends.

Confidentiality agreements, as opposed to restrictive agreements, such as a non-compete agreement, are more likely to be enforced. A confidentiality agreement, while similar to a non-compete agreement, differs because it does not prevent an employee from accepting or working in a specific employment field. On the other hand, a confidentiality agreement simply prohibits an employee from disclosing confidential information to anyone.

A non-compete agreement, for example, may state that a specific person may not work for a competitor in Florida for three years. This agreement prevents a person from working in a specific field in Florida during that period. On the other hand, a confidentiality agreement simply states the employee will not reveal confidential information to a competitor. Thus, the employee can work for a competitor if confidential information is not disclosed to the new employer.

If the information is a trade secret, it can be considered confidential.

In general, if the information is a trade secret, it can be treated as confidential. A trade secret in Florida is information that a company has a significant interest in keeping secret and has made efforts to keep secret. Several factors determine whether the information is a trade secret:

• The extent to which information is known outside the business
• The extent to which information is known within the business
• The precautions taken by the holder of the information to guard the secrecy
• The value that the secrecy of the information represents to the holder of the information
• The money spent or effort expended to obtain or develop the information
• The time or expense it would cost a competitor to obtain or develop the information

For example, a Fried Chicken Restaurant chain that spends time and effort creating a unique blend of herbs and spices will most likely want anyone who knows how to make the blend to keep that information private. While people inside and outside the company may know how to obtain and blend herbs and spices, they are unaware of how the company creates that unique blend. Therefore, the information would most likely be considered a trade secret as long as the company makes an effort to keep the method of blending its specific blend secret.

Trade secrets can include a wide range of information. A trade secret could be any information that a company wants to keep private, such as:

• Contract information
• Customer lists
• Financial information
• Marketing plans
• Special recipes
• Development methods
• Secret formulas
• Specific processes
• Supplier lists

Duration and geographic scope are irrelevant in determining the reasonableness of an agreement.

The reasonableness of a confidentiality agreement is unaffected by the agreement’s duration or geographic scope. Thus, a confidentiality agreement can be in effect indefinitely, as long as the information protected remains private. Furthermore, the information is confidential regardless of where it is disseminated, so no geographical restrictions are required.

For example, a local restaurant may create a unique barbeque sauce. Customers can purchase the barbeque sauce in bottles from the restaurant. People travel long distances to buy their barbeque sauce. To keep the competitive advantage that this barbeque sauce provides the restaurant over competitors, employees knowing how to make the sauce should likely sign a confidentiality agreement. This confidentiality agreement protecting the barbeque sauce recipe is almost undoubtedly enforceable, even if it does not include time or geographic restrictions. However, if the restaurant later publishes a cookbook with the recipe for the barbeque sauce, the confidentiality agreement isn’t enforceable because the information is no longer confidential. After all, the restaurant has made it available to the general public.

• What information or type of information does the business wish to keep confidential
• Whether there is any authorized way to use the information
• Why the information should be kept confidential (e.g., gives the business a competitive advantage in the industry) (i.e., indefinitely, three years, etc.)

If the agreement must be enforced, clearly defining the terms will assist the court in determining whether the agreement is reasonable. A company should also ensure that the contract is tailored specifically to their needs.

NDA’s, better too soon than not in time

It is much more difficult to recover damages and take action against an employee who reveals confidential information and harms a company’s bottom line without a confidentiality agreement.

Waiting until someone betrays a company’s trust can be too late. Having a reasonable and adequate confidentiality agreement in place, on the other hand, can show the court that the employee was aware of the confidential information and revealed it despite the agreement. While a court cannot undo the disclosure of confidential information, it can award damages to the business to compensate for some of the damage caused by the disclosure.

The Essential Elements of Non-Disclosure Agreements

Non-Disclosure Agreements do not have to be long and complicated. The best ones are usually only a few pages long.

The following are the essential components of Non-Disclosure Agreements:

• Identification of parties
• Define what is considered confidential.
• The scope of the receiving party’s confidentiality obligation
• Restriction on confidential treatment
• The length of the agreement

The Signatories to the NDA Agreement

The parties to the agreement are typically a simple description set forth at the beginning of the contract. For example, when only one party provides confidential information, the disclosing party is referred to as the disclosing party. The recipient of the information is simply referred to as the recipient.

The tricky part here is determining whether other people or businesses may also be parties to the agreement. For example, does the recipient intend to reveal confidential information to a related or affiliated company? To a companion? To a representative? If this is the case, the NDA should also cover those third parties.