The Key Elements of Non-Disclosure Agreements

There are many situations in business where you may need to share confidential information with another party. However, the key to doing so safely is ensuring that the other party is bound to respect and not use the confidential information you provide them.

A Non-Disclosure Agreement (NDA), also known as a “Confidentiality Agreement,” is a common way to protect the secrecy of confidential information given to another party.

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.

Confidentiality agreements do not protect general knowledge.

Confidentiality agreements must be reasonable, or they will not be enforced. In addition, an unreasonable confidentiality agreement is typically overly broad or unfair to the employee.

A confidentiality agreement may be deemed overly broad or unfair if it attempts to protect not inherently confidential information. For example, general knowledge or skills acquired by an employee during the course of employment are not covered information. A restaurant, for example, is unlikely to enforce a confidentiality agreement with a cook who learns only basic skills from his job, such as how to chop an onion, because these fundamental skills are open to the public and are not confidential.

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.

When it comes to enforcing an agreement, specificity and relevance are crucial.

An adequate confidentiality agreement helps to ensure that information of value to a business or that provides a competitive advantage remains confidential. In addition, if an employee discloses confidential information to a competitor or leaks it to the general public, a confidentiality agreement allows the company to pursue legal action against the employee.

To ensure that an agreement is enforced if an employee discloses confidential information, it is critical that the agreement adequately covers the needs of the business without becoming overbroad. When creating a confidentiality agreement, it is essential to ensure that specific details are specified. For example, the contract should state:

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.

What Is Considered Confidential?

This section of the NDA defines confidential information. Is there any information here? Is it information that has only been labeled “confidential” in writing? Can oral information be considered confidential?

On the one hand, the disclosing party wants this definition of confidential information to be as broad as possible. But, on the other hand, the opposing party does not find a loophole and begins using its valuable secrets.

If you are the recipient of the information, on the other hand, you have a legitimate desire to ensure that the information you are supposed to keep secret is identified so that you know what you can and cannot use.

Oral information, in particular, can be challenging to manage. Some information recipients insist that only information conveyed in writing must be kept confidential. But, of course, the party providing oral information may object that this is too narrow. The typical compromise is that oral information can be deemed confidential. Still, the disclosing party must confirm in writing to the receiving party shortly after disclosure so that the receiving party is now aware of which oral statements are deemed confidential.

The Scope of the Confidentiality Obligation

The heart of the Non-Disclosure Agreement is a two-part obligation on the part of the receiver of the information: to keep the confidential information truly confidential and not to use the confidential information itself.

The first requirement is that the recipient of the confidential information keeps it secret. And this usually means that the recipient must take reasonable precautions to prevent others from accessing it. For example, reasonable steps could include restricting access to the information to a few people within the recipient’s company and informing them all of the nature of the confidentiality restrictions.

The second component is also critical—recipients are unable to use the information themselves. After all, the last thing you want is for them to turn your brilliant idea or mailing list into a multibillion-dollar business.

If the scope of the NDA is broad enough, you can sue for damages or prevent the recipients from using the information if they violate either their confidentiality obligations or their non-use agreement.

Treatment Exclusions from Confidentiality

Every NDA contains specific exclusions from the receiving party’s obligations. These exclusions are intended to address situations in which keeping the information confidential would be unfair or too burdensome for the other party.

Excluded information is a typical example of a common exclusion.

The recipient is already acquainted with you.
The general public is already aware of it (as long as the recipient did not incorrectly release it to the public)
independently developed by the recipient without reference to or use of the disclosing party’s confidential information
Disclosed to the recipient by a third party who owes the disclosing party no duty of confidentiality.

The NDA can also deal with situations in which the recipient of the information is forced to disclose the information due to a legal process. For example, if compelled by a court order, the recipient should be allowed to do so without violating the NDA, as long as the recipient has warned the disclosing party in advance of the legal proceeding.

Terms of the Agreement

How long should the NDA be in effect? Some lawyers may argue that the NDA should be in effect indefinitely. Why should someone have the authority to use your personal information at any time?

However, if you are the recipient of the confidential information, you should probably insist on a precise end date for the agreement. After all, most information becomes obsolete after a certain number of years, and the cost of policing confidentiality obligations can be prohibitively expensive if they are “forever” obligations.

So, what is reasonable if you agree to a term? It all depends on the industry and the type of information being conveyed. A few years may be sufficient in some sectors because technology changes so quickly that the information becomes essentially worthless.

Most agreements I see (if they have a term) have a two to a five-year time limit. However, your NDA should also state that, even if the term expires, the disclosing party is not relinquishing any other rights that it may have under copyright, patent, or other intellectual property laws.

More NDA Provisions That Might Make Sense

Depending on your situation, you may want to include some additional clauses in your NDA to protect your company from future problems. Here are some ideas:

Employee Recruitment If the recipient has significant access to your employees, you may want to include a clause prohibiting the recipient from soliciting or hiring your employees for 12-24 months. With a few exceptions, the opposing party may occasionally agree to that. For example, the recipient may wish for the restriction to apply only to employees with whom they have had contact during their review of information or interviews.
Jurisdiction in the event of a dispute. If you are the disclosing party, you want to ensure that the dispute will be resolved solely in your city if there is a disagreement about whether the other party has met its obligations. You don’t want to travel a long distance and incur additional costs to enforce your NDA.
An injunction. Ensure you have a clause that gives you the right to injunctive relief if the other party violates the agreement. This clause simply states that you can obtain a court order preventing the other party from performing the infringing act (rather than just monetary damages after it is too late).
The receiving party has no rights. It’s sometimes helpful to include a clause stating that just because you’re going to share confidential information with them, the other side is not required to do so.