Can You Keep a Secret? The Importance of Nondisclosure Agreements

What are nondisclosure agreements?

An NDA is a legally enforceable written contract in which one or more parties agree not to disclose confidential information they’ve shared as a necessary part of doing business together. 

NDAs are also known as confidentiality agreements, proprietary information agreements or secrecy agreements. Parties who sign the agreement are bound by it not to use or share confidential and proprietary information for business pursuits outside the arrangement. “The NDA protects the company’s information by creating a contractual obligation for the party receiving the information not to disclose it to third parties and to protect the information from accidental disclosure,” explained Morgan Jenkins, partner at Johnson & Associates.

Types of nondisclosure agreements

The type of NDA someone signs depends on who is sharing confidential information:

• Unilateral NDAs: Unilateral NDAs are the most common option. They’re used when only one party will share protected information. For example, consider employer-employee or investor-startup relationships or situations where you’ll arrange influencer content to grow your business. In these situations, sensitive data like financial details, business strategies, merchandising systems, trade secrets, shareholder information and other crucial operational data may be revealed during everyday work activities or negotiations and pitches. These agreements protect the sharing party by preventing its confidential information, which gives it a competitive edge, from falling into unauthorized hands.
• Mutual NDAs: There may be situations where two parties will exchange confidential information, such as franchise agreements, corporate takeovers and mergers and when you’re selling a business. In these situations, a mutual NDA (also called a bilateral NDA) is essential to ensure sufficient protection for both sides. With mutual NDAs, both sides seek to protect private information that will be disclosed and are obligated to adhere to the terms of the agreement.
• Multilateral NDAs: Some situations are highly complex and include numerous parties that require confidentiality. In these instances, a multilateral NDA is necessary to protect each party’s private information.

Why are nondisclosure agreements important?

“NDAs are vital because they serve as a legal boundary between what you share and what others can actually use,” explained Cody German, partner at Cole, Scott, & Kissane. “NDAs set the tone that what is being shared is sensitive and proprietary.”

Here are just a few key reasons NDAs are important for businesses:

• NDAs protect your intellectual property: However intangible intellectual property may seem, it is yours to keep under an NDA. “Think of NDAs as the ‘do not pass go’ card for your intellectual property,” said German. “It helps ensure your secrets … stay yours instead of being stolen and becoming someone else’s competitive advantage.”
• NDAs keep your business and customer data safe: They help ensure compliance with regulations like the General Data Protection Regulation by preventing the unauthorized disclosure of sensitive business and customer data. This minimizes the risk of the costly legal repercussions of data breaches.
• NDAs set a legal precedent: An NDA establishes a foundation that makes it easier to prove a breach of confidence and pursue appropriate legal action if necessary. “Without a written NDA, it will be more difficult for businesses to establish that information was protected at law and determine who is liable for any breach of confidence and obtain an adequate remedy,” explained Oliver Tidman, intellectual property lawyer at Tidman Legal.
• NDAs can attract investors: Investors are more likely to invest in companies with a strong commitment to protecting their assets. Having an NDA in place demonstrates a proactive approach to safeguarding your intellectual property, which can increase the level of confidence potential investors have in your business.

What are the downsides of nondisclosure agreements?

Before entering into an NDA, consider the following potential downsides and risks:

• NDAs can be costly: Writing an NDA comes with associated costs, including legal fees. The good news is that once you have the template, you can use this general NDA to customize future NDAs. 
• NDAs may be violated accidentally: Employees might not fully understand the terms of the agreement and may accidentally violate the NDA. This situation can prompt an unwanted legal process and incur legal fees for enforcing the NDA.
• NDAs may stir mistrust: If you require employees to sign an NDA as part of the employment contract, your workers may feel you don’t trust them. This sentiment can foster an uncomfortable work environment or lead to speculation over the motives behind the NDA.
• NDAs may serve as a barrier to top talent: The restrictive nature of NDAs, which prohibit employees from discussing work details, employment terms and company culture, can deter potential high-quality employees from joining your company. Those who value business transparency and openness in the workplace may see this level of confidentiality as a red flag. 

What should you consider before requiring an NDA?

If you’re a business owner, carefully consider the following before requiring someone to sign an NDA.

Pinpoint situations where you’ll need an NDA. 

NDAs are particularly crucial at the start of a new business relationship, explained German, and should be tailored to that specific situation. Consider the following examples where an NDA should be considered: 

• Onboarding new employees and independent contractors: An NDA is almost always recommended and typically expected in onboarding because new employees and contractors will likely access sensitive company information. Have the employee sign an NDA as soon as possible as part of their employment contract; anything that occurs before signing can cause issues down the line if they disclose sensitive or confidential information. Keep the signed NDA in the employee personnel file. 
• Approaching investors or lenders: When presenting your idea to investors or seeking business loans, consider what your initial conversations will entail, which information is public or private and how much confidential information you must disclose to pique interest. If you can conduct initial conversations around public and nonconfidential information, hold off on asking for an NDA. Once conversations turn to a company’s sensitive business information, such as business accounting, marketing strategies or an intellectual property portfolio or details about services and products, both parties should secure and sign an NDA.
• Courting a new client: Initially, discussing terms without an NDA may be beneficial, so you and your potential new client can do your due diligence via outside contacts. Once you formalize a deal or venture, an NDA may be necessary to exchange information more freely about the project’s scoop, entities or matters involved and price or fees. 
• Before a new launch: “It’s critical to use NDAs before pre-launch discussions — times when you’re sharing product ideas, go-to-market strategies or technical breakthroughs with potential partners or collaborators,” said German.

Determine the information you must protect with NDAs.

Since NDAs vary, you must tailor them to your specific business arrangements. Boilerplate agreements often serve little purpose if breached; parties will simply argue over what is and isn’t considered confidential. 

Here are the primary categories to address in a typical NDA:

• Trade secrets and intellectual property: When dealing with new employees, private contractors or new clients, protecting a company’s trade secrets and intellectual property is of the utmost importance. If you’re onboarding a new person to a project or giving a client access to your product (especially if you’re in the software realm), tailor the NDA to encompass what you want to protect and what is considered a breach.
• Marketing or financial information: If you’re more concerned with keeping your business’s marketing strategy or financial information private, highlight the information that falls under these categories in an NDA.
• Product testing: If you allow clients to beta-test a product and elicit customer feedback on their user experience or product recommendations, include a feedback clause within the NDA to protect and maintain the confidentiality of all exchanges belonging to your company. 

What should you include in an NDA?

An NDA should comprehensively and outline its scope and parameters for all involved parties. To guarantee your agreement is complete and effective, ensure it includes the following elements.

A description of confidential information in your NDA.

When drafting an NDA, include specific information defining what constitutes confidential information. While specific agreements may define any information disclosed as confidential, others will only deem information as private when explicitly stated or marked.

All parties’ requirements and obligations in your NDA.

Explicitly state how each party will handle the confidential information. For the recipient, this means outlining measures they will take to keep the information secure, like preventing access by unauthorized individuals and ensuring it won’t be used for personal advantage.

According to Robert Pennell, attorney at The Law Offices of Robert Grant Pennell, LLC, an NDA is not enforceable unless both parties agree to the nondisclosure in a fair exchange. “If I draft an NDA that merely says Party A will not disclose or misuse the information it receives from Party B, it is not enforceable, as it lacks consideration to Party A for agreeing not to disclose such information,” Pennel said.

Exclusions to the confidentiality agreement in your NDA.

If there is information you don’t want covered under the NDA, list it in this section. For example, list previously disclosed information, common knowledge and information that must be shared with third parties to conduct regular business.

The duration of the NDA.

Specify the duration of time the confidentiality agreement will remain active. Whether the agreement is indefinite or for a set period ― like in cases where a brand is guarding details about an imminent product launch ― it’s important for all parties to be aware of the NDA’s active period.

The consequences of an NDA breach.

Detail the course of action if any party breaches the agreement. Some remedies may include paying for damages, loss of employment or filing a restraining order. Include a clause allowing alternative dispute resolution in case these remedies aren’t deemed appropriate for the situation.

However, avoid specifying dollar amounts for damages, as you’ll be locked into these costs during the court process, which could harm your case. 

Common mistakes to avoid when drafting an NDA

Drafting an NDA requires careful attention to detail to ensure its effectiveness and enforceability. Overlooking key elements can render the NDA useless or even create legal complications. Here are some common mistakes to avoid:

• Selecting the wrong governing law: Choosing the wrong governing law can significantly impact the enforceability of an NDA, as well as your ability to seek legal remedies in the event of a breach. According to Tidman, this is a common mistake that businesses make when drafting their own NDAs. That’s why it is always recommended to consult a lawyer during the drafting process.
• Providing overly narrow or broad definitions of “confidential”: “A definition that is too narrow could exclude information that might otherwise be confidential. A definition that is too broad could violate public policy and make the NDA void as it relates to some information,” Jenkins explained.
• Not identifying involved parties or obtaining signatures: Ensure all parties are explicitly named in an NDA and that it is signed by individuals with the authority to legally bind their respective organizations. Tidman highlights the importance of proper execution, emphasizing that failing to identify all parties involved or obtain proper signatures can render the agreement unenforceable.
• Requiring NDAs for every single employee, regardless of role: Pennell cautions against the practice of asking all employees to sign NDAs, given that many of them will not have access to the information your business needs to protect. “Hourly employees with entry-level jobs will not have access to this type of information,” Pennell said. “Overuse of NDAs can undermine their effectiveness and create unnecessary administrative burdens.” 
• Not communicating the terms of your NDA: According to Robert W. Taylor, of counsel with Carstens, Allen & Gourley, LLP, employees under an NDA often lack a clear understanding of their obligations under it. To avoid this, companies must communicate the NDA’s terms to all relevant employees, including the scope of confidentiality and the consequences of a breach.

What should you do if a nondisclosure agreement is breached?

Unfortunately, if someone breaches an NDA and spills your company’s confidential information, serious damage can be done depending on the extent of information disclosed. When you learn about an NDA breach, immediately notify your company’s legal counsel. The first thing your lawyer will do is review the contract both parties signed to confirm details and assess what has been breached. 

“Legal counsel should be consulted to determine the best course of action, which may involve pursuing remedies like injunctive relief to halt further breaches or seeking damages to compensate for losses,” said Taylor. “Swift action helps mitigate harm, reinforces the seriousness of confidentiality obligations and may help save some trade secrets that have not already been disclosed publicly.”

Depending on your specific situation, your lawyer may advise you to seek damages for:

• Breach of contract
• Misappropriation of trade secrets
• Copyright or patent infringement
• Breach of fiduciary duty
• Conversion
• Trespassing
• Theft

Each employee, client or potential investor is different, so how you approach each situation requires equal parts legal consideration and business strategy. Remember that if you are being asked to sign an NDA, don’t think of it as a restraint. Instead, see it as an opportunity to become part of the circle of trust.

Sean Peek contributed to this article.