Non-Disclosure Agreement NDA
If you own a business or are planning to start one, there will be instances when you would need to share your personal information with a third party. Put your troubles aside and concentrate on your business with a non-disclosure agreement.
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Non-disclosure agreements are often also called confidentiality agreements, and serve as legal contracts that protect sensitive information. The parties who sign an NDA agree to keep the information they learn confidential, with specified legal consequences if the contract is broken. A well-written NDA anticipates all the possible scenario and their fallout. It includes a covenant requiring the confidential information to be “used solely for evaluation of a possible transaction”, or words to that effect. This is one of the more important provisions of an NDA and is not normally subject to much negotiation or modification.
Why a company needs to use NDA?
- Non-disclosure agreements protect any information that could potentially damage the business if it were to be leaked to the competition or the general public. The specifics of what information any NDA protects should be written in the contract and understood by both parties. Brand owners can tailor their confidentiality agreements to safeguard various aspects of their business.
- An NDA is very important and useful for the seller (the disclosing party), as the seller is the one who is disclosing every piece of confidential information about the company. They face more risk from others finding out about the information, as it may not generate positive sentiments from customers and employees. For buyers, on the other hand, it is absolutely fine and normal to look for acquisitions and growth. , when a company is looking to sell itself, it may have any prospective buyer sign an NDA to protect any confidential information that the company may disclose during sale negotiations. Similarly, the company may have prospective investors and vendors/suppliers sign NDAs.
- One of the most common situations in which companies use NDAs, however, is when employees have access to confidential information, including trade secrets, proprietary processes, client information and lists, marketing strategies, and any other valuable or sensitive information. These agreements also allow courts to provide relief for unauthorized confidential information disclosure.
Confidentiality Agreement which can become unenforceable?
Examples of how this might happen include, but are not limited to:
- The agreement language is too broad: If the NDA is overly broad or restrictive, it’s more likely that a court will find problems with it, especially if it’s not limited in scope or duration.
- The information is not confidential: It’s certainly going to be harder for the company to convince a court to uphold the NDA against an employee if the information has already been widely disclosed or is public knowledge.
- The agreement is requesting the employee do something illegal: For example, the employer requests that the employee remain quiet about something that the employee has a legal duty to report. But these are just a handful of the almost endless list of circumstances in which a non-disclosure agreement may be unenforceable.
To make an NDA enforceable Language and word choice are of utmost importance.
Non-disclosure agreements can be tricky. They are designed to protect a company’s confidential information because there is a lot at stake when it comes to trade secrets. The language within the NDA must be precise so that a court can uphold any violations. This is why these agreements must be taken very seriously.
Contents and Terms in a Non-Disclosure Agreement (NDA)
- Parties – The parties to the confidentiality agreement will be the potential buyer and seller. It describes the buyer as the “Receiving Party” and the seller as the “Disclosing Party.” In case the buyer has few or no assets, then a guarantor may also be involved.
- Confidentiality – It defines the meaning of “confidentiality.” It includes data, information, or any other note shared electronically or physically, including meetings, that can’t be obtained from public sources. A very important clause from a “Disclosing Party” perspective is that all documents exchanged will be considered “confidential” rather than just the documents that are “specifically marked as confidential,” as there can be a situation wherein the seller misses marking a few documents as confidential.
- Exceptions to Confidentiality – Confidentiality agreements usually exclude certain information, which doesn’t amount to a breach of the confidentiality clause. Some of the exception clauses are:
– Information that is in the public domain
– Information that the disclosing party disclosed before signing the agreement
– Information received by the “receiving party” from a third party, wherein the third party was not obliged to keep the information confidential
– Information that was in the lawful possession of the receiving party before the date of signing of the NDA
- Disclosure of Information – The NDA will usually define the objective of the agreement. It will include the purchaser and other parties to whom the information can be disclosed for the assessment of a potential transaction. Generally, the receiving party is allowed to disclose the information to its employees, advisors, lawyers, and investment bankers.
- Destruction of Materials – The disclosing party would always want to include a provision that all information, including all physical and electronic data, should be destroyed if the parties terminate negotiations. However, the receiving party generally negotiates this clause with the disclosing party and concludes that the destruction of such records does not apply to their internal recordkeeping, any electronic backup storage, or professional recordkeeping.
- Period of Enforcement / Termination of Confidentiality – The NDA would specify the length of time the agreement is in force. No potential buyer would like to get tied up with an agreement for an indefinite period. Generally, an agreement is in force for a period of one or two years. Sometimes, parties also agree to terminate the agreement on completion of the transaction.
- Restraint Provisions – Confidentiality agreements also include non-solicit provisions. It restricts the receiving party and its subsidiary companies from approaching and soliciting any employee of the disclosing party. Sometimes, the disclosing party is also prevented from approaching any customer that the receiving party wouldn’t have in their ordinary course of business.
- Binding Agreement – The receiving party makes sure that the language clearly distinguishes and differentiates it from an agreement to negotiate a transaction. The objective of the NDA agreement is to explore an opportunity and explore its feasibility in terms of business fit and rationale for investment, rather than a commitment to bid for the deal.
- Implications for Breach of Confidentiality – It is very common and obvious that there is never an adequate remedy for a breach of confidentiality by the receiving party. The disclosing party keeps a provision to apply for an injunction and specific performance and other relief on an actual basis.
What are some benefits of NDAs for employers?
- Establishes employee expectations: When an NDA clearly outlines which business, information is protected — as well as the consequences for employees who violate the NDA — employees know from day one the importance of protecting company trade secrets. A well-written, detailed NDA may also provide employees guidance when it comes to the handling of trade secrets.
- Helps protect trade secrets when info is shared: While one goal of an NDA is to prevent employees from sharing confidential information in the first place, it can also help protect trade secrets when this information is shared during the regular course of business. For example, as mentioned earlier, a company may need to disclose some or all trade secrets with vendors and other third parties they do business with. But if the third parties sign NDAs, the trade secret will still be protected.
Gives the employer additional legal recourse: If an employee discloses a company trade secret, It may be permitted for the employer to file a misappropriation claim. But if the employee also signed an NDA, the employer may be able to pursue legal remedies under that agreement. And in many cases, pursuing a breach of NDA claim is simpler for employers than a trade secret misappropriation claim.
Consequences of breach
Violating an NDA can have serious consequences — NDAs are legally binding contracts. If an employee has violated an NDA, then the company may take legal action. The most common claims in NDA lawsuits include: Breach of the contract (such as the breach of NDA), Breach of fiduciary duty, Misappropriation of trade secrets, Copyright infringement, Other intellectual property law violations.
The penalties for violating NDAs can vary from situation to situation.
Suppose an employee or former employee violates the provisions of a non-disclosure agreement. If the employer finds out, the employer may seek an injunction to prevent the employee from further violating the NDA. An employer might also file a lawsuit for financial damages for all losses related to the breach of confidentiality obligations.
Types of NDAs?
- Unilateral NDAs also known as one-way NDAs, only require one party to disclose its confidential information to the other party. They are the most common type of NDA, and you will come across them whenever companies need to disclose confidential information to employees, advisors, clients, partners, and other stakeholders. Here are the most common types of unilateral NDAs:
- Employer-employee NDAs
Employers often require employees to sign these NDAs once they are hired. These agreements restrict the employees from using and disseminating confidential company information, such as Trade secrets– Business and development plans- Pricing data-Supply sources- Operation plans -Merchandising systems-Technical information such as projections and inventions.
- Company-contractor NDAs
Companies can use these NDAs to limit contractors from sharing confidential company information. Like employer-employee NDAs, company-contractor NDAs limit contractors from sharing critical business information that could reduce the competitiveness of the company.
Companies may also add detailed avoiding conflict of opportunities clauses and non-competition clauses to these NDA to limit contractors from using the knowledge they’ve gained while working at the company. Contractors are independent workers who have more flexibility and autonomy than employees. As such, companies will impose more limitations on contractors to prevent them from using and sharing information that could affect competition.
- Inventor-evaluator NDAs
Inventors can use unilateral NDAs to protect their inventions from being patented, used, or marketed by the evaluator. These NDAs also limit evaluators from using and disclosing the inventors:
- Business operations, including the inventor’s financial information, vendor information, internal cost information, external business contacts, and the methods and manners of conducting business
- Customer information, including the names of the customers, their contact information, and the data they provided
- Intellectual property, including test data and test results, status and details of research and development of services and products, patents, copyrights, and trade secrets
- Service information, including all data related to the inventor’s products and services
- Accounting information, including all balance sheets, company liability information, expense reporting, and profit and loss reporting
- Seller-buyer NDAs
Sellers can use NDAs to limit the buyer from sharing confidential information that they were exposed to during the sale of goods or services. They usually limit buyers from sharing the following:
- business operations, such as the seller’s financial and internal information.
- Intellectual property, such as the information relating to the seller’s proprietary rights and the status and details of research and development
- Production processes, including the processes used in the creation, manufacturing, and production of the seller’s products and services
- Computer technology, including all technical and scientific information about any process or machine used by the seller
- Bilateral NDAs
- Also known as mutual NDAs or two-way NDAs, bilateral NDAs require both parties to disclose their confidential information to each other. Both parties can limit how the other party will use and share their information.
- Bilateral NDAs are commonly used in situations where parties are required to exchange a lot of private business information during negotiations. These include corporate takeovers, joint ventures, and mergers and acquisitions.
- Multilateral NDAs
Multilateral NDAs or multiparty NDAs involve three or more parties where at least one of them will disclose information to the other parties. The party or parties will also require the other parties to protect that information from further disclosure.
- Multilateral NDAs are often found in complex, negotiation-heavy deals. A typical example of this type of NDA is a multiparty confidentiality agreement. Three or more companies can use this agreement to ensure that each party is only disclosing confidential information so that each party can determine whether it is interested in entering into further agreements.
If both you and the other party are inventors, you should specifically limit the other from sharing test data, test results, copyrighted material, and any other data that could make your invention less competitive if leaked.
Protect confidential information before signing the NDA
To avoid falling into this trap, just refer to your confidential information as “trade secrets” or “confidential data.” Don’t talk about the actual substance of the information—just focus on the length of the agreement and the limitations that you want to impose.
Our legal experts can help you with non-disclosure agreements (NDAs) in several ways.
- Firstly, we can advise you on whether an NDA is necessary for your specific situation. NDAs are typically used when you need to share confidential information with another party and want to ensure that they do not disclose it to others. We can help you determine if an NDA is the appropriate legal document for your situation.
- Secondly, we can help you draft an NDA that is legally binding and enforceable. This includes ensuring that the NDA includes all necessary elements, such as the definition of confidential information, the obligations of the receiving party, the term of the agreement, and the consequences of a breach of the agreement.
- Thirdly, we can review and negotiate NDAs that are presented to you by other parties. We can help you understand the terms and conditions of the NDA and ensure that your interests are protected.
- Lastly, in case of a dispute, we can represent you in legal proceedings related to the NDA. This includes helping you file a lawsuit to enforce the NDA or defend you against allegations of breach of the NDA.
We can provide valuable guidance and expertise when it comes to non-disclosure agreements, ensuring that your confidential information is protected and your legal rights are secured.