Last week, we talked about some important aspects of Confidentiality and Non-Disclosure Agreements, often referred to as NDAs. These agreements protect your valuable business information. But when should your business utilize an NDA? Here are three common situations that indicate your business needs an NDA now.
1. You are negotiating a business transaction.
Let’s imagine that a business (“BigCo”) is looking to expand. The owners of BigCo like your line of business. While your business is relatively new, you have found your niche. Your niche is a great fit for BigCo’s expansion. The two businesses aren’t exactly competitors, but they could be in the future. And in this line of business, you are ahead of BigCo in the game.
BigCo reaches out to you, saying that it is interested in purchasing your business or merging the two businesses together. You are excited that someone sees the value in the business you’ve created.
Your business needs and NDA now. Before you go any further, sign an NDA with BigCo.
In order to purchase or merge with your business, BigCo will conduct due diligence. They’ll want to know what they are getting for what they are paying. That means you’ll likely have to disclose customer lists, business strategies and plans, financial information and more to Big Co.
The NDA will allow you to disclose information knowing that legal protections are in place. It will also limit BigCo’s use of the information to evaluate the potential transaction between the two companies. Hopefully, the transaction happens. But if it doesn’t, you’ll have an agreement in place that prevents BigCo from using your confidential information to create a competing business.
2. You have employees or independent contractors who have access to confidential business information.
Let’s say that you are a graphic designer. A food and beverage company (“F&B”) hires your business to help create its new marketing campaign. F&B provides you with business strategy, customer information and other confidential business information. F&B requires your company to sign an NDA to protect this information and to prevent your business from disclosing it to third parties or using it to service future clients.
This is a big project on (of course) a short timeline. You decide to hire an independent contractor to assist you with the design work. Your NDA with F&B allows you to hire the contractor. However, your business is responsible for any breach of the F&B NDA, even if the breach is committed by the independent contractor without your knowledge or consent.
Your business needs an NDA now. Before you give the independent contractor any information, sign an independent contractor agreement that contains an NDA.
Properly drafted, the NDA with the independent contractor serves two purposes. First, it fulfills your obligation to F&B to protect its confidential information. The NDA with the independent contractor is physical proof of your efforts to comply. Second, the NDA protects your business’ confidential information, such as design processes and customer information.
3. Your business settles a dispute.
Now let’s change up the example. Your graphic design business signs a contract with a local clothing boutique (“CB”) to assist with a marketing campaign. While you stand behind your product, CB is unhappy with what your company delivered. CB files a lawsuit, saying your company breached the agreement.
The court orders the parties to mediation. While you don’t believe your business breached the contract, the lawsuit is distracting. CB makes a settlement offer, and your business agrees to pay the settlement.
Your business needs an NDA now. Before paying one penny, sign a settlement agreement that contains an NDA.
Your attorney can assist with drafting the settlement agreement. One of the provisions should have NDA language. This language will prevent either party from publicly disclosing anything other than the fact that a lawsuit existed and it was settled. Neither you or CB may disclose the amount paid to settle the dispute.
Your Business Needs an NDA Now
NDAs are all over the news these days. Arguments abound over the enforceability of certain NDA provisions. However, businesses and attorneys regularly use NDAs to protect valuable information.
While there may be a push to limit the enforceability of NDAs in some circumstances, there is a strong public policy argument for enforcing NDA provisions. The NDA is a valuable tool that allows businesses to explore opportunities, protect client confidences and settle disputes without public disclosure that could harm a business.
Disclaimer: This article is not a substitute for legal advice. Every situation is different; you should not rely or act upon the contents of this article without seeking advice from your own attorney. Use and access to this article or any materials or information provided herein do not create an attorney-client relationship between you and Christine Stroud, PLLC d/b/a Fincher Stroud Law, PLLC (the “Firm”). By providing public access to this article, the Firm is not purporting to solicit or render legal or other professional advice or opinions on specific facts or matters, and the Firm is not creating or intending to solicit or create an attorney-client relationship between you and the Firm.