A Confidentiality and Non-Disclosure Agreement (NDA) can protect your business from unauthorized disclosure of valuable business information. You’ll often hear a Confidentiality and Non-Disclosure Agreement referred to as an “NDA.”
NDAs have been in the news recently. Stories about President Trump and Harvey Weinstein sometimes give these types of agreements a bad rap. However, businesses regularly use NDAs to protect confidential information and business trade secrets. Here are five you should know before utilizing an NDA to protect your business.
1. NDAs protect valuable business information in many forms.
Every business has information it wants to protect. Depending on the type of business, confidential information may include customer and vendor names, financial information, business plans, and much more. We typically define confidential information as anything provided to the other party. However, the parties may personalize the definition of confidential information to cover specific areas of concern.
The need for a NDA often arises when a company is considering entering into an agreement or buying or selling a business. Typically these situations require at least one party to disclose valuable business information. That’s where NDAs come in.
2. NDAs May be Unilateral or Mutual
These agreements are unilateral or mutual. If unilateral, one party will provide all confidential information to the other party or parties. The party who receives the confidential information agrees to keep the information confidential. The recipient may use the confidential information only in the manner permitted by the agreement. Unauthorized disclosure of the information breaches the terms of the NDA.
If the NDA is mutual, the parties will exchange confidential information. All parties are receiving parties. They must not disclose information to third parties and must comply with the obligations of confidentiality. In other words, the obligation to maintain confidentiality is reciprocal.
3. Some information is not confidential, even if you have signed an NDA.
Even if parties sign an NDA, some information exchanged might not qualify as confidential information under the terms of the agreement.
- A disclosing party may authorize the recipient to disclose information to a third party; or
- A court orders disclosure of information that would otherwise be considered confidential.
4. The obligation of confidentiality will eventually end.
We typically see NDAs with two-to-four-year terms. This means that at the end of the term, the obligation to maintain confidentiality and not disclose information ends. Oftentimes, information exchanged during the term of the NDA becomes stale. If the data is old, there’s not much concern upon termination. However, sometimes there’s a need for ongoing protection of information exchanged under an NDA.
Business owners worry about long-term protection of their data. There are some provisions that can mitigate this risk. For example, the parties might agree to certify destruction of confidential information exchanged during the term of the agreement. This might also include destruction of materials compiled by the recipient using the confidential information it received. This can occur upon written request or upon the expiration of the agreement.
In the example of a potential purchase of a business, the parties will exchange significant sensitive information. Some of this may contain trade secrets that need long-term protection (i.e., the information is not going to become stale). If you find yourself in that situation, ask your attorney to include specific provisions to help protect the long-term security of your business’ trade secrets.
5. You can agree to specific performance or injunctive relief for a breach of an NDA.
If a party breaches an NDA by disclosing confidential information to an unauthorized third party, the matter is urgent. If a party had to wait weeks or months to file litigation and for a judge to hear their case, the damage is done. Parties to an NDA may agree that money damages are insufficient and that if a breach occurs, a party may seek specific performance, injunctive relief, or some other equitable remedy. This allows the court to intervene and shut down the disclosure immediately by issuing a temporary injunction. While this is just what it says—temporary—but it might prevent irreversible damage. In addition, a court may put additional restrictions on disclosure while a lawsuit over the breach is pending.
If a recipient wants to disclose your confidential information, he will probably do so. An NDA cannot physically stop this from happening. However, an NDA does give you more options to protect your business and confidential information in the event of a breach.
Drafting and negotiating an NDA is relatively painless process. While it might not stop someone from disclosing your confidential information, it can serve as a deterrent. And, if drafted properly, it may help reduce the damage that your business incurs due to an unauthorized disclosure. The NDA will also give you the right to sue for breach of contract, a cause of action that may not be available without the agreement.
You can learn more about preventing mistakes in business relationships here.