R unning a successful business takes a great deal of hard work and dedication. It also often requires safeguarding certain sensitive information about your business to maintain a competitive edge and continue to set yourself apart from the competition. This is where NDAs can come into play.
So, what is an NDA, and how can you utilize these types of agreements in a business context? In this guide, we’ll explore the ins and outs of non-disclosure agreements, when to consider using them in your business dealings, and how to better ensure that your NDAs are reasonable and enforceable.
What Is an NDA?
A non-disclosure agreement (NDA) is a type of legally binding contract between parties who agree to keep certain information confidential. For this reason, NDAs are also commonly referred to as confidentiality agreements. Businesses frequently use NDAs in various industries and situations to protect proprietary information and other sensitive data from unauthorized disclosure to third parties. When carefully drafted, NDAs can offer several benefits, including:
Protecting proprietary information, such as trade secrets, financial data, and customer lists, by classifying it as confidential and preventing competitors from gaining access.
Preserving business relationships by building trust between parties who provide their assurances that they will handle confidential information with care.
Providing avenues for legal recourse if one or more parties to the NDA breach the terms of the agreement and wrongfully disclose confidential information.
In short, if your business’s success potentially rests on the preservation of proprietary or sensitive information, an NDA can be a great tool for protecting this information in the future.
When to Use an NDA
An NDA might be useful for your business in various scenarios. Below are some common examples.
Non-Disclosure Agreement for Employees
NDAs frequently arise in the context of employer-employee relationships. In this type of non-disclosure agreement, a business typically seeks to protect trade secrets, company financial details, and other confidential information from being disclosed or otherwise misused by its employees. Notably, non-disclosure agreements for employees often require employees to keep covered information confidential during and after their employment.
Business Sale Non-Disclosure Agreement
An NDA for a business sale is another common type of non-disclosure agreement. Business sales transactions regularly require prospective buyers, investors, and other relevant parties to exchange sensitive information related to:
Customer lists
Business strategies
Financial records
Intellectual property
Asset lists and valuations
Disclosing this information to potential buyers may be necessary in the course of a potential business sale. However, not all potential sales will make it to the closing table. If the sale of your business falls through with one potential buyer, it is nevertheless essential that your proprietary information remains confidential moving forward. Thus, having an NDA in place at the outset can help prevent competitors from gaining access to information that might otherwise impact the sales process.
Vendor or Supplier Agreements
In the course of your business, you may need to partner with other parties to market, manufacture, or distribute your products and services. When working with third parties who are not directly affiliated with your business, it is crucial to ensure that these vendors, suppliers, and other business partners do not disclose or misuse certain information about your business. Such sensitive information can include knowledge of your company’s internal operations, products, services, and customers. Before formally partnering with any individuals or entities you would need to entrust with proprietary information about your business, consider using an NDA that details the obligations of the parties.
Business Settlement Agreements
NDAs may also arise in the context of business settlement agreements. While no business ever wants or expects to be involved in a legal dispute, such disputes do indeed happen. When parties can resolve their dispute amicably, they often set forth the terms in a binding settlement agreement. These contracts frequently include a non-disclosure or confidentiality provision specifying that the parties agree to refrain from disclosing the amount or terms of the underlying agreement.
Unilateral vs. Mutual Non-Disclosure Agreement
Regardless of the context in which you enter into a non-disclosure agreement, the NDA will generally fall into one of two categories: unilateral non-disclosure agreement or mutual non-disclosure agreement.
A unilateral, one-sided, NDA only requires one party to keep covered information confidential. Unilateral NDAs are more commonly used where only one party has confidential information to share with the other, such as in the case of an employer who shares company trade secrets, finances, and business strategies with an employee. Conversely, a mutual NDA is one in which both parties agree to keep each other’s sensitive or proprietary information confidential. An example of a scenario where a mutual NDA may be beneficial is when two companies seek to explore a potential business partnership requiring each to share confidential information about their respective businesses with the other. Deciding whether to implement a unilateral or mutual NDA ultimately depends on the specific circumstances surrounding your business dealing and the level of confidentiality protection desired by each party.
Unenforceable NDAs
Under general principles of contract law, NDAs are generally considered enforceable by the courts. However, there are some exceptions. Below are some examples of terms or provisions that may render an NDA unenforceable:
Restrictions on whistleblowing or terms that attempt to restrict parties from reporting illegal activities or from filing complaints with regulatory agencies.
Overly broad definitions of confidential information that would encompass information that is not genuinely confidential or that is already publicly available.
Terms that impose unreasonably or disproportionately harsh penalties for breaching the NDA.
While NDAs can certainly be a useful tool, it’s important to remember that there are some limitations that must be considered and complied with.
If your business’s success potentially rests on the preservation of proprietary or sensitive information, an NDA can be a great tool for protecting this information.
What Terms to Include in an NDA
Each NDA should be tailored to fit your business’s particular needs and goals. That said, below are some key items to consider including in your NDA:
Clear definition and scope of what constitutes confidential information
Obligations of each party concerning any confidential information
Duration of any confidentiality obligations
Jurisdiction and governing law that will apply in the event any dispute arises under the NDA
Available remedies in the event of a breach of the NDA, such as injunctive relief or monetary damages
In today’s competitive and interconnected business environment, protecting your confidential information is critical to preserving your rights and better ensuring the long-term success of your business. That’s why it’s never been more important to consider a comprehensive and well-crafted NDA to protect your business interests now and in the future.
