If you pay attention to the news or are involved in business transactions, you’ve most likely heard the term non-disclosure agreement (NDA) before. While most stories that discuss NDAs center around salacious details that someone (usually a celebrity or politician) doesn’t want to be made public, there are far more less-sensational situations where they might be appropriate.
NDA agreements could be an essential aspect of protecting your business.
What Is a Non-Disclosure Agreement (NDA)?
Non-disclosure agreements, also called confidentiality agreements, are a legal document signed by two people or an employer and an employee. It’s a legally enforceable contract, so if your employee violates it, for example, they can face stiff financial penalties.
There’s not much agreement on who created the NDA, but most experts agree that they emerged in the 1970s as a way for new tech companies to protect sensitive information and intellectual property.
An NDA protects a company by keeping an employee from taking insider information to other companies or share any confidential details about what the company is working on.
Now, more and more employers require employees to sign an NDA when they accept a job.
When Do You Need an NDA?
While some can use NDAs to stifle employees, there are many situations where they are appropriate and necessary, including:
- Protecting an inventor of a new product or concept
- Safeguarding sensitive information or intellectual property
- Distinguish what information is confidential and what may be shared (for example, in the case of an employee who leaves their job)
- Protect the identity of clients or customers of a company
If this sounds like your business, it might be smart to have new employees sign an NDA when they accept the job and before they begin work.
What Is Included in an NDA?
The main components of an NDA include:
Detailed Description Of The Confidential Information
The scope of your NDA should be guided by the information that you considered confidential. Sometimes the NDA is as broad as possible to protect company secrets, intellectual information, and proprietary information. However, if the agreement is too ambiguous, it won’t hold up in court.
The detailed description is, without a doubt, the most critical component of a non-disclosure agreement. This description spells out what information is not to be disclosed, the specifications about what constitutes “privileged” information, as well as an explanation of which formats are covered.
In other words, cover all your bases and specify that information shared through documents, emails, oral conversations, hand-written notes, letters, etc., is all included.
Requirements And Obligations Of The Parties
Beyond defining the Disclosing and the Recipient parties, a non-disclosure should also contain a clause that specifies who else the Recipient Party may disclose the confidential information during the course of the agreement.
There are times the Recipient might need to disclose information, such as speaking to their accountant, so this needs to be defined.
However, the point is that the Recipient should be required to protect the confidentiality of the information, refrain from using the information for personal gain, and be obligated to take reasonable steps to prevent access to the information.
Term Of The Non-Disclosure Agreement
Typically, most businesses want their information to be protected indefinitely. However, there should be a definite term inserted into the contract. Regardless of the agreement, the term timeframe of the agreement should be clear to avoid any misinterpretation.
There’s no standard time-limit for these agreements, as each situation is unique. Some trade secrets may be just as crucial ten years from now as they are today, so specify that in the agreement. Also, some information might be irrelevant in a year, so the agreement should reflect that as well.
It is crucial to keep in mind that most jurisdictions won’t enforce unrealistic time limits on any legal agreement, including non-disclosures. While you want to protect your business and the information you’re about to disclose, you also have to be practical and fair to the receiving party.
Consequences Of Breaking a Non-Disclosure Agreement
A clearly defined NDA will include the consequences of breaking the confidentiality agreement. Some consequences may include end of employment, additional damages, and attorney fees.
The Return of the Information
At the end of the agreement, the confidential information typically needs to be returned or destroyed by the Recipient Party. Your non-disclosure should contain a clause stipulating exactly how and when this should occur.
Should You Have Employees Sign an NDA?
Now that you have the answer to “what is a non-disclosure agreement,” you can determine if one is right for your business. If your company has sensitive information about new products, patents, or other information that needs to remain confidential, you may want to consider having your employees sign an NDA.
Remember, at the very least, a Non-Disclosure Agreement should cover:
- Obligations from all those involved
- Definitions and exclusions of confidential information
- The period for which the information must be kept confidential
- Anything excluded from the confidentiality rules
The NDA should be very specific about which information is deemed confidential and cannot be shared. It should also detail how long the information must be confidential (this time frame could range from a few years to indefinitely). But there are many more clauses that can be added to protect the confidentiality of your business.
An experienced business law attorney can help you determine when you need a non-disclosure agreement, what is included in a non-disclosure agreement, and what else can be done to protect your business.