Can You Keep a Secret? The Importance of Non-Disclosure Agreements

What are non-disclosure agreements?

An NDA is a legally enforceable written contract by which one or more parties agree not to disclose confidential information they’ve shared as a necessary part of doing business together. 

NDAs are also known as confidentiality agreements, proprietary information agreements or secrecy agreements. Parties who sign the agreement are bound by it not to use or share confidential and proprietary information for business pursuits outside the arrangement.

Why are non-disclosure agreements important?

NDAs are crucial because they create a legal framework to protect ideas. 

For example, a design company has a design for a new invention, but it must work with a manufacturer to build the prototype and future units. The manufacturer won’t know what to build without receiving proprietary information. The design company protects its information with an NDA. It can share invention details knowing it can file a lawsuit if the manufacturer divulges information about the design company’s invention. 

What are the downsides of non-disclosure agreements? 

• Cost: There are costs associated with writing an NDA. The good news is that once you have the template, you can use this general NDA as a basis to customize future NDAs. 
• Accidental violations: Employees might not fully understand the terms of the agreement and may accidentally violate the NDA. This can prompt a legal process and ensuing legal fees for enforcing the NDA. 

What to consider before requiring an NDA

If you’re a business owner, carefully consider the following before you require someone to sign an NDA.

Who are you talking to?

Each NDA should be tailored to a specific relationship. Consider having an NDA in place in the following circumstances: 

• When onboarding new employees and independent contractors. An NDA is almost always recommended and typically expected in onboarding because new employees and contractors will likely access sensitive company information. Have the employee sign an NDA as soon as possible as part of their employee contract; anything that occurs before signing can cause issues down the line if they disclose sensitive or confidential information. Keep the signed NDA in the employee personnel file. 
• When approaching investors or lenders. When seeking private investors or business loans, consider what your initial conversations will entail, which information is public or private, and how much confidential information you’ll need to disclose to pique interest. If you can conduct initial conversations around public and non-confidential information, hold off on asking for an NDA. This may help generate a good rapport with your potential investor or lender. Once conversations turn to a company’s sensitive business information (e.g., business accounting, marketing strategies, or an intellectual property portfolio) or details about services and products, both parties should secure and sign an NDA.
• When courting a new client. Initially, discussing terms without an NDA may be beneficial, so you and your potential new client can do your due diligence via outside contacts. Once you formalize a deal or venture, an NDA may be necessary to more freely exchange information about the project’s scoop, entities or matters involved, and price or fees. 

What information do you need to protect?

Since NDAs vary, tailor them to your specific business arrangement. Boilerplate agreements often serve little purpose if breached; parties will simply argue over what is and isn’t considered confidential. 

Here are the primary categories to address in a typical NDA:

• Trade secrets and intellectual property. When dealing with new employees, private contractors or new clients, protecting a company’s trade secrets and intellectual property is of the utmost importance. If you’re onboarding a new person to a project or giving a client access to your product (especially if you’re in the software realm), tailor the NDA to encompass what you want to protect and what is considered a breach.
• Marketing or financial information. If you’re more concerned with keeping your business’s marketing strategy or financial information private, highlight the information that falls under these categories in an NDA.
• Product testing. If you allow clients to beta-test a product and elicit customer feedback on their user experience or product recommendations, include a feedback clause within the NDA to protect and maintain the confidentiality of all exchanges belonging to your company. 

What are you prepared to do if confidentiality is breached?

Unfortunately, if someone breaches an NDA and spills your company’s confidential information, serious damage can be done, depending on the extent of information disclosed.

When you find out about an NDA breach, immediately notify your company’s legal counsel and determine if it’s possible to seek a temporary restraining order or preliminary injunction to prevent further information dissemination.

From there, discuss the appropriate next steps with legal counsel, including seeking damages for breach of contract, misappropriation of trade secrets, copyright or patent infringement, breach of fiduciary duty, conversion, trespass, and theft.

Each employee, client or potential investor is different, so how you approach each situation requires equal parts legal consideration and business strategy. 

Remember that if you are being asked to sign an NDA, don’t think of it as a restraint. Instead, see it as an opportunity to become part of the circle of trust.

Daliah Saper contributed to the writing and reporting in this article.