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Learn how to protect confidential and proprietary information via NDAs.
For small and large businesses across all industries, protecting proprietary information is crucial to maintaining a competitive advantage. From critical financial information to exclusive designs, there’s plenty of information you should keep confidential from competitors. However, there are times you must disclose it to advance your interests. In these cases, the contract you use to keep your secrets as secure as possible is the nondisclosure agreement (NDA).
An NDA is a legally enforceable written contract in 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.
The type of NDA someone signs depends on who is sharing confidential information:
NDAs are crucial because they create a legal framework to protect ideas and intellectual property.
For example, say a company has a design for a new invention but must work with a manufacturer to build the prototype and future units. The manufacturer won’t know what to build without receiving proprietary information. In this case, the design company can protect 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.
Before entering into an NDA, consider the following potential downsides and risks:
If you’re a business owner, carefully consider the following before requiring someone to sign an NDA.
Every NDA should be tailored to a specific relationship. Consider the following examples where an NDA should be considered:
Since NDAs vary, you must tailor them to your specific business arrangements. 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:
An NDA should comprehensively and clearly outline its scope and parameters for all involved parties. To guarantee your agreement is complete and effective, ensure it includes the following elements.
When drafting an NDA, include specific information defining what constitutes confidential information. While specific agreements may define any information disclosed as confidential, others will only deem information as private when explicitly stated or marked.
Explicitly state how each party will handle the confidential information. For the recipient, this means outlining measures they will take to keep the information secure, like preventing access by unauthorized individuals and ensuring it won’t be used for personal advantage.
If there is information you don’t want covered under the NDA, list it in this section. For example, list previously disclosed information, common knowledge and information that must be shared with third parties to conduct regular business.
Specify the duration of time the confidentiality agreement will remain active. Whether the agreement is indefinite or for a set period ― like in cases where a brand is guarding details about an imminent product launch ― it’s important for all parties to be aware of the NDA’s active period.
Detail the course of action if any party breaches the agreement. Some remedies may include paying for damages, loss of employment or filing a restraining order. Include a clause allowing alternative dispute resolution in case these remedies aren’t deemed appropriate for the situation.
However, avoid specifying dollar amounts for damages, as you’ll be locked into these costs during the court process, which could harm your case.
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 learn 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.
Sean Peek contributed to this article.