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

Business.com / Legal / Last Modified: February 22, 2017

You don’t want anyone else to know your secret sauce but sometimes you just have to disclose it in order to advance your business interests.

If you are like most businesses you have developed, acquired, or painstakingly aggregated proprietary information that gives you a competitive advantage. 

You don’t want anyone else to know your “secret sauce” but sometimes you just have to disclose it in order to advance your business interests. 

In these cases, the contract you use to keep the secret as secret as possible, is the Non-Disclosure Agreement (NDA) aka the Confidentiality Agreement.

A Non-Disclosure Agreement is a legally enforceable, written contract by which one or more parties agree not to disclose confidential information that they have shared with each other as a necessary part of doing business together. 

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As a business owner, before requiring an NDA, think about the following questions:

1. Who Are You Talking To?

The Content of an NDA varies depending on who the signing party is, and considerations regarding what private information the signatory may be exposed to.

Each NDA should be tailored to the specific relationship. Some different situations and parties to consider having an NDA in place include:

a. When Onboarding New Employees and Independent Contractors:   

In this situation, an NDA is almost always recommended and typically expected since they will likely have access to sensitive company information. 

It is best to get the employee to sign an NDA is upon commencement of employment or contract, as anything that comes prior to signing an NDA may then cause issues down the line if a disclosure of sensitive or confidential information does occur.

b. When Approaching Possible Investors or Lenders:  

As a business owner seeking funding, you should consider what the initial conversations will entail, what information is public and what is private, as well as how much confidential information will need to be disclosed to pique interest. 

If there is a chance that initial conversations can be conducted relying primarily on public information as well as non-confidential information, than holding off on asking for an NDA from the investor or lender may help garner good rapport between the business and the investors. 

Once conversations turn to a company’s sensitive business information (i.e. accounting books, marketing strategies, intellectual property portfolio) or details regarding services and products, then an NDA should be secured and signed by both parties.

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c. When Courting a New Client: 

As with approaching investors, it may be beneficial to have both sides discuss terms without an NDA, as that allows both sides the chance to do their due diligence on each other through outside contacts. 

Once formalization of a “deal” or “joint business venture” seems to be taking place, an NDA may be necessary to be able to more freely exchange information with each other regarding the scope of the project, the entities or matters involved, and the price or fees associated. 

2. What Information Do You Need to Protect?

Since NDAs vary case-by-case, each should be narrowly tailored to your dealings with the party signing the agreement.

Boilerplate agreements often serve very little purpose if they are breached, as parties will just argue over what is and isn’t considered confidential. 

Here are main categories to address in a typical NDA:

a. Trade Secrets and Intellectual Property:

Typically, when dealing with new employees, private contractors, or even new clients, protecting a company’s trade secrets and intellectual property is of utmost importance. 

If onboarding a new person to a project or giving access to a client to your product (especially if you are in the software realm), detailing and tailoring an NDA to encompass what you want to protect and what is considered a breach of the NDA is highly important.

b. Marketing or Financial Information:

If instead, you are more concerned with keeping your business’ marketing strategy or financial information private, highlighting what information falls under these categories in a NDA.

c. Product Testing:

If you are allowing clients to beta-test a product and will be eliciting feedback on their user experience or product recommendations, including a “feedback clause” within the NDA helps protect and maintain all exchanges confidential and belonging to your company.  

3. What Are You Prepared to Do When Confidentiality Is Breached?

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

Upon immediate realization of a breach, notify your company’s legal counsel and take the steps to determine if seeking a Temporary Restraining Order or Preliminary Injunction to prevent further dissemination of the information is possible.

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

As always, receiving guidance form an experienced attorney is key when navigating the hush-hush world of NDA’s. 

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

Also, remember that if you are being asked to sign a NDA, you should not think of it as a restraint, but instead, as the possibility to soon be part of the “circle of trust.” 

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