Nondisclosure agreements (NDAs) are commonly used in business deals of all kinds, such as when businesses start new projects with an independent contractor, bring on new investors during mergers and acquisitions, and seek guidance from third parties. Business NDAs help ensure that privileged and sensitive information obtained from either party during the working relationship, or during the negotiation period before work starts, remains confidential and is not released, leaked, or used to the benefit of either party should the negotiations falter or when the working relationship ends.
The key to a successful NDA is making sure it is fair for both parties. To accomplish this, many parties utilize mutual NDAs because they are beneficial for all involved. When in doubt, default to a mutually constructed NDA; it cannot hurt and may protect you from the actions of business associates acting outside of your company's best interest.
What are nondisclosure agreements, and why they are important?
NDAs are legally enforceable documents that secure information between two or more parties who wish to protect the business interactions that they have willingly entered into. Since it is not prudent to make business agreements securing information with a handshake, a written legal document is necessary to bind both parties to the agreed terms.
These are some critical components of any NDA:
- Identification of the parties: All parties impacted by the agreement should be included in the agreement.
- Effective dates: Any agreement should specify the dates when the agreement will officially go into effect or be executed. In some instances, the document will also note when the agreement expires.
- Terms of the agreement: Although some of the other items within this list are part of the terms and conditions of an agreement, the agreement will usually outline the broad terms of an NDA early in the document before going into detail on them.
- Information deemed confidential: As part of the agreement, you must outline exactly what confidential information is protected. Generally speaking, not all information between two parties is considered "confidential." Examples of confidential information would be trade secrets, customer lists, intellectual property, product formulas, financial and employee data, computer codes, marketing or branding plans, other contractual agreements, and other proprietary information.
- Exclusions from confidential treatment: In some cases, you will note if there is critical information that will not or cannot be included in the confidentiality clause.
- Covenant of nonuse: This agreement ensures the confidential information is not copied, transmitted, reproduced, summarized, quoted or made available in any way, except as may be necessary to perform the agreed-upon duties.
- Additional parties eligible for disclosure: In many cases, confidential information relating to the agreement needs to be shared or released to third parties. A common example is if a new product line is being launched and a third-party manufacturer is executing the production. It stands to reason that the manufacturer will need to know a lot about the products within the line.
- Remedies: This is an acknowledgment that breaches of the obligations agreed to in the NDA will cause irreparable harm to one or both parties. In that event, the harmed party is entitled to several remedies, including an immediate issuance of a temporary restraining order or preliminary injunction enforcing the agreement, and damages caused by the breach.
- Subpoenas and other compulsory processes: If served with a subpoena or other compulsory judicial or administrative processes calling for production of confidential information, the issued party will immediately notify the other, so it may take any action it deems necessary to protect its interests.
- Attorney fees: If any action or lawsuit is instituted to enforce the obligations of the agreement, the prevailing party should be entitled to recover from the other party all reasonable expenses and attorney fees.
- Jurisdiction for arbitration and adjudication: This is the country, state, county and/or city the rules within the agreement will be adjudicated if necessary. It typically says something to the effect of, "This agreement shall be governed by and constructed in accordance with the laws of the state of [name of state] exclusive of choice of law rules."
- Waivers: Any waiver concerning the provisions of the agreement is generally not in effect unless in writing and signed by all parties subject to the agreement.
- Destruction and return policies and procedures: Much of the time, confidential information needs to be destroyed (such as copies of documents made to help execute the agreement). The agreement should outline how, where and by whom the information will be destroyed. Likewise, note any returning information and outline the expectations for any party who may have received confidential information in error, or received confidential information as a third party to execute their duties within the agreement but needs to return the information when the work is complete.
Information protected by NDAs is usually vital to the business's continued or future success. Typically, the NDA's protection of the information allows the business to maintain its trade secrets or other information that has enabled the company to succeed in its industry.
What types of NDAs are there?
Three types of NDA are common today:
- Unilateral NDAs clearly favor one party, allowing that party to share confidential data.
- Bilateral NDAs generally aim to provide equal protection for both parties involved. Both parties can typically share confidential information as outlined within the agreement.
- Multilateral NDAs are constructed with three or more involved parties in mind and may also provide mutual protection.
In some cases, any of these agreements, technically speaking, can be mutually constructed (meaning that the rights and protections of the agreement apply to and cover all parties involved).
The importance of mutual nondisclosure agreements
Mutually written NDAs allow all involved parties to share in equal protection from any violations of the agreement. This ensures all entities can focus on executing the agreement for the betterment of their organization, without worrying what other members of the agreement are sharing with others.
Another common use of a mutual NDA is when highly complex and/or unknown aspects within a project require sharing information early on that all parties within the NDA may need to protect, or at least have peace of mind on, during the initial or ground-laying phases of project planning.
Lastly, mutually constructed NDAs are useful in situations when a party to the potential agreement is reluctant to proceed because of how "one-sided" an agreement reads. In other words, one side feels as though the other party is better protected. To avoid this liability, which may result in delays or a loss of interest to proceed entirely, mutually written NDAs can be a positive way to proceed within the agreement construction process.
Invalidations of your NDA
Mutual protections also help with the legality of NDAs in general. For example, some court cases have overruled or thrown out NDAs signed by both parties, because the agreement was grossly unbalanced, illegal or vague. Aiming for the middle road, which highlights fairness, is a win-win approach that helps everyone meet their objectives.
These are some reasons a mutually written agreement could be invalid:
- The provisions within it are too broad or the language too general.
- One of the two parties has received otherwise-protected information independently, potentially rendering part or all of the agreement moot.
- It was signed by a member of a party who does not have legally binding authority to agree to the terms.
- It includes an incorrect party name. For example, if the "Limited" is omitted in references to a company legally called XYZ Limited, the NDA is not valid. A parent company may be listed, but no others within its business.
To ensure that your NDAs are truly mutual, connect with your attorney, who can usually provide a template to ensure your agreement includes all of the critical points.
When do NDAs not protect your business?
An NDA is not a free pass that protects anything and everything. Some business-related information generally cannot be protected in standard mutual NDAs, such as mundane or unimportant information that can easily be found in public records.
- Public information: If information about a business, a project, products or services are already deemed to be within the confines of public record, an NDA will have a hard time upholding its confidentiality.
- Information called for in a subpoena: Although this varies on a case-by-case basis and your attorney should weigh in on this matter, any information mentioned in an issued subpoena is not usually protected within an NDA. Attorneys and courts use subpoenas to acquire information that is part of a court order or may be requested for evidence in a case. Always check with your attorney before responding to a subpoena.
- Mislabeled "proprietary information": Information that is not considered proprietary does not need to be noted within the agreement, as it typically won't enjoy NDA-like protections.
- Industry-related common knowledge: Any information that is widely known within the business's industry will not retain nondisclosure protections.
- Preexisting knowledge: Any information that was provenly known by either party before the NDA's activation is usually not covered by an NDA.
Creating a mutual nondisclosure agreement
These are some of the quality resources available online to help you create mutual NDAs:
- LegalZoom offers interactive templates that help you complete NDAs online, with recommendations based on how you are using the document.
- Rocket Lawyer offers NDAs specific to state laws and other state-based restrictions. Much like LegalZoom, Rocket Lawyer guides you through the process.
- Legal Templates highlight its templates' focus on protecting both parties involved in the agreement. It outlines the differences within certain NDA forms, such as for mergers and acquisitions and business startups.