Guide to Non-Disclosure Agreements
What is a non-disclosure agreement?
A non-disclosure agreement (”NDA”) is one party’s legal promise not to disclose another party’s confidential information to an outside third party. It is a written agreement, often also called a “confidentiality agreement.”
The NDA is a legally binding document, usually including remedies for breach of agreement. It is predominantly used between businesses and signed by representatives of each business having the power to legally bind their respective companies. But it may also be used between employers and their employees, between individuals, and between individuals and companies.
When the agreement is “two-way,” meaning both parties may be sharing confidential information and each agrees not to disclose the other’s, it’s called a “mutual non-disclosure agreement.”
When is it used?
Two companies working together for a joint business purpose will sometimes need to share sensitive information that is not publicly known in order to further their business arrangement. The information could be client lists, business processes, trade secrets, financial data, or any other information a company is not required to disclose to the general public, and which has been previously kept confidential.
The business arrangement could be between a client and a supplier, vendor or consultant. It could be between two non-competing companies seeking to enter some type of joint venture or joint marketing arrangement, or two competing companies considering a coalition, merger, or acquisition.
Why is it used?
The most important purpose of an NDA is to give the respective parties notice that some of the information being shared is confidential and is expected to be kept confidential. In any legal case regarding unauthorized use or disclosure of trade secrets or other confidential information, the existence of an NDA greatly strengthens the case.
Though most ethical businesses would never knowingly share confidential information it acquired about another company, they could do so unintentionally if not advised what information the other company considers “private”.
The NDA prompts the discussion of what each company considers confidential and memorializes the discussion in writing. By virtue of a written agreement with potential legal implications, each party is more likely to be discerning about how it uses the other company’s confidential data.
How is it enforced?
Most standard-form NDAs state that the party whose confidentiality is violated can obtain a court-ordered injunction to prevent the other party from continuing to use or reveal the information.
While it is possible to sue the violating party for damages if actual damages are incurred and can be quantified, that is usually not specified in the agreement, nor does it have to be.
Generally, the parties signing an NDA are motivated by maintaining a good reputation within their industry for ethical behavior, knowing that they can be ostracized if they become known for cavalier treatment of NDAs. The fear of litigation costs may be only a subtle additional deterrent.
How do you create one?
Type “nondisclosure agreements” into an Internet search window. You will encounter a large number of free and purchasable forms that are exceedingly similar.
Remember, it is not so much the terms of the agreement as the fact that you and the other party have discussed the issue, and have agreed to each keep one another informed of what information is confidential and to keep it confidential.
How do you use it effectively?
Rule #1: Don’t use the Agreement for petty reasons or to cover information that is not really confidential. A good NDA identifies what can be considered confidential and what cannot. You will identify yourself as a business novice if you pull out an NDA for inconsequential matters.
Rule #2: Don’t be cavalier when signing an NDA. If it covers YOUR confidential information, let the other party know that you will always try to specifically identify the information you consider precious. You want to help them keep your secrets by letting them know what you deem secret. And if you really consider it secret, don’t tell the other party unless it is necessary for your business purpose.
Rule #3: If the agreement covers the other party’s information, let them know how serious you are about protecting that information as assiduously as you would protect your own. Ask them to be sure to identify confidential data when it is divulged, but assure them that you would not share insider information of any kind indiscriminately. You will raise the value of your personal stock in the other person’s eyes immensely.
Rule #4: If a signer represents a company, be sure he or she has the power to bind the company. If not, then (s)he has an obligation to obtain a signed NDA from anyone else in his company that (s)he may pass your confidential information to before sharing it. Be sure that expectation is discussed if leaking the information could be devastating to your business.
(This article was first published by the Steve Holder at Helium.com)
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