Shhhh!! Can you keep a secret? Protecting your business with an NDA.
What is an NDA? An NDA is a Non-Disclosure Agreement, also known as a Confidentiality Agreement. It is a contract between individuals and/or companies who are considering doing business together and need to share information about each other’s businesses in order to work together. The NDA creates a protective shield of confidentiality around the relationship, preventing one or both parties from disclosing non-public, proprietary information about the business and trade secrets.
I know what you are thinking: you aren’t the inventor of the paper clip or the designer of the personal computer, so why do you need an NDA?
My short answer is that if you have a business or product idea that you think can make money, or a new twist on any kind of business/product/service, you need an NDA to protect your ideas and business processes. If you are trying to patent an idea, an NDA will allow you to protect and yet share information before your patent application has been filed and approved (patent applications must be filed within one year of the first public disclosure). Also, if you work with vendors, contractors or employees, you need one to protect your proprietary information, financial information and any other non-public information specific to your business.
Let’s just get down to it. If you run a business, an NDA is a very prudent thing to add to your standard contract collection.
These agreements can come in many forms and can be as simple or complex as your business warrants, but they all have certain characteristics in common, which I will outline briefly. Before I do, please remember that this posting (and all my postings) are not legal advice and you should always consult with an attorney before taking action that affects your legal rights.
Now then, let’s get into a bit more detail.
First, NDAs can be mutual (both parties are restricted from disclosing protected information – also known as a two-way NDA) or unilateral (only one party to the agreement is restricted from disclosures – also known as a one-way NDA). One common form of an NDA is one between an employer and future employee, which is usually a one-way agreement that prevents the employee from using or disclosing company information, especially for her own benefit or the benefit of a competitor or other third-party. A similar agreement would work for a business that is about to hire independent contractors or vendors.
Second, NDAs typically have provisions for some or all of the following topics:
1. Who are the parties? (see my previous post on this subject – precision on this is critical to the effectiveness of your agreement)
2. A clear description of what kind of information is confidential (be comprehensive, and include items such as customer lists, financial information, intellectual property, etc…).
3. What is excluded from the definition of confidential, which usually includes information revealed prior to the agreement, public information, and any information subject to disclosure under government order (e.g. Homeland Security) or court order (subpoena, or otherwise). This last item is critical, because you don’t want to be found in breach of an NDA by complying with a government or court order. Such orders should always trump the obligations of an NDA, but they only will if the NDA specifically carves out those potential scenarios from the definition of confidential information or from the obligations of the recipient.
4. What is the purpose of the disclosure and what use is permitted? The information should not be used for any other than the stated purpose.
5. When does the NDA expire and how long do the obligations exist even after expiration or termination (if at all)? Make sure that you consult with an attorney in your jurisdiction about this, because in some states, an indefinite time period in an NDA might render the agreement unenforceable.
6. What are the legal remedies in the event of breach (usually, you would want the ability to get a temporary restraining order or injunction, as well as money damages)? Here, you would include language to say that both parties agree that a disclosure would cause immediate and irreparable harm to the non-breaching party, and that injunctive relief is the appropriate, immediate remedy to mitigate further damage.
7. What are the obligations of the recipient of the confidential information? This typically requires the recipient to only use the information for stated purposes and to use reasonable efforts to keep the information confidential and secure. “Reasonable efforts” means taking the same care as the recipient would use to keep its own confidential/proprietary information secure.
8. When, if at all, is the recipient of information required to return any materials provided by the other party (often at the termination of or completion of the relationship)?
There you go. These are some of the basics about NDAs. Of course, consult with your friendly, local business attorney to determine which choices to make to best protect your idea or business.
For the record, I personally wouldn’t begin developing a business idea or share details about my budding idea without an NDA. And most people are more than understanding about signing them. The only exception might be in the Venture Capital world, which goes beyond the scope of this posting. Maybe there are some other arenas where some of you have found that NDAs are not considered acceptable or welcome?
I hope some of you will share with us your stories about how NDAs have been useful or not so useful in the development, operation and protection of your businesses. Maybe some of you have had to take legal action to enforce one, and if so, how did that go and what provisions proved to be (or would have been) most useful in that fight?