Non-disclosure Agreement
What is a non-disclosure agreement?
A non-disclosure agreement is a written arrangement between two or more parties. It aims to specify what information can and cannot be disclosed and to whom. NDAs can be standalone contracts or be separate clauses for different types of contracts, like employment contracts or joint venture contracts. These agreements are fundamental for companies or individuals that decide to run a business.
Business parties use this type of business contract to agree on confidential material they share but prevent third-party and competitor access.
The purpose of an NDA
NDAs serve as crucial tools in business to safeguard sensitive information shared between parties. These agreements create a binding commitment and seal data, intellectual property, and innovative ideas from unauthorized entities. The violation of NDAs can lead to severe financial and reputational damage, legal complications, expensive fines, and even criminal charges. Let’s understand their relevance and applications across business scenarios.
1. Hiring a subcontractor
Subcontractors are part of the external workforce to whom specific business operations are outsourced. An NDA is indispensable because confidential information enables the subcontractor to perform tasks effectively. The agreement protects sensitive data about internal processes, client details, and trade secrets that remain solely for intended purposes. By implementing an NDA, companies mitigate the risk of information leakage, which could otherwise compromise their competitive edge or breach client trust.
2. Employee recruitment
The process of recruitment involves sharing confidential information with potential employees. This usually contains insight into company strategies, client information, or proprietary technologies. In this case, an NDA serves two purposes:
Protecting the company’s sensitive data
Establishing clear legal expectations of confidentiality for new hires
This legal barrier deters misuse of information and shields you from the potential risk of having valuable data shared with competitors or used maliciously.
3. Joint ventures & collaborations
In a joint business venture, each party brings specific insight, capabilities, and intellectual property to the table. NDAs are critical in these partnerships, providing a legal framework that makes sure all parties respect the confidentiality of shared information. The clause(s) would specify that the knowledge, ideas, techniques, and any proprietary solutions that each party shares with the other cannot be used outside the scope of the project or after its conclusion. Parties are then legally assured to freely share and innovate without fear of misappropriation.
Unilateral vs bilateral agreement
NDAs come in two primary forms: unilateral and bilateral. Each has different modes of information exchange and serves different purposes.
1. Unilateral non-disclosure agreements
Unilateral non-disclosure agreements refer to one-way arrangements in which only one party is receiving them. In this case, a business shares sensitive data with an external entity like an independent consultant, contractor, or potential investor. The unique characteristic of a unilateral NDA is that the obligation to maintain confidentiality only lies on the shoulders of the receiving party.
2. Bilateral non-disclosure agreements
A bilateral NDA is a mutual arrangement in which both parties exchange confidential information, typically between two businesses in a partnership, merger, acquisition, or joint venture. In each case, there is a need to protect proprietary information from each other in a secure environment for open and trustful negotiations and exchanges.
Key differences and considerations
The primary difference between unilateral and bilateral NDAs is the direction of information flow and the number of parties obligated to maintain confidentiality.
Unilateral NDAs: Only one party is disclosing and the other party is receiving.
Bilateral NDAs: There is a two-sided exchange of information, with both parties assuming equal responsibility to maintain secrecy.
In both cases, the draft must contain confidential information, the scope of confidentiality, the duration of the agreement, and the permissible use of the information. This clarity prevents disputes and legal complications.
The decision between a unilateral and bilateral NDA is based on the specific needs of the information exchange, the nature of the relationship between the parties, and the type of information being shared.
Protected information in NDAs
Protected information in NDAs refers to data or knowledge that is confidential and not publicly available. They could be tangible documents or intangible assets like knowledge, skills, and capabilities. The following is the range of information types:
Trade secrets: These are formulas, practices, processes, designs, instruments, or patterns that are unique to a business’s offering and market positioning.
Business strategies and plans: Business strategies, marketing tactics, or expansion strategies that are sealed under NDAs. Those could involve product roadmaps or new market entry strategies.
Financial information: This includes profit margins, revenue, financial statements, and other monetary information that is sensitive.
Client and customer information: This covers histories, client lists, customer preferences, and databases often shielded to stay competitive and foster client trust.
Technical data and know-how: These include engineering data, technical plans, product specifications, and manufacturing processes or developmental methodologies or system architecture.
Research and development information: Any ongoing research, results of experiments, and development activities in the technology and product development sectors.
Employee information: Staff details, HR policies, and workforce strategies.
Characteristics of a good non-disclosure agreement format
The creation and enforcement of non-disclosure agreements are pivotal to synergistic business relationships. Their effectiveness hinges on specificity, appropriate exclusions, well-defined duration of protection, and a clear understanding of legal implications and enforcement mechanisms.
1. Importance of clarity and specificity
Defining protected information in an NDA has to be specific. Vague descriptions can cause legal disputes or loopholes in information protection. This could undermine the reason the NDA exists in the first place. It’s essential to explicitly list what is confidential comprehensively to avoid misunderstandings. A good contract management system provides appropriate templates and guidelines to ensure all critical information is appropriately categorized and described.
2. Exclusions from protected information
Not all information can be classified as ‘protected’ under an NDA. Publicly available information that is known to the receiving party before the NDA or independently developed without reference to the confidential information is excluded. Any information disclosed by law cannot be held under the confidentiality obligations of an NDA. Recognize these exclusions to prevent overreach and make sure the agreement is legally sound. This helps identify and categorize exclusions reducing legal risk.
3. Duration of protection
The time duration for which information must stay confidential must be specified. This can vary depending on the nature of the information and the industry. Information like trade secrets or proprietary processes may need long-term protection while others may be relevant for shorter times. Specify the time that’s necessary for you to run your business operations collaboratively with the counterparty. Track these durations and send reminders when the period is reaching an end to meet compliance standards and implement a timely review of terms tailored to your business needs.
4. Legal implications and enforcement
Violating NDAs can lead to legal repercussions with financial compensation and injunctive relief. Both parties need to understand the consequences of breaching the agreement. A contract management system monitors this compliance and integrates with tools to document, check, alert, and report any potential breaches so violations are addressed swiftly and efficiently.
The effectiveness of NDAs to protect confidential information rests upon the above factors. As the landscape of information management continues to evolve, their function, precision, and adaptability will stay cornerstones in the realm of contract management.
Common clauses your non-disclosure agreement must have
Here are some important clauses typically found in NDAs:
Definition of confidential information: Clearly define what is confidential information like data, trade secrets, company strategies, client details, and other sensitive information. Avoid ambiguity.
Exclusions from confidential information: Exclude what is non-confidential information like what is already in the public domain, information available to the receiving party before the NDA, or from another source.
Obligations of the receiving party: Specify the duties of the party that receives the confidential information. This could be things like not disclosing to third parties or in marketing without proper authorization.
Duration of the agreement: Specify the time frame for which the NDA is valid. This includes the period in which the confidentiality stays after the conclusion of the agreement.
Return or destruction of information: When the agreement is concluded, terminated, or ends at the request of the disclosing party, this clause requires the receiving party to return or destroy the confidential information.
No license of rights granted: This clause makes sure that the NDA does not grant the receiving party any rights or licenses to the confidential information except for a limited purpose.
Disclosure required by law: This clause addresses a situation in which the receiving party must legally disclose confidential information in case there is a court order or a legal requirement.
Remedies for breach of agreement: A clause that outlines the consequences of breaching the NDA, including legal action, injunctions, and financial compensations.
Non-compete and solicit clauses: They restrict the receiving party from competing with the disclosing party or soliciting the employees or clients for a specific period.
Jurisdiction and dispute resolution: This specifies the legal jurisdiction that governs the NDA and the necessary mechanisms to resolve these disputes, including arbitration or litigation.
For starters, common clauses are critical to understand and implement. When automated, they can be drafted, reviewed, managed, and closed several times faster. More on this below.
Legal enforceability of NDAs
Legal enforceability is contingent upon several key principles.
Mutuality: Both parties must be clear about their obligations and rights. The NDA serves its purpose when it has a clear offer, acceptance, and something of value exchanged between parties.
Reasonableness: The scope, duration, and geographical extent of an NDA are crucial. Courts are unlikely to enforce NDAs that are too restrictive or too broad in coverage to allow normal business activities or the right to earn a living. Make sure they are within reasonable limits.
Legality: NDAs are not enforceable if they aim to protect information related to illegal activity.
Consequences for breach: This must be clear and specific. Include outlining the remedies available in case of a compromised agreement such as injunctive relief or damages.
Automating NDAs with HyperStart
Finally, if NDAs are a key pain point for your business and contract volumes are growing faster than legal headcount, then it might be time to automate your contract management solutions.
HyperStart is a comprehensive, feature-rich CLM platform that streamlines and fast-tracks your legal operations without toggling between multiple applications. It helps your precious legal counsel maintain its strategic bandwidth to agree and manage NDAs in one unified workspace.
