Non-disclosure agreements have been in the news in recent months surrounding President Trump's alleged dealing with various women. The agreements, known as NDAs for short, have been around for a number of years and can cover many types of business arrangements. Here is a look at what a non-disclosure agreement is and some of the situations in which it might be used.
What Is a Non-Disclosure Agreement?
An NDA is a contractual agreement between two parties that defines a confidential arrangement. NDAs generally arise when there is information of a confidential nature that one party might become privy to in the course of the business arrangement.
As with the ones used by the president, an NDA can arise from a personal arrangement where one party wishes to keep all information about their interaction a secret.
More commonly, an NDA comes into play when an employee or outside service provider is engaged by a company and the work involves confidential company information that is not to be disclosed outside of that working relationship. For example, a contract developer doing work for a tech company might be required to sign an NDA to ensure that he or she doesn't disclose confidential information about the company to others. Doing so could put the company at a competitive disadvantage in the marketplace.
Some other examples of when an NDA might be used include:
- When one party is presenting a business idea or invention to a potential investor or business partner.
- When a business is considering selling itself and presents company financial information to a prospective buyer and/or the buyer's representatives such as an attorney or CPA.
- When sharing information about a new technology or product to a potential buyer, business partner or distributor.
- When employees need to access sensitive company data in the course of their normal duties.
What Does a Non-Disclosure Agreement Include?
While all NDAs are a bit different, most have one or more of the following elements:
- Identification of the parties involved in the agreement. This might be the company originating the NDA and the employee, or a prospective investor or service provider with whom the confidential information is being shared.
- The NDA should clearly describe the information that is deemed to be confidential and that is covered by the agreement. Does this only cover information received in written form, or is information received in an oral format also covered?
- The scope of non-disclosure expected by the party receiving the information. This usually includes both keeping the information confidential from others and not using this confidential information for their own gain.
- Typically, there are exclusions from an NDA. This might include information that is already in the public domain, information that was already known to the receiving party prior to this arrangement, related information that was independently developed by the recipient or information that is disclosed to the recipient by a third-party who has no duty of confidentiality in this situation. There is generally also an exclusion in the event that the recipient is compelled to disclose the confidential information by a legal entity such as law enforcement or by a court of law.
- The NDA might contain clauses stating what jurisdiction applies if a legal action is brought, a clause preventing you from soliciting the company's employees if you are a service provider to the company as well as a clause stating that the receiving party has no rights to your product or idea nor are you bound to enter into any sort of working arrangement with them.
Types of NDAs
The two most common types of NDAs are:
Unilateral NDAs arise when it is assumed that only one party will be sharing confidential information with one or more parties on a unilateral basis. If there is no chance that the other party involved will be sharing confidential information of their own, then this type of agreement makes sense.
Mutual NDAs make sense if both parties to the agreement will be exchanging confidential information back and forth.
Why Are NDAs Important?
If a company or an individual has developed a new technology or product, they want to protect proprietary information regarding that product or technology to keep their competitive advantage and maximize potential sales.
Many companies routinely provide certain employees access to confidential information and business processes needed to perform their duties. If those employees were to share this information with competitors, it could harm the company's financial position and their position in a competitive marketplace.
How Long Should an NDA Last?
Opinions vary about this. From the perspective of the company or individual who is sharing the confidential information, especially in a unilateral NDA, their attorney might want the term to be forever.
As the recipient of the information you will likely want the agreement to specify a more finite term, say 2-5 years, or some term that is reasonable given the overall circumstances. This isn't so much about being able to go out and disclose the information, but rather about the time that you are responsible for guarding the information from being disclosed even inadvertently.
What Happens if You Break a Non-Disclosure Agreement?
As with any legal agreement that you might sign there could be penalties for violating an NDA.
If you are an employee of a company and violate your NDA with your employer this could result in the termination of your employment.
The NDA might specify monetary penalties for violating the agreement and/or you might find yourself being sued by the other party. This could turn out to be an expensive proposition whether or not you ultimately lose. In addition to any monetary judgment the legal costs to defend yourself might be staggering.
Note if the NDA has clauses that prevent employees from making claims for things such as harassment or discrimination by the employer, these clauses may be deemed invalid if the employee brings an action against the employer.
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