In situations that require strict confidentiality, businesses and individuals can enter into a nondisclosure agreement (NDA). By signing an NDA, the parties agree that they will not share sensitive or proprietary information with competitors, the media, or the public.
Businesses commonly use NDAs when negotiating or building relationships with other companies. The NDA serves as a form of legal protection and offers enforceable, defined consequences for parties who reveal confidential material.
How Are NDAs Used?
NDAs are common legal contracts that businesses use when they have information that they wish to keep private. They are also referred to as confidentiality agreements, confidentiality disclosure agreements, and nondisclosure contracts.
The purpose of an NDA is to ensure that the signing parties will not disclose any information described within the contract with any parties not included within said contract. Every business owner must specifically identify what material should be included when creating an NDA; many companies want to protect information related to:
- Intellectual property: patents, trademarks, trade secrets, and copyrights.
- Customers: major customers, contact information, and customer preferences.
- Marketing: billing policies, pricing, brand documents, and advertising techniques.
- Operations: suppliers, payroll, and employees.
What Is Included in an NDA?
The contents of an NDA vary based on the type of relationship and needs of the business. For example, an employer-employee NDA might differ significantly from an NDA between two companies during a merger or acquisition.
However, there are some key components that are essential to NDAs. In most cases, this document should identify:
- Participants: the parties who will receive sensitive information.
- Confidential information: What cannot be shared with outside parties.
- Exclusions: Information that is not considered confidential.
- Appropriate use: Circumstances in which it is acceptable to share information.
- Time period: The point at which the information is no longer considered confidential.
Specificity is key to creating an effective NDA. Businesses cannot add information to an NDA after the NDA has agreed upon, so it’s critical to include all necessary information when initially creating the contract.
What Are the Types of NDAs?
Businesses may choose to use one of three types of NDAs. This decision is based on the number of parties involved and who will be disclosing confidential information.
Unilateral NDAs
When an agreement applies to only one party in a two-party relationship, it is referred to as a unilateral or one-sided NDA. These NDAs typically come into play when an organization discloses sensitive information to an employee, client, partner, or consultant. Common unilateral NDAs include:
- Employer-employee
- Company-contractor
- Inventor-evaluator
- Buyer-seller
The use of employer-employee NDAs is especially frequent. Recent research has shown that up to 57% of the United States workforce is bound by an employer NDA. Business owners may wish to have a unilateral NDA to protect their business idea from disclosure to outside parties.
Bilateral NDAs
If both parties disclose confidential information, they enter into a bilateral agreement, also known as a mutual or two-way NDA. Each party decides how information can be used and shared. This kind of NDA is commonly used when two parties are in negotiations and therefore sharing private knowledge or data.
Multilateral NDAs
When there are multiple parties involved and at least one of them is sharing sensitive information, they may choose to enter a multilateral or multiparty NDA. If three or more companies are engaged in negotiations, a multilateral NDA can take the place of separate unilateral or bilateral agreements. This simplifies the process and offers clarity to everyone involved.
What Are the Benefits and Drawbacks of NDAs?
Although NDAs are common practice, they are sometimes controversial and can create their own challenges. It’s important to consider both the benefits and drawbacks of using NDAs.
Advantages
Confidentiality is the key goal and advantage of an NDA. Businesses can protect their trade secrets, data, research and development, and finances as needed. It’s also relatively inexpensive for a business to create an NDA, which makes it an affordable legal measure even for smaller companies.
When they are written clearly and in detail, NDAs offer a significant level of protection for businesses that can seek recourse if the terms are violated. The expectations and consequences for all parties are specifically identified, which helps to make the relationship more transparent from the outset.
Disadvantages
While they are sometimes necessary, NDAs can also have negative outcomes. Asking someone to sign such an agreement might suggest a lack of trust between parties. This can tarnish a relationship from its earliest stages and lead to financial consequences.
For example, many investors will outright refuse to sign an NDA in order to hear a business pitch, and aspiring business owners would find it unlikely that they could institute an NDA and secure an investor.
In addition, although creating an NDA is low cost, violations can lead to lawsuits, which can quickly become expensive and time-consuming.
Finally, if a business requires employees to sign an NDA, it can be difficult to recruit the most talented and qualified candidates for a position. These individuals may not want to engage in work that they cannot openly discuss, and they may feel uncomfortable in an environment that requires such a high level of secrecy.
What Are the Consequences for Violating an NDA?
NDAs are legally binding contracts, which means that a party who violates the agreement by sharing confidential information can face serious consequences. The specific outcomes for violations are outlined within the NDA and are thus enforceable once the agreement has been signed.
The primary concern in most cases of NDA violations is financial. Lawsuits can result in hefty penalties and lengthy court battles. In addition to the financial ramifications, there is potential reputational damage, which could make it difficult to work with future employers or partners.
Does Every Business Need an NDA?
Not every business needs to use NDAs, and they are not appropriate for every situation. It’s important to be fully aware of local laws regarding NDAs and when they are most beneficial. For example, to prevent the abuse of employees, some states have placed greater limitations on the use of NDAs by employers.
Entrepreneurs, executives, and administrators who want to learn more about NDAs and how to use them can enroll in A Legal Toolkit for Starting and Scaling a Business. This non-credit certificate program equips business owners with the knowledge they need to build, manage, and scale their businesses.