The information you create or acquire in your business is a valuable asset. Some of this information is trade secrets which is information that provides you with an economic advantage over your competitors. As such, it’s important to keep all of this information confidential. In the case of trade secrets, it’s essential since you’re required to prove that you’ve made “reasonable efforts” to keep them secret to maintain their status as trade secrets.
While there is some overlap, here are some general examples of confidential information and trade secrets:
Confidential information:
- Customer information
- Reports or analyses
- Business relationships
- Contract terms
- Price lists
- Business plans
- Marketing plans
- Formulas
- Processes
- Designs
- Methods
- Tools
- Know-how
For purposes of this article, confidential information and trade secrets are referred to together as confidential information.
When to Use a Nondisclosure Agreement
Even though it’s important to maintain your confidential information as confidential, running a business may require you to occasionally disclose that confidential information to third parties such as suppliers, vendors, and financial institutions. The risk in disclosing your confidential information to these third parties, however, is that they may disclose them to others, including your competitors.
One of the simplest and most effective ways to prevent these unintended disclosures, and to prove you made reasonable efforts to safeguard your confidential information, is to have third parties who want or need access to your confidential information to sign a nondisclosure agreement or NDA (NDAs go by other names as well including “Confidentiality Agreement”, but they all operate the same way).
An NDA is a contract in which the party receiving your confidential information (also called a Recipient) agrees to protect its confidentiality. As part of the confidential relationship created by an NDA, the Recipient promises not to disclose or use your confidential information except as permitted by the NDA. If the Recipient violates the NDA, you have the right to sue the Recipient for the damages that result, and/or seek an injunction to prevent any further disclosures in violation of the NDA.
NDAs can be either mutual or unilateral (i.e. one way). In a mutual NDA, two or more parties exchange their confidential information with each party. A mutual NDA is common for businesses working together. In a unilateral NDA, one party discloses its confidential information to one or more parties who don’t disclose their own confidential information. A unilateral NDA is commonly used by employers to prevent employees from disclosing confidential information they learn on the job to a competitor when they leave.
Other circumstances in which NDAs are used include:
- The hiring of consultants or contractors. Information is disclosed to explain the scope of a project and to facilitate a quote for services.
- The retaining of suppliers or other vendors. Information is disclosed so that the vendor or supplier can figure out whether they can provide the goods or services your company needs.
- Review by accountants, financial institutions, and product reviewers. For example, you may need to disclose your financial information to a financial institution so that it can decide whether it wants to give your company a loan.
Elements of a Nondisclosure Agreement
Typical elements of an NDA include:
- The names of the parties to the NDA.
- A description of the confidential information being disclosed.
- What information is excluded from the description of the confidential information being disclosed.
- The obligations of the Recipient to protect the confidential information being disclosed.
- The time period during which the confidential information being disclosed must be maintained as confidential.
- Miscellaneous provisions.
The parties to the NDA describe who is the discloser of the confidential information and who is the recipient of this information. In the case of a unilateral NDA, only one party will be disclosing confidential information. In the case of a mutual NDA, each party will be disclosing and receiving the confidential information of the other parties (some mutual NDAs involve more than two parties in which case not all may be disclosing or receiving confidential information of the others).
Confidential information described in an NDA is often listed in categories or types. The goal is to establish the subject matter of the confidential information, without actually disclosing that information. For example, a description of confidential information in your NDA may state: “Confidential Information means the trade secrets and other confidential information of the Company including customer lists, financial information, sales information, and manufacturing processes”. Simply stating “confidential information” or “trade secrets” in your description without listing a specific category may mean your NDA is overbroad and therefore unenforceable.
Excluded information is information that the Recipient has no obligation to protect as confidential. Categories of excluded information are typically listed out in an NDA and include information (1) that was independently created or developed by the Recipient (as proven by its written records), (2) considered common or public knowledge, (3) disclosed by the owner of the confidential information to a third party without an obligation of confidentiality, or (4) which was in the Recipient’s possession before it received the confidential information from the owner.
Under an NDA, the Recipient will be required to keep confidential information as confidential and limit its use to specific situations listed in the NDA. Keeping the confidential information as confidential means that the Recipient will be required to safeguard it with the same degree of care it uses to protect its own confidential information of a similar nature.
Timelines and Waiver Agreements
Although the time periods for the Recipient to maintain confidential information in confidence are negotiable, five years is common in American NDAs (depending on a company’s bargaining power, however, this period is often reduced to 2-3 years), and ten years for European NDAs.
Miscellaneous provisions are sometimes called “boilerplate” and appear at the end of the NDA. They include provisions relating to (1) which state’s law will apply should there be a lawsuit between the parties over a breach, (2) the return of confidential information upon expiration or termination of the NDA, (3) how disputes are resolved (e.g., through arbitration or court action), and (4) whether the winner in a dispute will be entitled to attorney’s fees from the loser.
Sometimes a document entitled “Nondisclosure Agreement” or “Confidentiality Agreement” will have terms which have a party giving up claims to the confidentiality of its confidential information. This is referred to as a waiver agreement. If you sign an NDA with a waiver agreement, you could be losing your right to claim that your confidential information should be kept confidential.
Examples of waiver agreement language include:
- “There is no confidential relationship between the parties”.
- “The exchange or disclosure of information is not being made in confidence”.
- “No obligation of confidentiality is created by the disclosure or receipt of information”.
Becker Law LLC Can Help
Don’t make the mistake of relying on a poorly prepared NDA to protect your business. Becker Law LLC can create a legally enforceable NDA that guards your confidential information and is written in plain language that clearly spells out the rights and responsibilities of both parties. Contact us today to get started.