"Non-Disclosure Agreements" or "Confidentiality Agreements" are legal contracts where one individual assures not to reveal private information that is shared with them.
This type of agreement could also be called a "Confidential Disclosure Agreement", "Proprietary Information Agreement". or simply a "Secrecy Agreement".
The name differs based on the industry or company. This guide will use the term "NDA" to refer to all of these agreements. Contracts like these are traditionally called "agreements" because the word sounds less imposing than the term contract.
Even so, NDAs are legally binding contracts.
The party who possesses the information or technology to be revealed is typically called the "Discloser" or "Disclosing Party". Contrarily, the party receiving this confidential information is referred to as the "Recipient" or "Receiving Party".
The level of protection offered by an NDA can differ. Some NDAs only require the Recipient to keep the information confidential, while others also forbid them from using any of the disclosed information or bar them from improving upon or reverse engineering any technology that was revealed.
There are even some NDAs with assignment clauses that make the Recipient assign anything they invent or develop as a result of learning about the Disclosing Party's information to said party.
Non-disclosure agreements (NDAs) are often signed when two businesses, people, or other legal entities want to start working together and need information about the processes used in one of the other's businesses.
Before NDAs can be put into place, both parties must agree on what confidential material will be restricted and how long the period of restriction lasts.
Additionally, employers may require their employees to sign NDA contracts containing provisions that restrictions apply to both sides or just a single party.
From a legal perspective, there are two general types of NDAs:
(1) a "unilateral" or "one way" NDA - where only one party (the Recipient) agrees to keep the information disclosed confidentially.
This agreement does not legally bind the other party.
(2) a "bilateral", "two way", or "mutual" NDA - where both parties agree to keep the information disclosed confidentially and are legally bound by this agreement when they receive such information from the other party.
For example, let us say you have a new product idea and want to discuss it with a possible manufacturer.
Ideally, you want the manufacturer to sign your unilateral or one way NDA because you are disclosing information about your product or technology.
However, the manufacturer could require that you sign a bilateral or two way NDA instead.
In some cases, there might be good legal reasons why the manufacturing company insists that both parties should be required to keep secret any shared information.
For example, if the manufacturer discloses private methods of production or other trade secrets to you, they will likely want you to agree to keep the information secret as well.
Business people often feel better when there is an equal exchange in the agreement.
So, in many situations, two way NDAs are used even though a one way NDA would be preferable from a legal perspective.
Even if the other party has the information you want, remember that if you agree to confidentiality in a mutual NDA, then you cannot use the confidential information from the other party for any other purpose or with any other person.
This might limit what you can do in the future and with other people, so always weigh the pros and cons of an NDA before signing one.
As mentioned earlier, the degree of protection an NDA affords varies. NDAs can therefore be broadly classified according to how much protection they offer.
There are typically (1) "recipient friendly" NDAs, and (2) "disclosing party" or "discloser" friendly NDAs.
Many companies have two versions of their NDA forms: one for when they expect to receive the majority of information (recipient-friendly version) and another where they will provide most details (discloser friendly version).
Consequently, many knowledgeable companies keep these four varieties on hand at all times:
(1) A mutual recipient friendly NDA;
(2) A mutual discloser friendly NDA;
(3) A one-way recipient friendly NDA; and
(4) A one-way disclosed friendly NDA.
They will never tell an outsider which NDA agreement they sent you nor how many versions they have. Usually, only lawyers know the difference between forms.
There tend to be minor variances between a recipient friendly NDA and a discloser friendly one, so watch out when signing any contract of this sort.
If you want to share your technology or inventions with a large company, chances are high that they will send you a "Recipient Friendly" NDA.
Recipient Friendly NDAs, as the name suggests, shift some of the load regarding obligations and damages off of the recipient and onto the disclosing party.
There are provisions that can make an NDA exponentially more difficult for a disclosing party if they are not careful. Some examples are:
(1) Definition of "Confidential Information" - If an NDA narrowly defines Confidential Information, the agreement would not cover much of what is typically included.
(2) Exceptions to Confidential Information – Most NDAs will have a list of exceptions to what is considered confidential information.
An example of this would be information that is already public knowledge. However, in a Recipient Friendly NDA, there are other exceptions included which nullify much of the disclosed information.
(3) Limitations on Damages - In some NDAs that are friendly to the recipient, the damages are limited to "direct damages." However, in an NDA situation, there probably will not be direct damages.
Furthermore, if there are any direct damages, such damage would be more complicated than usual to prove. Thus, an NDA with a clause limiting direct damages may nullify any real liability of the Recipient.
Discloser Friendly NDAs are broader in meaning than Recipient Friendly NDAs, and the exceptions or exclusions included are fewer.
In a discloser friendly NDA, there would typically be no limits to damages that could be claimed, and indemnity clauses may also be present.
Moreover, NDAs that are friendly to those who must disclose information often have additional specific provisions to safeguard the disclosing party.
These may include: not being able to use the information for any purpose other than what is specified, no reverse engineering of the confidential info, and if the recipient creates intellectual property based on said information, then automatic assignment of intellectual property rights.
People often get nervous when they see a long contract, believing they are about to be scammed with legal trickery.
So, we have many clients who prefer shorter NDAs. A short sample NDA is included in the last part of this guide for reference purposes only.
Some clients prefer NDAs that are one page or shorter. In response, some law firms manipulate the physical appearance of the document by reducing the font size and using dual columns.
Hence, it appears to be one cohesive page, even though it is difficult to read without a magnifying glass.
NDAs that are well-written and comprehensive can protect both parties involved because they address most potential problems that could arise.
This minimizes ambiguity in the contract and reduces the likelihood of facing unknown risks.
Conversely, short agreements do not cover as many eventualities, leading to more ambiguity and greater chances of encountering unforeseen issues.
Some law firms prefer contracts that are well-organized and address a variety of potentialities. They usually prefer lengthy yet concise and easy-to-read contracts.
If shorter agreements are used, they must be "custom" orders, which may be more expensive than longer forms since the lawyer will have to understand the intricacies of the business deal and both sides involved before knowing how to modify the NDA properly.
As Mark Twain once said, "I did not have time to write a short letter, so I wrote a long one instead".
In many ways, the same applies to legal contracts and forms.
For example, if the client is pushing for a shorter NDA, It might be inclined to leave out the venue clause (the section that specifies where any disputes will be settled).
Suppose the client is working with another nearby business.
In that case, it is likely perfectly okay to omit the venue clause because any disagreements by default would go through the local court system.
The client could be forced to spend extra money in proceedings if the contract does not address or indicate where uncertainties might lie.
To avoid this, always recommend a long form that is more comprehensive and lessens the likelihood of problems later on.
I f the client requests a shorter document, gather additional information about them and their business deal to determine what can be safely left out without compromising fundamental protection interests.
Companies often find themselves in hot water because they use the same NDA form for every situation rather than customizing it to fit each specific circumstance.
What has worked in a past agreement may not be useful or binding in another case involving different parties. It is alarming how many companies carelessly use a recipient friendly form when they are the Disclosing Party.
The distinction between a "one way" or "two way" NDA, as well as a Recipient friendly or Discloser friendly NDA, largely boils down to the comparative bargaining power of the people involved.
For example, suppose you are working for a small company or pitching an idea to a large manufacturer as an individual inventor. In that case, likely, you will not have much-negotiating power.
In this case, the large manufacturer may require you to use their standard "two way" recipient-friendly NDA.
Initially, when you begin working with a large company, you will likely come into contact with contact the organization's lawyers and paralegals.
These individuals usually request that their own forms be used. While it is possible to ask for changes to be made to these (particularly if you can explain why), more often than not, the legal team states that policy does not allow for such modifications.
In other words: "If you want our business, agree to use our form as is--even though we are fully aware that it puts you at a disadvantage".
It is a shame that this is the perspective of various businesses. However, just because a situation is complicated does not imply you should give up on a possible business deal. Instead, take an empathetic and non-legalistic approach instead.
When you are not in the ideal position to use an NDA, protect your information as much as possible, and be discerning about what details you share with them.
This will require self-control since many clients act like they can tell anything once an NDA is signed. Your strategy should focus on interesting the company's businessmen and engineers in your product or technology.
If they express interest, they can put pressure on their lawyers to negotiate a second, more favorable agreement with you.
When dealing with a big company who is unwilling to use balanced forms, take a two-step approach. Only share the information required to get their business or technical personnel interested at first.
Once they are showing genuine interest, you have more leverage to insist on a stronger NDA before revealing any more details about your technology.
As stated before, non-disclosure agreements are frequently signed when two companies or people are thinking about conducting business and need to be privy to the processes used in business for assessment purposes.
Many employers make their employees sign an NDA or a similar agreement as a requirement of employment.
Companies should also oblige that their vendors and contractors sign NDAs if they will have access to internal company procedures or information.
If someone you have a non-disclosure agreement (NDA) with divulges your trade secrets without permission, in theory, you can go to court and get an injunction to make them stop.
You might also be able to sue them for the damages caused by their breach of confidentiality.
However, NDAs can often be hard to enforce. They should not be relied on too heavily--think of them more as insurance that is hopefully never used.
Generally speaking, you should only disclose confidential information if the other party really needs to know. You do not want to give away more than necessary for the business deal to go through.
This especially applies to engineers and those with a sales background--you need to be aware of your natural inclination towards disclosure and teaching.
Remember that the best way to protect yourself is not to disclose anything!
Your second best form of protection is a non-disclosure agreement that limits disclosure and is fully enforceable. Although it can be difficult to enforce NDAs, they offer other benefits such as patent and trade secret protection.
Disclosing the details of your inventions to anyone without an NDA often starts patent filing deadlines and may destroy your ability to obtain patents, especially overseas.
In other words, disclosing a patentable invention or technology to someone without an NDA could lose the opportunity for international patents. You will probably damage your chances at U.S. protection.
Let us say you are a doctor with an idea for a new surgical instrument. Approaching a medical device company without an NDA in place will make it more difficult to obtain patents, both domestically and abroad.
This also puts potential investors at risk, as they are unlikely to invest in a company or technology that cannot be protected.
Therefore, even if you do not have immediate plans to file for patents, it is important not to damage your chances of doing so down the line.
If you think your technology might be patentable, always use an NDA when disclosing it to other parties.
The primary purpose of NDAs is to protect trade secrets. Unlike patents, which must eventually be made public, trade secrets- by definition- are meant to be "secret".
Most states and countries offer special legal protection for those who own trade secrets.
However, remember that this only applies if reasonable steps are being taken to keep the information hidden from others.
NDAs are contractual agreements that prevent the sharing of private information. They often protect trade secrets from being exposed, and companies will have their employees sign NDAs.
A well-known example is Coca-Cola's secret formula for "Coke". If it were to get into the public domain, anyone could make it, and Coke would lose its value. So, both present and future employers sign NDAs with contracts stating they will not reveal the recipe.
It would have made the ingredients publicly available if it had filed patent protection for its product formula over 100 years ago.
Instead, Coke chose to keep it as a trade secret, maintaining its allure throughout the decades.
However, NDAs that are used to protect trade secrets must be carefully drafted by a lawyer who understands this area of law in your particular state.
If you are going to disclose trade secrets, speak with such a professional beforehand.
The "trade secret" problem is complicated. Although it may be confusing, the following explanation will give you a better grasp of the issue.
Do not fret if this explanation leaves you feeling unclear about the subject matter.
The issue at hand is that many states have conflicting laws when it comes to "trade secrets laws" and "contracts laws." To summarize, these conflicts are as follows:
Otherwise, there is a possibility that the disclosing party accidentally waives their right to keep the disclosed material secret after a specific amount of time has passed (three to five years being common.)
Perpetual obligations in contracts are unenforceable in many states. The reasoning is that while companies may want an agreement to last forever initially, circumstances often change and lead to the termination of a business relationship.
The term of an NDA under trade secret law cannot be definite (for example, five years) without putting your trade secrets at risk. However, contract law requires the use of a definite term; otherwise, the contract may not be legally binding in most cases.
Be cautious of revealing trade secrets, as many problems could arise from such a disclosure. It is best to avoid disclosing them if possible or, at the very least, minimize the information given.
This section will provide an overview of the typical provisions found in many NDAs to discuss the primary issues for the reader.
The following section will include a comprehensive examination of various provisions in an NDA. Most NDAs have six main areas or provisions, which are:
An NDA, or non-disclosure agreement, exists to protect a business's confidential information.
This term usually encompasses a broad range of items like unpublished patent applications, technical know-how, etc.
By defining what is included in the NDA agreement, both parties understand and agree upon what can and cannot be shared outside the meeting or conversation.
As stated before, not every NDA is the same. In fact, some NDAs have such a specific definition of Confidential Information that it makes the entire agreement pointless.
Therefore, comprehending the term "Confidential Information" in an NDA Agreement is key.
"Recipient friendly" forms have a narrowly defined term for "Confidential Information", while slipping in a large exception later on in the agreement.
In contrast, "provider friendly" forms usually have broadly defined terms for Confidential Information and do not contain many exceptions.
You can find examples of broad and narrow definitions in Section 3 of the second part of this guide.
For example, some "recipient friendly" forms confine the definition of Confidential Information to solely that information which has been conspicuously marked "Confidential".
Other forms use a broad definition of Confidential Information but restrict the secrecy requirements on behalf of the receiver to information that had been plainly labeled as "Confidential".
In our experience, this is not a reasonable prerequisite because most clients would not mark their correspondence with one another as "Confidential".
Many clients claim early presentations are "confidential"; however, they rarely document conversations or appropriately label follow-up emails.
As a result, chats, follow-up emails, and presentations often are not covered under the NDA requirements because the person revealing the information forgets to document conversations or mark all messages as "Confidential".
Frequently people do not realize this when they sign an NDA with such provisions.
Conversely, "disclosure friendly" measures typically classify any information revealed as "confidential information", whether it is labeled or not, regardless of how it was divulged.
For instance, this would include informal chats, emails, and text messages.
In fact, some NDAs consider anything written down by the recipient based on the disclosing party's info as confidential information.
If you are supplying most of the information to the other person, make sure to use a definition that favors disclosure instead of one that protects recipients (for example, by requiring information to be clearly labeled).
Non-disclosure agreements typically have a few exceptions to their definition of confidential information. A couple of common and valid examples are:
(1) if the Confidential Information becomes public domain by no mistake of the Recipient,
(2) when the Confidential Information is already known to the Recipient, or
(3) with Disclosing Party's written agreement that some of said Confidential Information could be treated as non-confidential.
Some forms also have other exclusions, so it is crucial to understand the limits of any exclusion.
For example, many "Recipient friendly" forms might include an exception for information that the Recipient develops independently from Confidential Information.
However, this can create issues when trying to prove that new independent information was actually developed without using disclosed Confidential Information.
An exclusion similar to this is "information that was created or discovered by the recipient before any involvement with the disclosing party".
This is a justifiable exclusion ONLY IF the disclosing party can prove, through conventional business documentation, that it possessed said information before disclosure occurred.
Thus, when listing this type of exception, be sure to state what standard of proof will be needed.
If, for example, you hire a contractor who creates something that uses your trade secrets before disclosing any information to that contractor, then the law still permits the contractor to use their invention in public.
This is especially true if the contractor can demonstrate through standard business documentation–such as an inventor's notebook or provisional patent application–that they invented the technology independently.
Non-disclosure agreements typically outline the expectations and responsibilities of the party receiving confidential information.
These often include requirements to keep the information private. However, in "Discloser Friendly" versions of these contracts, there may be additional language obligating parties to:
Including certain restrictions and obligations in an NDA typically boils down to the relative bargaining power between the parties.
However, it is essential to remember that there should always be "non-use" obligations present as well. It may come as a surprise, but many NDAs actually do not include such clauses.
An NDA does not legally bind recipients unless the restrictions are spelled out very clearly. For example, suppose the only limitation in the NDA is the non-disclosure of narrowly defined Confidential Information.
In that case, nothing prevents recipients from using your information to develop competing technology or products, as long as your Confidential Information is not disclosed.
This is one reason why a disclosing party should insist on "non-use" requirements in addition to non-disclosure requirements.
Many NDAs contain a clause dictating how long the receiving party must keep the information confidential.
In some cases, this may be set as several years, while in others, it may be tied to an event like a patent publication.
In the United States, five years is often used as the standard length of time.
Depending on the state, an NDA with no reasonable term length may be unenforceable or terminable at will.
In these instances, courts do not support perpetually binding obligations because they are not anticipated to last forever.
Nevertheless, patentable technology is not a problem since it will eventually become available to the public domain when the patents expire.
However, as explained above, this may cause your trade secrets to no longer be considered confidential.
So, if trade secrets are involved, the time period may have to be modified and carefully worded to avoid losing these rights.
Initially, NDAs have a set time limit in which neither party can divulge any exchanged information. However, this period is often extended for a longer duration.
For example, the NDA may allow six months to elapse so that both parties can assess the deal, but the non-disclosure agreement would still be binding for three to five years after that initial six-month mark has passed.
When it comes to damage, courts typically do a good job of awarding damages afterward.
They do not usually have the power to prevent an event from happening that might cause damage in the future--this power is known as "injunctive" or equitable power.
Courts only use their equitable powers in specific scenarios though they are hesitant to do so. If the party who wants disclosure has to go to court, the other argumentative party may state that a judge should not intervene.
Arguing like this will only obstruct court proceedings.
Most non-disclosure agreements have a clause that permits the court to take prompt action to prevent harm if one party breaches the agreement.
This can reduce the time before a court takes action and often obviates the need for litigation arguments.
Provisions often labeled as "Miscellaneous" or "Boilerplate" at the end of an NDA can be just as important legal documents, even though they may appear unimportant.
Therefore, it is key that you read through these types of clauses carefully.
Some examples of provisions typically included in NDAs are arbitration, choice of law, and venue selection clauses. These will be discussed further in the second portion of this guide.
Agreement - Although the words "agreement" and "contract" are often used interchangeably, they have different legal meanings. An agreement is simply a contract that has been given a friendlier name.
Arbitration - A private process where the parties involved pay for an arbitrator and the facilities to settle a dispute. It can be similar to going to court but may be less formal.
Bilateral NDA - A "bilateral," "two way," or "mutual" NDA where both parties agree to keep the information disclosed confidentially and are legally bound by this agreement when they receive such information from the other party.
Choice of Law Provision - A "choice of law" or "governing law" provision in a contract permits the contracting parties to agree that the laws of a particular state will be used to interpret the agreement, even if they reside in (or the agreement is signed in) another state.
Confidential Information - Confidential Information refers to any non-public information that belongs to a company or individual. This can be anything from business practices to technological advancements.
Confidentiality Agreements - A mutual agreement between two parties in which one or both promise to keep particular information secret.
Consideration - Anything with legal value may be defined as "consideration." In a common law contract, both sides must offer something of value for the agreement to be binding.
Course of Dealing - A pattern of typical business interactions between two companies that are seen as an indicator of future expectations and may change how a contract is interpreted and carried out.
Detrimental Reliance - If someone believes and relies on another person's false statement to their detriment, that is known as detrimental reliance.
Direct Damages - Damages naturally occur due to a breach of contract.
Discloser - A person who discloses Confidential Information to the other person in a non-disclosure agreement.
Discloser Friendly NDA - A non-disclosure agreement that benefits the Discloser more than the Recipient of Confidential Information.
Disclosing Party - The party who discloses Confidential Information to the other party in a non-disclosure agreement.
Effective Date - The date on which a contract becomes valid. If a contract clearly states its Effective Date, it is legally binding as of the Effective Date, even if opposing signatures are not dated.
Equitable Powers - Developed during the birth of the common law system, equity is a legal doctrine used to resolve disputes where damages are an unsuitable remedy.
Equity Powers refer to a court's ability to order parties to do something instead of just awarding damages after the fact.
Estoppel - The term "estoppel" refers to a number of legal doctrines that prevent someone from taking a certain action based on their actions or inaction to avoid unfairness.
Indefinite duration - An open-ended contract that does not specify a definite end date.
Injunctive Relief - A court-ordered act or prohibition relating to a petition for an injunction is called an order of abatement. This type of order uses the court to handle a problem that cannot be solved with a money judgment.
Jurisdiction - A geographic area having a court with the legal authority to hear cases.
Liquidated Damages - Liquidated damages are a specified amount of money that the parties agree upon in advance as compensation for a specific type of breach.
In this case, liquidated damages would be paid to the Disclosing Party if the Receiving Party develops improvements to the technology covered by the NDA.
Mutual NDA - This means that both parties are limited in their ability to use the materials provided, or they can limit the use of material by a single party.
Non-use Requirements - A contractually obligated requirement to not use disclosed materials or information.
Perpetual Obligation - An obligation unenforceable by some courts as an unfair restraint on trade.
Purpose - The justification for the parties exchanging information.
Receiving Party - The party that receives confidential information from the disclosing party in a contract or agreement.
Recipient - A person in a business contract or agreement who is privy to confidential information from the other person.
Recipient Friendly NDA - A non-disclosure agreement containing provisions that would be more beneficial to the Recipient.
Recitals - Commercial contracts will often contain recitals that explain the backstory of the agreement. These are usually factual statements that begin with "Whereas."
Representation - A statement made by one party to another before or at the time of making a contract regarding a fact or circumstance that influenced the agreement.
If the representation is incorrect, then the other party may be able to receive fraud and misrepresentation damages instead of standard contract damages.
Severability Clause - The clause that allows the contract's provisions to be independent of each other. This clause is essential because it can help ensure that even if one provision in the contract is deemed unenforceable, the entire contract will still be valid.
Tort - Any act (outside of those under contract law) that results in civil legal action or liability.
Trade Secret - Valuable information that is meant to be kept secret and for which reasonable efforts are taken to maintain its secrecy.
Unilateral NDA - A “one way” NDA is an agreement where only one party agrees to be legally bound by its terms and conditions.
Venue - The geographic location in which a court resolves disputes.
Waiver - A voluntary relinquishment of a right, which can be done either by express statement or conduct (such as not enforcing a request). A waiver may be interpreted as giving up the right to enforce that same right in the future.
Warrant - A contractual obligation that comes with different remedies than just those for breach of contract, including warranty indemnity.
The terms listed above are some of the more commonly seen in NDAs. Balancing a client's desire for a shorter contract with necessary legal protections can be tricky.
Other possible NDA provisions might relate to publicizing the agreement or compliance with securities law.
What should go into an NDA depends on the individual circumstances surrounding the need for such an agreement. If you are unsure, always consult a lawyer familiar with these contracts.
