What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA) is a legal contract between an organization and a contractor, employee, or other entity. The contract prevents the contractor or other party from sharing or misusing the private information you’ve shared with them during your work together. Basically, this document makes sure no one discloses (shares) trade secrets with your competitors or uses them for their own gain.

NDAs can protect a wide range of information, including research, client, and membership details, financial information, product specs, operating information, marketing campaigns, research and development information, intellectual property, unique processes, and anything else that’s useful for your business.

Let’s look at an example. Let’s say you’ve developed a new technology that you plan on selling. To launch your new product, you ask new employees to sign a non-disclosure agreement. By doing so, you make sure your team doesn’t share information about your patent-pending tech (or any other sensitive data).

That way, your employees can’t sell the information they have to the competitors or use it to launch their own competing tech product.

NDAs can fall into a few categories:

Bilateral. If you’re entering into a partnership with another business, you may want to sign an NDA where you agree not to share each other’s business information.

Unilateral. Most NDAs are this type of one-sided agreement. A unilateral non-disclosure agreement is about your data. So you might ask an employee to agree not to share your trade secrets, but the NDA will not mention the employee’s data or any obligations you have towards that (though this may be covered by other agreements you’ve signed with your worker).

Multilateral. If you’re signing a deal with at least two other organizations, you don’t have to sign multiple NDAs. One multilateral agreement can outline whose trade secrets are protected.

One more thing you need to know: sometimes, the terms non-disclosure agreement and confidentiality agreement are used interchangeably. There’s no legal difference between the two, although NDAs tend to be one-sided and used more often with contractors. The point is to prevent them from sharing trade secrets.

Confidentiality agreements tend to be broader, for situations where more secrecy may be needed. For example, if you want to keep all information related to a new product secret, you might sign a confidentiality agreement with your business partners.

This agreement may be proactive, requiring your partners to take concrete steps to keep the information from being disclosed. A confidentiality agreement may also require partners to seek NDAs from their own employees and contractors.

Why Is a Non-Disclosure Agreement Important?

Your freelancers and workers trust you to treat them fairly. And you trust them not to harm your business by sharing information they shouldn’t. A non-disclosure agreement can make this understanding legally binding, reducing the risk data will be misused. There are a few reasons why a non-disclosure contract can be important.

• It can protect you from lawsuits. Your employees may not just have access to your organization’s private information. They may also have sensitive information about your clients, customers, and business partners.

You can use non-disclosure agreements to make sure your team doesn’t spill proprietary secrets that don’t belong to you, which can protect you from lawsuits.

• It can keep you competitive. Your trade secrets, whether it’s a new product you’ve developed or the secret recipe you’ve built your company around, are what set you apart from competitors.

Using NDAs ensures others can’t use these special elements of your business to make money and lure customers away from you.

• It can protect your profits. Globally, trade secret theft costs companies as much as $1.7 trillion each year. It can be expensive for your business, too. Imagine you create a new consumer product and apply for a patent. Without an NDA, employees and contractors could leak your specs without consequences.

This could cause the market to be flooded with imitations, cutting into your sales. An NDA keeps money-making information in your organization, so it’s your company that benefits from your hard work.

Should You Use a Non-Disclosure Agreement?

You put a lot of work into developing your organization’s products, services, processes, and offerings. There are times when an NDA can help protect these assets:

• You’re hiring freelancers to work on a project where they will have access to trade secrets or other sensitive information.
• Your employees need access to information you wouldn’t want to get past your company doors.
• You have an agreement with a licensee who will use your creative work.
• You are working with a supplier, vendor, or business partner who will have access to information you wouldn’t want the general public to access.
• You’re entering a joint venture.

When considering whether to have someone sign an NDA, think about what information and trade secrets you may be granting them access to. If it’s something you wouldn’t want a hacker or a member of the general public to know about, a non-disclosure agreement can be a good idea.

When Should You Not Use a Non-Disclosure Agreement?

NDAs can’t protect all information. Here are some cases where these agreements don’t apply.

• Situations where information is available to the average person, maybe with a little research.
• Any situations where information is disclosed through no fault of the signee.
• Situations where the signee already knows the trade secrets or protected information before being asked to sign the NDA.
• Any situation where a person could get the protected information from another party.

What Are Some Best Practices for Using a Non-Disclosure Agreement?

To make your NDA enforceable and effective at preventing trade secret leaks, use these best practices.

Create a strong NDA

You can find templates of NDAs online. If you want to write your own, you will need these elements:

• Information about you and the signees. You want to outline who the disclosing party is, aka whose trade secrets are protected by the NDA. Indicate who the signee is, too.
• Details about the trade secrets. This is a careful balance. You don’t want the agreement to be so broad that it can be challenged in court, but you don’t want it so narrow that there are loopholes. Outline what information can’t be shared and how it can’t be shared.

For example, you might want to indicate all research and development information is protected and can’t be shared digitally, in writing, or through speech.

• The scope of the agreement. This part of the agreement outlines what you expect signees to do and not to do. For example, you might ban signees from misusing trade secrets or using them for their own benefit. You might want to indicate what signees should do, too.

For example, do you want signees to limit the use of trade secrets on their own team or carry cyber insurance to protect your business?

• Time period. How long do you want your NDA to be in effect? In many cases, these agreements last for about five years because by then, an organization has a chance to get patents for trade secrets or has developed new products, making old trade secrets less valuable.

If your company is based around a secret process or recipe, though, you can make an NDA last indefinitely.

• Exclusions. When does the NDA not apply? Usually, these contracts indicate that signees can share a company’s private information if required by the law or a legal claim.
• Any recourse in case of a contract breach. Some agreements outline remedies an organization may take or be entitled to. This part of the NDA may also state that anyone breaching the agreement may be responsible for attorney fees in case of legal action.

Have an attorney review your document

Whether you’ve written your own NDA or are using a template, consult with an attorney. An experienced business attorney understands the laws in your state and can help you close any loopholes. They can also make sure your agreement is legally enforceable.

Talk about it

Explain to employees why you need a non-disclosure agreement while reassuring them that you still trust them. This also ensures the signee understands what they’re signing and how to honor the contract. You can use an employee training app to help your team understand NDAs and their obligations.

Help signees honor your agreement

If some information at your company is confidential and some is public knowledge, make it clear which is which. You might want to mark some files as “confidential,” for example, to help workers understand what data they need to be extra careful with.

Keep your NDAs accessible

Make sure signees of your NDAs have a copy of the document and keep a copy for your records, too. You can use Connecteam to securely store and manage non-disclosure agreements and other employee documents in one place.

What Happens if Your Agreement Is Violated?

If someone has not honored your NDA, contact an attorney first. Your attorney can advise you on next steps. If possible, review the NDA to determine what clauses were violated and get as much information as you can about what was shared, when, and how. If you have any details about how the breach could impact your business, this can also be useful for your attorney.

In addition to any remedies outlined in your NDA, you may also have the right to sue the person who has leaked your confidential information. You can pursue legal action to prevent more misuse of your trade secrets. You can also seek financial compensation for the harm done to your business.  

Protect Your Organization With an NDA

In a perfect world, everyone you work with would keep your specs, patent-pending inventions, and other trade secrets private. In reality, you may need an NDA to keep others from misusing the private processes and information at your company. A well-crafted NDA is legally enforceable and can help you stay competitive and profitable in your industry.