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A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship between two parties: one that holds sensitive information and the other that will receive that sensitive information. The latter agrees that the information they receive won't be made available to others. An NDA may also be referred to as a confidentiality agreement.
Non-disclosure agreements are common for businesses entering into negotiations with other businesses. They allow the parties to share sensitive information without fear that it will end up in the hands of competitors. It may be called a mutual non-disclosure agreement in this case.
The NDA serves a purpose in a variety of situations. NDAs are generally required when two companies enter into discussions about doing business together but want to protect their interests and the details of any potential deal. The language of the NDA forbids all involved from releasing information regarding any business processes or plans of the other party or parties.
Some companies also require that new employees sign NDAs if they have access to sensitive information about the company. All employees are required to sign an agreement with some companies. Only select departments or types of employees will be subject to the agreement with other firms.
NDAs may also be used before discussions take place between a company seeking funding and potential investors. The NDA is meant to prevent competitors from obtaining their trade secrets or business plans in such cases.
Many investors are reluctant to sign NDAs, however. Not only will this potentially prevent them from sourcing future deals with other companies but the agreement may be very difficult to enforce in proving wrongdoing. Most investors simply won't sign the agreement rather than be burdened by a legal contract even after declining an investment opportunity.
The information that's being protected may include a marketing strategy and sales plan, potential customers, a manufacturing process, or proprietary software. The other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages if an NDA is breached.
NDAs come in various forms, each providing for different rules and purposes.
Consider a situation where two businesses are discussing the possibility of partnering together. Each company may disclose information about its operations to better inform the other side of its capabilities as part of strategic discussions. Both parties often agree to not disclose information because each side often receives sensitive information in such arrangements.
This type of agreement is also referred to as a unilateral NDA. It usually applies to new employees who have access to sensitive information about the company. The employee is the only party signing the agreement and is prevented from sharing confidential information in such cases. Only one party is bound to confidentiality because they're the only party receiving sensitive information.
Individuals are increasingly asked to sign the opposite of a non-disclosure agreement. A doctor may require a patient to sign an agreement that the patient's medical details can be shared with an insurer. This provides one party with the authority to share personal information and to prevent them from being sued for doing so.
An NDA is a legally binding agreement. A violation can lead to legal penalties.
NDAs can be customized for any situation but six major elements are generally considered essential to any non-disclosure agreement.
Every non-disclosure agreement must specifically designate each party involved. The individual receiving the sensitive information can be a specific person, all employees of another specific company, or any representative of the company.
It's very important for a company to appropriately define itself in an NDA. Consider companies with complex legal structures. The company must appropriately determine which legal entity has ownership of the information. A company may simply list any legal entity under a broad ownership umbrella in many cases.
An NDA must state what information is considered to be confidential and this is often among the most difficult pieces to appropriately define. A company can't simply assume that proprietary information will be understood by all. It's the company's responsibility to identify what information must not be shared.
The difficulty with defining confidential information is the process of not disclosing such information itself within the NDA. Companies may broadly assign confidentiality to a large group for this reason. A company might assess that any information disclosed from or regarding its research and development department may be confidential.
It may just be easiest to define what's not confidential in some situations. A company might state that all information shared with an external party is to be confidential except for specific items that are determined by that company. These types of agreements intend to allow a company to catch any exceptions that would have otherwise slipped by.
A company may sometimes state that no information is confidential or it may simply limit how the external party may use the information that's been given to them. A company may be fine disclosing operating processes to another party but that party can't use the information to share with a competitor or replicate it for personal financial benefit.
Many proprietary bits of information simply expire or become less valuable over time, especially those relating to research and development, Consider the early days of Apple iOS. Many components of the operating service were unknown and the technology was widely unknown by the market.
Much of that information is now replicated by other companies or adapted into newer technologies. What was once sensitive information may have lost its luster. Companies often define when the information is no longer confidential.
NDAs can be customized to serve any need. Various industries may have differing requirements and government agencies often have more stringent requirements for keeping sensitive information private.
An NDA may also detail applicable state law or laws that apply to the agreement and which party pays attorney fees in the case of a dispute. This may also define the course of action if the agreeing party should fail to comply with the terms.
Companies have endless opportunities to protect themselves with NDAs. They're generally used to protect information including but not limited to:
NDAs can't contain specific pieces of information if the information is common knowledge or already in the public domain. This includes any information that may be widely known or considered public knowledge although there can be disagreement about how this is defined. This also includes information that becomes publicly known at no fault to the recipient of the NDA and illegal activity because it's contrary to public policy.
Information that the receiver of the NDA already knows before receiving the agreement can't be included in the agreement. Information that could be determined via independent research or rightfully obtained from a third party can't be defined as confidential, either.
Many states have their own NDA requirements. You should always seek legal counsel before entering into any NDA agreement.
The primary benefit of an NDA is that sensitive information regarding your company is kept secret. This can be anything from research and development (R&D) to possible future patents, finances, and negotiations. Signing an NDA is a way to protect private information from becoming public.
NDA agreements are also clear. They specify what can and can't be disclosed to avoid any confusion. NDAs can be created at a low cost as they're just a signed piece of paper. This is one of the most cost-effective ways to maintain private information.
NDAs also outline the consequences of disclosing prohibited information and this should prevent any leaks. NDAs are a good way to maintain comfort and trust in a relationship as well.
Make sure that confidential information and trade secrets are distinguished from each other when you're entering into a non-disclosure agreement. The latter usually has an indefinite period of confidentiality.
One of the primary disadvantages of an NDA agreement is that it starts a relationship on the idea of mistrust. This can set the tone of the relationship and may not always result in a positive one. Employee NDAs can prevent top-tier talent from joining your firm because they know they'd be limited in discussing their jobs in the future.
Asking current employees to sign NDAs when they're working on special projects might sour their experience of working for the company because they feel less trusted. NDAs can also result in potential lawsuits if breached and this would become a headache for everyone involved.
Apple is one of the most private companies in the world. It keeps its technology and future products closely guarded until it's ready to release them. The idea is to deter competitors from stealing trade secrets and copying its products because it's been a pioneer in technology for most of its life. It also generates buzz as a marketing ploy.
CNBC reported in January 2021 that carmaker Hyundai confirmed in a statement that it was in talks with Apple regarding cars. This, of course, raised suspicion that Apple was possibly entering the car market or creating a product related to automobiles. Hyundai then released a follow-up statement that removed any mention of Apple.
Apple insists on secrecy in all its relationships and it requires that any partner sign an NDA. Apple tells its partners that they can't mention the name "Apple" in any manner and it has threatened partners that have leaked information with monetarily hefty lawsuits.
You'll be susceptible to the consequences outlined in the contract if you break an NDA. It's not usually considered a crime but it can be depending on what was violated, such as if the issue is theft of trade secrets.
An individual will typically be sued if they break an NDA and this can result in a monetary fine, termination of employment, or the return of an asset. You may also be sued for intellectual property violations such as copyright infringement or breach of fiduciary duty. A court can levy financial damages and associated legal costs.
Every NDA is unique so each can last a different amount of time. Common timeframes range from one year to 10 years, however, depending on the information that's to be kept private. An NDA can also be indefinite. It must not be too open-ended or generic for an NDA to be enforceable in some states. The courts will otherwise throw it out.
The cost of an NDA can vary depending on the complexity of the agreement. Creating one typically ranges from $175 to $1,500.
An NDA template is a non-disclosure agreement format that an individual or company can follow to create their own NDA. The template will have the general legal information and blanks that can be filled in to create a unique NDA between two or more parties that applies to their relationship.
NDA templates can be easily found online through an internet search. Many sites offer NDA templates for use.
Non-disclosure agreements are low-cost, easy-to-create, legally binding documents between two or more parties that keep private information confidential. They're used by organizations and individuals to protect their businesses or personal information and allow businesses to work together without fear of private information falling into the hands of competitors.
It's important to be as detailed as possible when you're drafting an NDA so all parties know what can and cannot be shared as well as the consequences of leaking information.
