What are NDAs and why are they necessary?
Non-disclosure agreements (NDAs) are often necessary where there is highly sensitive business information. An example might be the details of the algorithms that drive the world’s biggest internet search engine. The same can probably be said of the Colonel’s secret recipe at KFC. These trade secrets are often protected by agreements not to divulge them. These are called NDAs or confidentiality agreements.
Businesses and start-ups may need to expose confidential information to selected parties in order to do business. But they will want to keep it secret from everyone else. This can raise the need for a formal written agreement with legal consequences, designed to protect the company’s interests.
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Any information about a business has the potential to be used to its detriment in the wrong hands. Business owners should consider covering not only intellectual property (IP) with NDAs but current business plans, client lists, profit forecasts, patent applications, budget allocation, agreements with third parties and other sensitive information.
The best way to keep information secret is not to disclose it in the first place. Clearly this is not always going to be practical. So when potential sensitive information is to be shared with a third party it is always best to put some parameters around this before actually sharing the information. Ideally it should be in writing and detail:
- What information is to be disclosed
- To whom
- For what purposes
- For how long.
The recipient should read and sign the agreement before any sensitive information is shared.
Business owners should consider covering not only intellectual property (IP) with NDAs but current business plans, client lists, profit forecasts, patent applications, budget allocation, agreements with third parties and other sensitive information.
Non-disclosure agreements are legal contracts binding one or more parties to keep secret the material covered in the agreement. They can be standalone contracts or confidentiality clauses within larger legal documents. Breaching an NDA carries civil, not criminal penalties, but they can be substantial if a court finds that the defendant must compensate the plaintiff for lost profits.
Getting a professionally written NDA is a prudent step to take. Having a lawyer write one up should at least ensure that it is enforceable. An NDA written by an untrained person might miss important details and prove ineffective when the time comes to test it.
Our specialist company lawyers have written a template NDA that covers most eventualities. It is 11 pages long and drafted by a solicitor with particular expertise in this area. You can purchase the template NDA via the box on the right. We have also written a blog post about what the Inform Direct NDA covers and the approach it takes for maximum clarity and effectiveness.
The Inform Direct NDA Template
A professionally drafted, comprehensive NDA template.
An NDA should be drafted widely enough to cover as many scenarios as possible. The aim is to maximise both the deterrent value of the NDA and the chances of winning in court should a breach of the agreement occur.
When are NDAs used?
NDAs are most often used in the following circumstances:
- When allowing potential business partners to evaluate a product, service, technology or concept
- To prevent employees from revealing sensitive business information to anyone outside the company
- When sharing business information with a prospective buyer for the business or when considering a merger
- When dealing with a supplier who needs to work with confidential information to provide its service to the business
- In the settlement of legal disputes when it is desirable for the terms of the settlement not to be disclosed
- Between a company and the press, in advance of a product launch or announcement. An NDA of this type is a more elaborate and consequential version of an embargo.
NDAs can involve varying numbers of parties depending on the circumstances. Some common dynamics are:
- Unilateral. Examples: a new employee is asked to sign an NDA because they need to know sensitive information to do their job. An entrepreneur needs to share their IP with a potential investor, manufacturer, licensee or franchisee. In these cases only one party agrees not to disclose information.
- Bilateral (mutual). Example: two parties need access to each other’s business-critical info for purposes of evaluation before doing business. This could be a merger, acquisition or joint venture. Both parties agree not to disclose information.
- Multilateral. A single agreement between multiple parties. Simpler than a web of one-way and two-way NDAs between parties, provided everyone can agree to sign it. For complex multi-party negotiations.
What should a non-disclosure agreement contain?
As a minimum any unilateral NDA should contain:
- Names of all parties to the agreement
- A statement of intention to disclose the information to the recipient and the purposes for doing so
- Definition of the exact purposes for which the recipient should use the information
- A statement that the recipient undertakes to keep the information confidential, not to make any copies of it, and to use it only for the stated purposes
- The parties they may share it with, if any
- The consequences of a breach of confidentiality: damages, court orders, injunctions, repayment of profits obtained by using the confidential information, dismissal from employment, etc.
- A list of circumstances where the recipient will not be held in breach of the NDA. For example, if the information was already in the public domain, known to the recipient before they received it, or when disclosure is required by law or a court
- If applicable, the format the information takes (text, diagrams, images, specifications, technical drawings, video, audio, etc.) and a statement that it is still considered sensitive if converted into other formats
- Duration: for how long is the agreement binding? Is it open-ended or time-limited? It may be sensible to define two periods: how long disclosures will be made for and for how long confidentiality is to be maintained afterwards. Three, five and ten years are common periods for the latter.
- Where applicable, statements of what the agreement is not, to avoid potential misunderstandings or abuses and adverse legal repercussions for the company. For example, that it is not an offer for sale or license, no rights are granted, all documents and materials remain the property of the discloser, no copyright is transferred, etc.
- The jurisdiction(s) and laws governing the parties, g. English law
- What is to be done with the confidential information or materials when the agreement ends, e.g. immediate return of materials, no copies to be kept by the recipient.
As well as including these specifics an NDA should be drafted widely enough to cover as many scenarios as possible. The aim is to maximise both the deterrent value of the NDA and the chances of winning in court should a breach of the agreement occur.
Misuse of NDAs
A non-disclosure agreement cannot stop someone whistleblowing or prevent them from reporting a crime. NDAs are sometimes used in attempts to silence victims of discrimination or harassment, to cover up misconduct or inappropriate behaviour, or to intimidate would-be whistleblowers. Attempts to silence people in such ways have been under government scrutiny for some time. Some legislation has been passed; for example, whistleblowers are protected by the Public Interest Disclosure Act 1998.
Managers’ perceived need to gag people and the risk of any resulting legal action can be reduced by the application of better management practices. These include well-defined grievance, disciplinary and whistleblowing policies and other steps that foster a more open and productive workplace culture.
It is sometimes reasonable to use an NDA to maintain confidentiality when a workplace dispute has led to a settlement whose details or existence are best kept private for sound business and human resources reasons.
There is proposed legislation to crack down on the misuse of NDAs and ensure that their use is limited to the legitimate protection of business interests.
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