- Anmol Trehin
NDAs: How They Work and Why They’re Important
What are NDAs?
Non-disclosure agreements (or NDAs for short) establish a confidential relationship between parties through which they agree that the sensitive information that will be shared will not be made available to others.
NDAs can be unilateral, bilateral, or multilateral. Unilateral NDAs, known as one-way NDAs, only require one party to disclose information to the other party. These are common in employer-employee relationships to prevent the employee from using information such as trade secrets, supply sources, and pricing plans.
Bilateral NDAs are two-way agreements in which both parties disclose confidential information. These are used in situations such as a joint venture, a merger and acquisition, or a corporate takeover. Multilateral NDAs are used when there are more than two parties sharing information.
Why are NDAs Important?
NDAs are an important tool in helping businesses protect their information and processes to maintain a competitive advantage. There are various situations in which a company may need to use an NDA. When hiring an employee or independent contractor; or when engaging with investors or suppliers that will have access to confidential information. As mentioned, NDAs are also used for joint ventures, mergers and acquisitions, and takeovers.
However, NDAs are more than just legal documents used to scare the receiving party. It helps put everyone on the same page regarding what is and is not considered sensitive information. Levelling the field in this way fosters an environment of trust between the parties which can assist in open negotiations.
Without an agreement in place, information that is disclosed may be used by the receiving party for their personal gain, to compete directly with the disclosing party, or be made public. Therefore, a strong NDA will include the consequences of the breach of the agreement.
How Do NDAs Work?
Scope of the Agreement
NDAs work by first defining the scope of the information that is considered confidential. The disclosing party may describe every information shared as confidential or describe the way information is considered confidential, like stamping a document as confidential. The disclosing party benefits from drafting a broad definition of sensitive information and may include catch-all provisions to cover information a reasonable person would classify as confidential.
In return, the receiving party is required to protect the information and refrain from using it improperly or for personal gain.
The NDA should also specify what information does not constitute confidential information or is excluded from the scope of the agreement. Often, this includes information that is already known publicly.
It can also include disclosures that must be made in the ordinary course of business. For example, an employee may need to disclose certain confidential information to a third party for them to complete an approved job or service. In this case, the disclosure by the employee will not be a breach of the NDA.
Length of Time
The length of time the NDA applies is negotiated between the parties and depends on the type of industry. While they can last indefinitely, NDAs generally last between 2 to 5 years.
Regardless of the length of time chosen, it should both be reasonable and clearly stated to avoid misinterpretation in case a breach occurs.
Consequences of a Breach
The NDA needs to define the consequences of a breach. These may include:
the end of the professional relationship (such as termination of employment, or the termination of the contract)
or an injunction.
Including these elements in the NDA provides an opportunity for the parties to know what information is confidential, what is excluded, how long the parties are obligated to maintain confidentiality, and the consequences of the breach.
Start-ups and large businesses alike benefit from implementing NDAs. Consult with a lawyer if you believe an NDA has been breached or you need to implement one. If you're not sure whether an NDA is the right option for you, we can help identify your legal needs through a consultation
This blog post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.