The Ultimate Guide to Non-Disclosure Agreements

By FormSwift Editorial Team

May 1, 2018

When Do You Use an NDA?

Here are some situations where NDAs are commonly used:

• Presenting a business idea to a potential partner or investor
• Sharing information about your business or demonstrating new technology to a prospective buyer
• Giving employees access to information that isn't common knowledge so that they may successfully meet their obligations

You don't want to overuse this type of agreement. People dislike hassle. A powerful party like a potential investor may walk away from the requirement of signing one if there is a project that doesn't require one. Think carefully about whether you really need one for your particular circumstances. For example, here are two situations involving intellectual property (IP). IP is a specialized and highly defined idea, thought process, or information that you want to protect. It can be a unique process, copyrighted material, trademarked material, or patented material that isn't available to the general public.

Not NDA-Appropriate: An idea for an oxygen-driven robot that makes macaroni and cheese.

NDA-Appropriate: An idea - including blueprints, calculations, and a list of potential materials - for an oxygen driven robot that makes macaroni and cheese.

The first idea is just that: an idea. It seems original, but from a technical perspective someone else could have thought of it. The second idea warrants a non-disclosure agreement because it includes data: specific plans, blueprints, calculations, and a list of materials. That information can be used to bring the idea to reality. In other words, it contains intellectual property that someone else couldn't just think of. It is, therefore, in need of official legal protection.

Types of Relationships Between Parties That Can Create NDAs

Employment/Service NDA

Sometimes, employees need sensitive, company information to do their jobs. When that’s the case, the employer uses a standard NDA. The employee is required to sign before they start their job. The NDA essentially makes the employee promise that they will maintain the secrecy of company-specific activities that are considered a trade or business secret. It may also include a provision that says if the employee leaves, they cannot disclose what they learned for several years.

Business Purchase/Sale NDA

An NDA for a business purchase or business sale is used when the seller will disclose information (this may also include financial information) about the business before the sale is finalized. Sometimes, showing this information, and how it is used in the business, can facilitate the sale.

Invention NDA

An invention NDA is generally used when someone is looking for a commercial partner after they’ve invented something. This essentially promises the inventor that the person or business they’re presenting their invention to will not steal the idea or the prototype.

If you are a business owner using a confidential disclosure agreement, you're asking that person to sign something requiring them to not share information that may be disclosed to them. Breaking the terms of this contract could entail serious legal repercussions. Common information covered in an NDA includes, but may not be limited to, client information, trade secrets, investment strategy, a unique invention or patented idea, a marketing plan, a plan for a new manufacturing process, a document that is being prepared for publication, or test results revealed to lab workers.

For an employee or a business partner asked to sign such an NDA, you’re being asked to sign because you’re going to receive certain information. Your signature promises that you won’t share that information. It’s vital that you understand your obligation. If you do not uphold your duties, you could open yourself up to a lawsuit.

What Are The Components of an NDA?

While there are endless possibilities of what may be included in an NDA, most share the following elements:

• Parties to the agreement: Who is disclosing the private information (i.e. “the disclosing party”)? Who is receiving it? Are there any other parties involved in the agreement (e.g. affiliated company, partner, agent, etc.)?
• Specification of what information is covered: What information must remain confidential? Is it only information shared between the two parties in writing? Does the agreement also cover information shared in conversation?
• Scope of confidentiality obligation: What responsibility does the receiver have to keep information confidential? Generally speaking, it is the obligation of the receiver to keep the information secret and to use it properly. If the document is broad in scope, the disclosing party can sue for damages if the recipient breaches the NDA.
• Exclusions: What information is excluded from the NDA? If any information shared between the two parties is publicly available, that information is automatically excluded from the agreement. Other information might not be confidential and the disclosing party may not require it to remain secret.
• Term of the agreement: How long will the NDA last? Remember to check your local law. For example, in California, an NDA is generally unenforceable, but the term limit for one in Texas would depend on if trade secrets are mentioned in the document.
• Other provisions to consider:
  • Employee solicitation: Can the recipient solicit or hire your employees? Are they prevented from doing so for a particular length of time?
  • Jurisdiction for disputes: If there is a dispute over the NDA, how and where will the conflict be handled? Must any potential legal proceedings occur in a particular city?
  • Injunction: An injunction is an action (generally a court order) that prevents the other party from breaching the agreement if they try to do so.

These are just the basics. Some jurisdictions may have additional provisions for this sort of contract. When drawing up yours, be sure to check local laws for any requirements.

At the top of the document, you’ll see a title clearly indicating that it is an NDA. Under the title, there should be a section specifying the full names of the primary parties involved. They may be referred to as the disclosing party and the receiving party. If the involved parties are an employer and employee, the parties as “employer” and “employee.” For businesses and independent contractors  it may be written as “business” and “contractor.” It's not unusual for the contract to specify the location and contact information of the mentioned parties. Next, there should be a statement that the two parties agree not to disclose the referenced information. The description of that information is included later in the document.

The next section is the main part of the agreement. It outlines the information that must not be disclosed. The information should be defined as precisely as possible. There may also be a component of the contract in which exclusions are specified.

Another component of the agreement template explains the obligations of the receiving party. These obligations center on the requirement of the recipient to keep the information confidential unless they have written permission from the disclosing party to share it.

There may be a section that lists the time period of the contract, as well as any sever-ability clauses. These are conditions under which the contract may be terminated. At the bottom of the agreement, you should include sections for both parties to print and sign their names and to write the current date.

How Do NDA’s Apply to Particular Circumstances?

NDA’s for Employees

According to the Harvard Business Review, approximately ⅓ of employees in the US sign an NDA. Sometimes instead of using a stand alone NDA, an employee contract may include a non-compete clause which prohibits a full time employee from working for a competitor for a given period of time. It may also include confidentiality clauses that perform the same function as an NDA.

NDA’s for Contractors

If you’re a contractor and are asked to sign an NDA, consider the following:

1. Are there provisions on your end? For example, if the client produces a faulty/dangerous product you should not be liable.
2. The NDA prohibits you from using unprotected information on the project for your resume, personal website, etc.
3. Does the NDA require you to deny the existence of the agreement? If so, don't sign it because you cannot legally deny the existence of an NDA in court.
4. Is the NDA negotiable? If not, you should consider its impact on you and your career before signing.

NDA’s for Developers

Developers are often asked to sign NDAs. It’s important to understand both why this occurs and how to make sure the NDA request is fair.

• Why are you (the developer) being asked to sign one? Generally, developers are asked to sign NDAs because of their knowledge of algorithms, prototypes, or other design elements that are essential to a client’s business. Furthermore, a client may plan to patent some of the information shared with developers.
• How do you know if it’s fair? Here's a checklist that can help you determine if the NDA request is fair. (If you’re still questioning if the document is fair after reading these, talk with an attorney to make sure that your interests are protected.)
• Timing: You should not be asked to sign an NDA before you agree to work with a client. You may also need to know at least some of the confidential knowledge before signing simply to determine if you have a conflict of interest.
• Source of information: Make sure that the NDA only prohibits you from using confidential information that you learn from the disclosing party. If you learn the same info from an unrelated source, you should be able to use that information however you please.
• Confidential information and trade secrets: The NDA should distinguish if and how you should treat confidential information and trade secrets because they are not the same thing. For example, there may be some people on the team that you cannot discuss trade secrets with.
• Term of confidentiality: How long are you required to keep the information confidential? The term should be reasonable (and within any local laws) because technology constantly changes.
• Consequences for violating the NDA: This section details what happens if either party breaches the agreement.

Assessing Red Flags

Here are some things to look out for when signing an NDA. The inclusion of any of these items is a red flag that indicates the agreement may not be in your best interest.

• Overly broad definition of confidential information.
• Excessive confidentiality terms.
• Unwillingness of the other party to negotiate clauses in the NDA.
• Non-compete provisions that extend past the life of the project. If this is included, the company generally must show a reasonable business interest in having the clause.

NDA’s and Intellectual Property

It is important to highlight that NDAs cannot fully prevent other companies from using your IP. That is too broad to be legally binding. There must be clearly defined confidential information or trade secrets listed. With this in mind, the creative team of any business may need to obtain a series of NDAs at each stage of the project. Doing this means that each individual stage (along with its secrets, IP, and other confidential information) is fully outlined and you have documentation of the receiving party’s agreement.

NDA’s and Investing

For startups seeking venture capital investment, NDAs  are not recommended. Most VC investors will refuse to sign them. Investors generally do not sign NDAs because they hear thousands of pitches each year. An agreement like this generally has a term of two to five years. It would be close to impossible for an investor to sign and keep up with the terms of what would amount to thousands of NDAs.

What Can You Do?

• Do your due diligence. Research your investor and their reputation. Make sure you believe your investor is an ethical person before you reveal important information.  
• When you write your business plan, keep your most confidential information out of the plan. Investors do not need to know those private details to determine if your business is attractive.
• If your investor asks for specific information regarding proprietary information, consider asking them to sign an NDA for that information. Keep in mind that some may be willing to sign, but most won’t.

What are the Legal Considerations of NDA’s?

A non-disclosure agreement is a contract between two parties in which one or both agree to keep certain information confidential. Let's say, for example, that a publisher wants to hire an editor for a newly written e-book. The publisher wouldn't want the proofreader to take the information in the e-book and use it to write and sell their own version. By having the editor sign a non-disclosure agreement, the publisher is creating a legal instrument that may help prevent the editor from using the information.

The language used in the form is important since a properly written NDA must clearly define the information that must not be shared. Upon considering the legal aspects of a non-disclosure agreement, it’s easy to see why they are commonly used. Just remember to do your research, learn as much as you can, and find out how it can protect you and your business.

It is imperative that the parties read the NDA carefully prior to signing it because it is is a legally binding document. By signing such a document, you are agreeing to all of its terms and conditions.

When Should You Not Sign an NDA?

• Don’t sign an NDA if the terms aren’t clearly explained. Remember that confidential information as well as business secrets must be explained so that you understand exactly what is considered confidential.
• You should not sign an NDA if you do not trust the person or business asking you to sign it.
• Do not sign an NDA during the very first meeting. At this point, you know very little about the client or the project. You don’t even know that you’re interested. Much like an investor, you shouldn’t be bound by just hearing an overview of an idea.
• Don’t sign an NDA if you believe that the document creates more liability for you than you can or should handle.
• Don’t sign an NDA if you believe that the person or business asking you to sign it only has an idea and has no real plan to execute on it.
• Don’t sign it if you believe that the party may be litigious. Litigious means that they are likely sue happy.
• Don’t sign it if you don’t believe that the relationship will go anywhere.

When is it Permissible to Break an NDA?

Are all NDAs legal? Can you ever break an NDA? Not all NDAs are legal. First, it’s important for you to know that when an NDA is overly broad, it’s next to impossible for a court to enforce it. Saying “intellectual property” is broad. Does it mean an idea? A copyright? A trademark? A patent? A blog post? The list can go on and on. In fact, every state has its own rules on how this information should be defined. Currently, many states are reviewing their laws associated with confidentiality agreements to determine if they should be revised.

From a technical perspective, you can break an NDA any time you want. That doesn’t mean you should. Breaking it can result in you being sued for breach of contract. You may be required to pay money to the disclosure if you break the agreement. Yet, there are also times when an NDA is considered null or void. Of course, one of the most common ways that an NDA is null or void is because it doesn’t conform to local law. If you’re sued for violating the agreement, the fact that the agreement was overly broad or didn’t follow state law can actually become your defense.

NDAs may also be broken or null and void if the information within was given to the receiver by a third-party not named in the agreement or if it is something that’s available to the public or something that the receiver already knew. Then, there are NDAs that violate public decency laws or cover illegal acts.