First we should understand that what is non-disclosure agreement
A non-disclosure agreement (NDA) is a legally binding contract that establishes a confidential relationship. The party or parties signing the agreement agree that sensitive information they may obtain will not be made available to any 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. In this case, it may be called a mutual non-disclosure agreement.
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 own interests and the details of any potential deal. In this case, 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 an NDA If the employee has access to sensitive information about the company. For some companies, all employees will be required to sign the agreement; for others, only select departments or types of employees will be subject to the agreement.
NDAs may also be used before discussions between a company seeking funding and potential investors. In such cases, the NDA is meant to prevent competitors from obtaining their trade secrets or business plans. However, many investors will be reluctant to sign NDAs. Not only will this potentially prevent them from sourcing future deals with different companies, the agreement may be very difficult to enforce and prove wrong-doing. Instead of being burdened by a legal contract even after declining an investment opportunity, most investors will simply not sign the agreement.
In all of the above, the information that is being protected may include a marketing strategy and sales plan, potential customers, a manufacturing process, or proprietary software. If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages.
What are the different types of Non Disclosure Agreements?
- Unilateral NDA: It involves two parties, out of which only one party discloses certain information to the other and expects that the information is prevented from any further disclosure.
- Bilateral NDA: It involves two parties; both the parties disclose information to each other, and both of them intend to protect the information from disclosing to another. E.g.- Joint Venture.
- Multilateral NDA: It involves three or more parties to the agreement, out of which one of the parties discloses the information to other parties and wishes to have that information protected from any further disclosures. These types of NDAs also eliminate the need for distinct unilateral or bilateral NDA.
What are the essential requirements that needs to be considered in any Non Disclosure Agreement
Especially relating to research and development, many proprietary bits of information simply expire or become less valuable over time. Consider the early days of Apple iOS; many components of the operating service were unknown, and the technology was widely unknown by the market. Today, much of that information is replicated by other companies or adapted into newer technologies. For this reason, what was once sensitive information may have lost its luster, and companies often define when the information is no longer confidential.
Participants to the Agreement
Every non-disclosure agreement must specifically designate who every party involved entails. For the individual receiving the sensitive information, this may be a specific individual person, all employees of another specific company, or any representative of the company.
On the other hand, it’s very important for a company to appropriately define itself in an NDA. For example, consider companies with complex legal structures. The company must appropriately determine which legal entity has ownership of the information; in many cases, a company may simply list any legal entity under a broad ownership umbrella.
Appropriate Uses of Information
Sometimes, a company may state that no information is confidential. However, it may simply limit how the external party may use the information that has been given to them. For example, a company may be fine disclosing operating processes to another party. However, that party cannot use the information to share with a competitor or replicate it for personal financial benefit.
Definition of Confidential Information
Often among the most difficult pieces to appropriately define, an NDA must state what information is considered to be confidential. A company can not simply assume that proprietary information will be understood by all, and it is the company’s responsibility to identify what information must not be shared.
The difficulty of defining confidential information is the process of not disclosing such information itself within the NDA. For this reason, companies may broadly assign confidentiality to a large group. For example, the company may assess that any information disclosed from or regarding its research and development department may be confidential.
As mentioned earlier, NDAs may be customized to serve any need. Different industries may have different requirements, and government agencies may have more stringent requirements on keeping sensitive information private.
In this area, 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.
When to sign a Non-Disclosure Agreement?
1. NDA while entering into a business deal: While entering into a business deal, like hiring a vendor or supplier or consultant, if you want to ensure that the proprietary information you are sharing with those vendors or service providers, does not become public, then entering into an NDA is a great idea.
2. NDA while starting a new project: On starting a new project and the need to collaborate with a few people, even when commercials are not explicit, or company or partnership isn’t framed, and there is no IP to protect yet, it may pay off to enter into an NDA.
3. NDA clauses in contracts: It is a practice that an NDA clause is inserted into all and sundry contracts as a part of special precaution. Unless a part demands its removal, it generally stay. It helps both parties on the whole, as business details have to be treated with caution and can’t be leaked to media, etc., without a doubt even when conflict arises in the course of doing business.
4. NDA to protect trade secrets: We often advocate signing a trade secret non-disclosure agreement when trade secret requires protection. It is not yet a practice in India but a very useful step. Top executives and employees should be made to sign such agreements. It goes a long way in preventing them from jumping into business with the same information and competing with the former employer.
What if the Non Disclosure Agreement is Breached
An NDA violation is a civil wrong. NDAs are legally binding agreements. When the parties sign a NDA, the receiving party must keep the confidential information secret. However, if the receiving party chooses to disclose confidential information to a third party or an unauthorized entity, the party will face legal consequences or penalties. NDAs not only bind the parties to keep confidential information private, but they also include legal remedies and penalties for any breach of the agreement, such as injunctions, indemnification etc. Breach of NDAs can result in significant monetary penalties, in addition to injuntive remedies. One should read a NDA very carefully before signing the same.
What is generally protected with Non Disclosure Agreement
- Operating information. This includes employee data, supplier information, any information related to payroll, or any aspect of internal costs required to operate the company not required to be publicly disclosed.
- Financial information. This includes specific financial information relating to any customer or any financial information not required to be publicly disclosed. This types of information is often more related to cost accounting information as opposed to financial accounting information.
- Customer information. This includes major customers, major customer contact information, and customer preferences. This may also include any direct communications with customers.
- Marketing information. This includes processes, billing policies, pricing strategies, and advertising techniques.
- Intellectual property. This includes patents, copyrights, trade secrets, technologies, and anything a company uses as a competitive advantage.
Pros & Cons Of NDA
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), possible future patents, finances, negotiations, and more. Signing an NDA is a way to protect private information from becoming public.
NDA agreements are also clear. They specify what and what cannot be disclosed to avoid any confusion. NDAs can also be created at a low cost as they are really 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, which should prevent any leaks. Furthermore, NDAs are a good way to maintain comfort and trust in a relationship.
One of the primary disadvantages of an NDA agreement is that it starts a relationship off 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 also prevent top-tier talent from joining your firm, knowing they’d be limited in discussing their job in the future.
Similarly, asking current employees to sign NDAs when working on special projects may sour their experience of working for the company as they will feel less trusted. NDAs can also result in potential lawsuits if breached, becoming a headache for everyone involved.
What generally is not covered
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, though there may be a discrepancy around how this is defined. This also includes information that becomes publicly known at no fault to the recipient of the NDA.
Information that the receiver of the NDA already knows before receiving the agreement can not be included in the agreement. In addition, information that can be determined via independent research or rightfully obtained from a third party can not be defined as confidential as well.
Should you sign NDA while talking to investors?
Many people used to do this in the past. However, it is an unnecessary practice and is becoming obsolete now. Most investors will refuse to sign such an NDA for early discussions. Only if and when the need arises to look inside the papers like revenue numbers or a particular technology or some sensitive data at an advanced stage of considering the company for investment, a request to sign an NDA first may be made.
Why you should not violate a non-disclosure agreement?
NDAs deter persons from disclosing sensitive information to third parties or the general public, and severe penalties accompany them. In many circumstances, the agreement will specify the consequences of breaking the NDA. The following are some instances of penalties for violating an NDA: injunction, indemnity, damages, termination from employment, loss of business reputation, clients, etc.
A NDA would typically contain language that would entitle the Disclosing Party to resort to any legal remedies it deems fit. Such wide language in itself should sound a warning bell to the Receiving Party. It is better to comply with confidentiality obligations than breach a NDA.
At The End
Non-disclosure agreements are low-cost, easy to create legally binding documents between two or more parties that keep private information confidential. They are used by organizations and individuals to protect their businesses or personal information and allow businesses to work together without the fear of private information entering the hands of competitors.
When drafting an NDA, it is important to be as detailed as possible, so all parties know what can and cannot be shared as well as the consequences of leaking information.