What is a Non Disclosure Agreement (NDA)?
A Non Disclosure Agreement is a written contract that officially recognizes a legally binding relationship between two parties – the Disclosing Party and Receiving Party.
Upon signing an NDA, the two parties agree not to disclose certain proprietary or confidential information explicitly outlined in the NDA agreement.
The Disclosing Party can be an individual, a company, or an entity. The Receiving Party is the individual or entity that is receiving the confidential information from the Disclosing Party.
Both the Disclosing Party and Receiving Party mutually agree that certain information is sensitive, technical, or nonpublic and holds value for commercial or other purposes.
Further, the two parties promise that they will not use or disclose the protected information with anyone else as they discuss and explore the possibility of entering into a business relationship with each other.
Depending on the region or industry, an NDA may be referred to as a:
• Confidentiality Agreement (CA)
• Confidential Disclosure Agreement (CDA)
• Proprietary Information Agreement (PIA)
• Secrecy Agreement (SA)
But is there really any difference between these various agreements? The short answer, quite simply, is, ‘No. Not particularly.’
Whether an affluent investor is asked to sign a secrecy agreement by a pioneering software developer, or a Fortune 100 company requires all new employees to accept the terms of a confidentiality agreement before being hired, each individual in these scenarios is putting their signature on a type of non-disclosure form.
A confidentiality agreement and a non-disclosure agreement both attempt to legally protect sensitive information like trade secrets from being leaked to a third party.
However, certain contracts may include a subsection known as a confidentiality or non-disclosure clause. This clause may be found in a wide variety of documents such as a joint venture agreement or freelance contract, and operates similarly to a self-contained NDA.
Protecting Trade Secrets
All businesses, from a simple Mom-and-Pop diner to an international corporation, have access to proprietary information which has allowed them to succeed in some form or fashion. Proprietary information (also known as a trade secret) is any type of information that a business seeks to keep confidential in order to maintain an advantage over the competition.
Maybe it’s a secret fried chicken recipe from that local diner — passed down for generations — which has kept them in business all these years. Perhaps it’s an unconventional advertising strategy which boosted that international corporation’s foothold in foreign markets.
Whatever the case may be, whenever an individual or business interacts with another party, the key to protecting a trade secret is with a Non-Disclosure Agreement.
The 2 Types of Non Disclosure Agreement: Mutual and Unilateral
Non-Disclosure Agreements are commonly used when one or both parties has valuable, confidential, or sensitive information like trade secrets, customer lists, or proprietary information.
In order to turn a great idea into cash flow, both parties consciously choose to share confidential information in order to explore a possible collaboration or business relationship.
There are two major types of NDA forms — the Unilateral and Mutual Non-Disclosure Agreement.
Both agreements are used to protect confidential information. However, they are not exactly the same.
When Do You Need to Sign an Non Disclosure Agreement?
While the overall goal of a Non-Disclosure Agreement is to protect two parties engaging in a business relationship, understanding which situations necessitate the use of one, or when exactly to sign an NDA, can be tricky.
Situations that Call for a Non Disclosure Agreement
Non Disclosure Agreements are generally tailored for specific scenarios. The following are a few of the most common situations which call for an NDA:
Employee – The employee version of an Non Disclosure Agreement is used to notify a company’s employees that they are not to discuss certain business information outside of work. In order for businesses to protect their valuable information, this document helps employees acknowledge that discussing any sensitive information is a breach of their contract.
Interview – It’s possible that in some interviews, it is necessary to reveal confidential information. In these cases, companies should consider having their interviewees sign an Non Disclosure Agreement before the job interview.
Inventor – This type of NDA agreement can be used by inventors to protect their unpatented inventions. Inventors may find themselves in situations where they need to discuss their project with an interested party. In this case, it’s important that the inventor can ensure that this third party will not relay any information elsewhere after the meeting.
Real Estate – A real estate non-disclosure agreement is used to protect the buyer, seller, broker, and anyone else involved in a property transaction. As real estate sales involve the disclosure of significant personal and financial information, having an NDA ensures privacy and also prevents the involved parties from brokering secret deals.
Trade Secret – With this type of non-disclosure form, companies can confidentially disclose their trade secrets to third parties without fear of theft. This is useful for protecting information such as special formulas, practices, instruments, software, technical designs and blueprints, and customer lists.
An NDA will help safeguard any information that you want to keep secret, no matter how unique the circumstance — such as:
• Documentary Film
• Advertising Agency
• Website Development
• Visitor or Factory Tour
• Bachelorette / Bachelor Party (Yes, seriously.)
• TV Production
• Software Development
Keep the Following in Mind Before You Sign an NDA
If you find yourself being asked to sign an NDA and are unsure about what to do, consider these 5 things:
- The document’s scope: Understand the main questions the NDA is asking you to do. What type of information are you required to keep confidential? What steps must you take to keep it confidential? How long will the NDA last for?
- Look for broad language: Be wary of broad language that doesn’t relate to information you already have personal or public knowledge of. Otherwise, you are handcuffing yourself and opening yourself up for greater liability.
- Liquidated damages: If you see a liquidated damages provision, run. A liquidated damages provision ensures that if you breach the NDA, the company or employer will be entitled to a specific amount of damages without ever having to prove you caused actual damage to them.
- The consequences of breaching it: Look to see if there are any unusually harsh or unfair punishments should you breach the NDA. If the punishment is disproportionate to the breach, hold off on signing.
- You can negotiate: You can always ask to modify the document if you find something you think is unjust or out of place. It can’t hurt to ask, and companies are more likely to allow changes when the NDA is last-minute.
The Consequences of Not Using an NDA Agreement
Without a valid Non-Disclosure Agreement, someone else may make money off of your once-in-a-lifetime idea, or exploit valuable confidential information.
Expensive lawyer fees to:
- Engage in a legal battle
- Seek remedies for unlawful use or disclosure of protected information
- Sue for trade secret misappropriation Expensive lawyer fees to:
- Engage in legal battle
- Respond to a lawsuit for unlawful disclosure of protected information
- Respond to alleged trade secret misappropriation
Mental anguish due to:
- Having your idea stolen and monetized by another Mental anguish due to:
- Being embroiled in a drawn out lawsuit As a legally enforceable agreement, an NDA can help alleviate genuine concerns that someone may leak your confidential information or use that valuable information for their own economic advantage.
Real-Life NDA Examples
Check out these real-life examples of how Non-Disclosure Agreements have kept information secure (or how the lack thereof has done the opposite).
• Coca-Cola: Coca-Cola possesses one of the world’s most famous and sought after trade secrets, the recipe for Coke. The recipe is only known by two employees at the same time, and is guarded in an Atlanta bank vault. Both employees have signed extensive NDAs to safeguard the recipe and their identities, ensuring Coke maintains its monopoly in the soft drinks market.
• Hotmail: Hotmail founder Sabeer Bhatia’s collection of over 400 NDA contracts in a two-year span is believed to have been a critical step in providing Hotmail with a six-month headstart and a competitive edge in the high-tech market, leading to a $400 million dollar payday for Bhatia.
• Facebook: The Winklevoss twins accused Facebook founder Mark Zuckerberg of stealing their business model and brand after working on their software “UConnect.” If they had asked their UConnect employees to sign an NDA, they would have likely had sufficient evidence to prove their allegations of “idea theft” by Zuckerberg.
What should be Included in a Standard NDA?
When drawing up a standard Non-Disclosure Agreement, it’s important to identify the following basic elements:
• The “Effective Date”: when the promise of privacy starts
• The “Transaction”: the potential business relationship being explored
• The “Confidential Information”: private, secret, sensitive, or valuable data
• The “Disclosing Party”: the individual or entity sharing information
• The “Receiving Party”: the individual or entity receiving information
• The “Representatives”: other people (i.e., directors, officers, employees, agents or advisors) who may share, receive, or protect information
A basic Non Disclosure Agreement will always, at the very least, outline these important, boilerplate components.
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