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What Is an NDA (Non-Disclosure Agreement)?

Commercial & Corporate Law

updated:
5.27.22
what is an nda

What is an NDA? A non-disclosure agreement (NDA) is a contract that forbids one or more parties from divulging proprietary business information to third parties. Since Colorado law is hostile to non-compete agreements, businesses must rely on NDAs more than businesses in other states do. A poorly drafted NDA, however, can result in a false sense of security that could trigger devastating consequences.

A trade secret, for example, needs NDA protection because it does not enjoy protection under patent, copyright, or trademark law. You can use contract law to enforce an NDA, just as you can enforce any other contract. You can collect money damages and perhaps even an injunction.

The Purpose of an NDA

The purpose of an NDA is to ensure the confidentiality of sensitive business information such as pricing strategies, customer lists, trade secrets, product development information, manufacturing processes, product specifications, and other information that a company has a legal right to keep confidential. This information does not have to qualify as a trade secret.

The following are three main purposes of NDAs:

  • Identifying precisely which information is confidential. This serves a critical legal function in, for example, the protection of trade secrets. It also serves to clarify matters for the company, its employees, and third parties.
  • Enforcing breach of contract provisions. Ideally, the existence of possible legal sanctions will deter any party from releasing confidential information in the first place. If not, at least it provides a remedy.
  • To prevent the inventor from losing the legal right to patent it. Sometimes information concerning a pending invention must be kept confidential to be protected. 

The corporate and commercial lawyers at Sequoia Law can help you draft and enforce an airtight NDA that is tailor-made for your circumstances.

How Does a Non-Disclosure Agreement Work?

Signing an NDA is not an action that you should take lightly. An effective NDA will:

  • Identify confidential information.
  • Specify how long the receiving party must keep the information confidential.
  • Include a clause detailing the consequences of divulging confidential information. 

Although criminal charges are possible in some instances, a contractual clause cannot force a prosecutor to prosecute.

Types of NDAs

what is nda

Three types of NDAs are commonly used in business transactions, depending on the circumstances:

Unilateral NDAs

You are likely to find a unilateral NDA in an employment contract relationship, either as an embedded clause or as a stand-alone agreement that is supplementary to the main employment contract. In a unilateral NDA, one party is the disclosing party and the other party is the receiving party. Consequently, confidentiality obligations bind only the receiving party.

Bilateral NDAs

In a bilateral NDA, two parties receive confidential information, and both are bound to confidentiality obligations. This might happen, for example, in an M&A transaction where the transaction demands that the parties disclose information to each other, yet no one is sure whether the transaction will eventually occur. 

Multilateral NDAs

In a multilateral NDA, three or more parties agree to keep certain kinds of information confidential. You might see a multilateral NDA in a complex business transaction, or among affiliated companies (a parent company and numerous subsidiaries, for example). Litigating multilateral NDAs can get complicated.

Elements of an NDA 

what does nda stand for

Although NDAs can run for many pages, some are only a page long. Following are some basic elements of an NDA. It is likely that you will need others as well.

Identification of the Parties 

The parties to an NDA agreement are often business entities. Make it clear that the company representative is signing on behalf of the company, not in their personal capacity. Use names and addresses, and identify each party as a disclosing party, a receiving party, or both.

Identification of Confidential Information

Precisely identify which information is confidential. The information should be identified clearly enough to allow a court to know exactly what information is confidential.

Duration of Confidentiality Obligations

Some secrets last forever, while others endure until a certain milestone is reached. In still other cases, the duration of confidentiality obligations might be somewhat arbitrary (five years, for example). In any case, be clear about when the confidentiality obligations end.

Consequences of Breach of the Agreement

In most contract disputes, the court or an arbitrator determines the exact amount of images, or the parties determine it in settlement negotiations. You can demand a specific dollar amount of damages in advance (“liquidated damages”) as long as the amount is reasonable. You can also use phrases such as “irreparable harm” to try to pave the way for a court injunction if necessary. 

Boilerplate Provisions

Most business contracts include certain “boilerplate” provisions such as:

  • A merger clause;
  • A severability clause; and
  • A dispute resolution clause.

Understand what each clause means before you insert it. Do not use the pre-fabricated boilerplate provisions that you might find on the Internet.

Risks of NDAs

Consider all relevant NDA risks before you sign the agreement. A few of these risks appear below:

  • Once you disclose information in the public domain, you cannot “undisclose” it. It is public forever.
  • Proving the breach of an NDA can be challenging.
  • It can be difficult to determine the number of damages you deserve. Even so, disclosure of your confidential information might put you in such a bad position that no amount of money damages can remedy it.
  • A party might find a way to use confidential information to its advantage (and to your competitive disadvantage) without actually disclosing it. This can be very damaging, but very difficult to prove. 

This is not a complete list of all the potential liabilities of an NDA.

When Do You Need an NDA?

You might be tempted to ignore an NDA until it is obvious that you need one. Perhaps you don’t know how to review an NDA or which of your company’s information qualifies as confidential. It is not a good idea to wait until your need for an NDA becomes obvious because, by the time this happens, the damage is usually already done. The situations in which you are most likely to need an NDA include:

  • When you negotiate a business deal with another company;
  • When you are starting a new project that includes the involvement of external stakeholders;
  • When you are talking to investors about a pending M&A transaction; and
  • When you hire a new employee.  

Take into account the degree to which your company’s value depends on the protection of its intellectual property. A startup lawyer can help you draft an NDA that is optimal for your company.

Pros and Cons of NDAs 

what is a non disclosure agreement

Following are some of the advantages and disadvantages of using NDAs.

Pros

Despite their liabilities, NDA benefits are numerous. They include:

  • Confidentiality. The obvious benefit is if the agreement works the way it is supposed to.
  • Legality. This means you have access to the courts.
  • Specificity. An NDA identifies which information is confidential.

The foregoing is only a very abbreviated list of the potential upsides of signing an NDA agreement.

Cons

Following are some of the potential drawbacks of NDAs:

  • The use of an NDA can sow seeds of distrust between two new business partners.
  • The existence of confidentiality obligations that outlast employment relationships can discourage talent from seeking employment with your company.
  • NDAs can generate significant potential liability for the receiving party.

Overall, under most circumstances, the “pros” far outweigh the “cons.”

Conclusion

If you need someone to draft or review an NDA agreement, or if you anticipate litigating such an agreement, contact Sequoia Legal today by calling (303) 476-2851 or by filling out our online contact form. Although our main office is in Denver, we serve clients throughout Colorado. We offer free consultations.

Our office is ‌at 7355 E. Orchard Road, Suite 375 Greenwood Village, CO 80111 (by appointment only).

FAQ

What happens if you break an NDA?

If you break an NDA, you will suffer ordinary civil liability for breach of contract. You may have to pay damages, for example. A court may also order you to stop distributing the other side’s information. If you ignore a court order, you could face contempt of court charges, including jail time.

How long do non-disclosure agreements last?

They last as long as the contract says they do. Theoretically, a non-disclosure obligation could last forever. If the contract does not specify a duration, a court will probably infer a “reasonable time” under the circumstances.

How do I prepare an NDA?

Talk to a commercial lawyer and have them draft your agreement for you. These agreements are tricky! Even a small error could result in disproportionate consequences years down the road.
Andrew Lopez

Andrew is the founder and managing member of Sequoia Legal, LLC headquartered in Denver. He advises domestic and foreign companies and organizations, entrepreneurs and individuals on a variety of corporate and international regulatory and transactional matters

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