What is a non-disclosure agreement (NDA)? A non-disclosure agreement (NDA) is a contract between two or more parties 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.
What Is an NDA Used for?
What is an NDA used for? The purpose of a non-disclosure agreement (NDA) is to ensure the confidentiality of sensitive business information. Sensitive business information may include elements 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.
Sensitive business information does not have to qualify as a trade secret in order to be protected under an NDA.
There are three primary 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 Do NDAs Work?
Two parties or more may sign an NDA to protect trade secrets, business processes, intellectual property, and other confidential information. The parties involved in signing a non-disclosure agreement (NDA) are usually in a business relationship or are contemplating a potential business relationship.
Once signed, one or more of the parties will be prohibited from trying to share sensitive information or otherwise disclosing the information covered to a non-authorized party.
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.
What NDAs Don’t Protect
Although non-disclosure agreements can be tailored to your specific needs, they cannot cover every type of information. NDAs cannot protect the following:
- Publicly available information: Information available in news reports, publications, government filings, or other public records is not protected by an NDA.
- Ideas: An idea cannot be protected by an NDA because it is not unique to your specific company. However, the expression of that idea can be protected, such as a product prototype or your business plan.
- Illegally obtained information: NDAs do not protect information that was obtained through fraud, espionage, theft, or other illegal means.
- Legitimately learned information: Finally, a non-disclosure agreement will not provide protection for the disclosure of information someone learns through legitimate efforts.
The courts will not enforce these terms even if they are included in a non-disclosure agreement.
Types of NDAs
Three types of NDAs are commonly used in business transactions. These may be either terminating or non-terminating.
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 non-mutual or unilateral NDA, one party is the disclosing party and the other party is the receiving party. Consequently, confidentiality obligations bind only the receiving party.
A bilateral NDA is sometimes called a mutual NDA. 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 transactions demand that the parties disclose information to each other, yet no one is sure whether the transaction will eventually occur.
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.
Terminating NDAs have provisions detailing an endpoint that will release the parties from their obligations. Such a provision might indicate that the receiving party can disclose the covered information to others after a certain time period. Or the agreement may specify that the NDA ends when the business relationship terminates.
These confidentiality agreements have no end date or circumstances under which they terminate. The party who receives the confidential info must keep the information secret indefinitely, or at least until the covered information becomes public information.
Elements of an NDA
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 damages, 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.
Your confidentiality agreement should specify what damages or other legal relief the parties might expect from a breach. Remedies could include monetary compensation, restraining orders, or other forms of economic and non-economic relief.
As long as the remedies contemplated are reasonable, courts will generally follow such 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.
The scope of confidentiality agreements speaks to the trade secrets, patent rights, intellectual property, and other confidential info that is the subject of these agreements. It is critical that the scope of confidentiality agreements be clearly defined.
Information that is public knowledge is excluded from NDAs as it cannot be made private again. Any information that a party knew or learned about before they sat down to sign an NDA is generally not covered under a confidentiality agreement.
What’s Not Included in an NDA?
Certain information will not remain confidential and will not be covered by an NDA. One of the most prominent examples is information supplied in public records and filings, such as filings with the Securities and Exchange Commission or the Colorado Secretary of State’s office.
In addition, an NDA cannot provide any legal remedies for the disclosure of confidential info made in response to a court order or subpoena.
Finally, an NDA’s terms will not stop a person from sharing sensitive information that was acquired outside of the business relationship. If a person learned your trade secrets through some other legitimate means aside from your disclosure of the information to them, the NDA might not provide you any recourse.
Non-Disclosure Agreement Risks
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.
Precautions While Creating and Signing a Non-Disclosure Agreement
When you need a confidentiality agreement to protect trade secrets and business processes, avoid common pitfalls by taking the following steps:
- Use language and terms that are clear, unambiguous, and specific.
- Make sure the descriptions of the confidential info, including trade secrets and sensitive information, are particularly specific.
- Whether the agreement involves two parties or two or more parties, each party should be given a chance to review the agreement and ask questions.
- Eliminate contradicting provisions, as they can prevent the agreement from being legally binding.
- Establish an expiration date for the agreement and describe how it can be renewed, if needed.
Reviewing your NDA at the outset can save you embarrassment and legal troubles down the road if you need to enforce it.
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.
How Much Does an NDA Cost?
The cost of a confidentiality agreement will depend largely on the scope and complexity of the agreement. Costs can range from a few hundred dollars to several thousand dollars.
What Situations or Circumstances Might Make an NDA Unenforceable?
Under certain circumstances, a court may find non-disclosure agreements to be unenforceable. An unenforceable NDA is one that the court finds is not legally binding, and the court will not award any damages for the breach of the agreement. Common reasons why a court may do this include:
- The non-disclosure agreement language is improper: If the NDA’s terms and conditions are overly broad, vague, or restrictive, a court may choose not to enforce the NDA.
- The information covered by the NDA is not confidential: If the information sought to be protected by the non-disclosure agreement is already public knowledge, the court is unlikely to enforce the NDA.
- The written contract requires illegal conduct: If the agreement’s key elements require one party to engage in illegal activity, the NDA will be invalidated.
The court may also refuse to enforce parts of a non-disclosure agreement that it finds objectionable or problematic, while still upholding other parts of the agreement. For example, an NDA might call for unreasonable damages in the event of a breach. In that case, the court may not award the full amount of damages.
How to Enforce a Non-Disclosure Agreement
If the other party to a non-disclosure agreement has breached the NDA, you have several options available to protect your rights.
Upon a breach of a non-disclosure agreement, you may file for injunctive relief to prevent further disclosure. You may ask the court for an order prohibiting the other party from violating the non-disclosure agreement and disclosing sensitive information.
In arbitration, you and the other party submit your dispute to a neutral third party. The decision of the arbitrator is often binding on the parties. Arbitration can be a cheaper and faster alternative to a lawsuit.
Arbitration does not resolve all NDA disputes. In these cases, you may need to file a lawsuit against the other party alleging a breach of contract.
To prevail at your trial, you must prove it is more likely true than not that:
- You and the other party entered into a legally enforceable non-disclosure agreement.
- The other party violated the terms of the non-disclosure agreement.
- Because of the other party’s breach of the NDA, you suffered harm or damages.
Pros and Cons of Non-Disclosure Agreements
Following are some of the advantages and disadvantages of using NDAs.
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.
Some of the potential drawbacks of NDAs include:
- 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.”
Where to Get Help with a Non-Disclosure Agreement
If you need someone to draft or review an NDA agreement, or if you anticipate litigating such an agreement, contact an experienced and knowledgeable Colorado commercial lawyer at Sequoia Legal today by calling (303) 993-0932 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).