Why Would a Business Want a Non-Disclosure Agreement?

QUESTION:

Why would a business want a non-disclosure agreement?

ANSWER:

The primary objective of a non-disclosure agreement (also known as an NDA) is to safeguard your information assets. For many businesses, your information assets are your most valuable business assets, like a customer list or a unique business process. Protection of this information is vital. Having a non-disclosure agreement should be part of your normal business practice for many other reasons too:

A written agreement helps avoid confusion around what the parties consider “confidential information.” Imagine you disclose a key business process and the recipient of that process then uses parts of it for its own commercial advantage. As a result, that party gains market share that would have otherwise been reserved for you. Your recourse now is to file suit on a verbal contract? You can do that, but the Recipient is likely going to take the position that you said the business process was not confidential or proprietary. The Recipient will make it appear that everyone uses a process like that. Had you executed a written non-disclosure agreement, however, the parties would have agreed in advance to keep the business process confidential.
A written agreement spells out the specific expectations for the use and disclosure of the “confidential information.”
It’s much easier to enforce your rights if you have a signed written agreement.

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QUESTION:

Don’t trade secret laws protect your confidential information, even if you don’t have a written non-disclosure agreement in place?

ANSWER:

Yes. Most state laws afford trade secret protection for critical information assets. The Defend Trade Secrets Act of 2016 (DTSA) (18 U.S.C. §§ 1831-1836) also creates a federal private cause of action for trade secret misappropriation. These laws will protect items like client lists, marketing plans, pricing and discount structures, business methods, production processes, recipes and chemical formulas and software algorithms and source code. There, however, is a BIG caveat. Under these laws, you most show you made reasonable efforts to keep your trade secrets a secret. If you disclose your trade secrets to another party without an NDA, this shows the opposite – you took no effort to keep your top-secret business information a secret. By executing an NDA, this helps you maximize your trade secret protection by reaffirming you made reasonable efforts to keep your information assets secret and confidential.

[InPrime CTA] If you want to scale fast and with confidence, call our office at 770-285-7785 and schedule a Strategy Session. During our time together, we’ll collaborate on how to align our legal strategy with your business goals to help you achieve more in business.

[Contract Sprint CTA] By the way, if you need an NDA, then go to freendasforlife.com. Our NDAs are free. No catch. No gimmick. It’s our give back.

QUESTION:

NDAs EXPLAINED: What main terms should be included in a non-disclosure agreement?

ANSWER:

All non-disclosure agreements (aka NDAs) should include these five main components:

A non-disclosure obligation. This is the affirmative duty by the Recipient to keep your information confidential and not to disclose it to others.
Access and use restrictions. Who has access? Is it your employees on a need-to-know basis? Is it access for a specific business purpose? What can the confidential information be used for? Is use limited to the business purpose that created the need to exchange information in the first place? Check out our NDA builder below. It will allow you customize these specific sections of the NDA to tailor it for your specific business objectives.
Security requirements. Are there specific security measures the Recipient must have in place before receiving your confidential information? If so, that should be spelled out in the NDA.
How long must the parties keep information confidential after termination or expiration of the NDA? This can be indefinite or fixed (i.e. 3-5 years). If you are the Recipient, then you’ll push for a fixed term. If you’re the disclosing party, then you’ll push for an indefinite term.
Return or destruction obligations. Must the parties return all confidential information after expiration of the agreement or upon request? Can they simply destroy it? If they destroy it, must they show proof of destruction? The NDA must be clear on how the Recipient should handle confidential information post-termination.

Other provisions might include non-solicitation, indemnification, warranty disclaimers, and intellectual property rights. All these terms are key to safeguarding your trade secrets and other information assets.

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QUESTION:

How soon in a business relationship should you execute an NDA?

ANSWER:

When should you sign an NDA? It depends. If you are the party disclosing information, then don’t wait. Request execution of a non-disclosure agreement (aka “an NDA”) at the outset of the relationship and before any of your confidential information is disclosed. An NDA protects your information assets. For many businesses, their information assets are their most valuable business assets (such as a customer list or key business process).

When we draft an NDA for a Disclosing Party, we include the following language:

“’Confidential Information’ means all non-public, confidential, or proprietary information disclosed before, on, or after the Effective Date.”

This language covers prior disclosures. So, even if you disclose confidential information before the execution of an NDA, the NDA will still prevent the Recipient from disclosing previously disclosed confidential information. If you are the Disclosing Party, then don’t risk it and have the NDA executed as soon as possible.

If you will solely receive confidential information, then your objective it to narrow what constitutes confidential information under the NDA as much as possible. The broader the definition, the greater potential you have for violating your contract obligations. When we represent the Recipient, we eliminate the prior disclosure legal language cited above. We also require that any information considered confidential must be clearly labeled as “confidential” before the Disclosing Party furnishes it to the Recipient or designated as “confidential” in a written notice within 10 days of its disclosure. Otherwise, it’s not deemed confidential under the NDA. And if it’s not confidential, then the Recipient cannot be liable for its disclosure, whether disclosure was on purpose or by accident.

Here’s the point. There is no such thing as a one-size-fits-all NDA. Make sure your NDA protects your position in deal before executing it.

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QUESTION:

The main agreement has a confidentiality provision. Do I need a separate NDA?

ANSWER:

It depends. A freestanding non-disclosure agreement (aka “NDA”) is often used if the parties need to exchange information before finalizing the main agreement. This happens with a proposed business acquisition or joint venture or if the parties are planning a strategic alliance. You also might want a freestanding NDA if you desire more comprehensive protection around your information assets. For many businesses, their information assets are their most valuable business assets (such as a customer list or key business process). So, the more comprehensive, the better.

A confidential clause (as opposed to a freestanding NDA), for example, is often not that comprehensive. It’ll include the non-disclosure obligations, the definition of confidential information, and a term, but it will typically leave out use and access restrictions.

If you use both a freestanding NDA and have confidentiality provisions in your main agreements, make sure they don’t conflict. An easy way to prevent conflicting contractual obligations is to have the main agreement simply reference the freestanding NDA. This clause might read as follows:

“Existing NDA. The parties executed a Non-Disclosure Agreement on [DATE] (“Existing NDA”). The parties agree the Existing NDA will continue to govern all disclosures of “Confidential Information” (as defined under the Existing NDA) as between the parties in furtherance of this Agreement and their business dealings.”

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QUESTION:

What happens if the other party uses my information in violation of the NDA?

ANSWER:

Candidly, it can be difficult to prove a party violated their non-disclosure obligations under an NDA. Even so, a well-drafted NDA will provide you a claim under contract law as well as injunctive relief. Injunctive relief gives the court the power to stop any further disclosures. If you can prove lost business profits because of the illegal disclosure, then that could be source of relief. An NDA also offers deterrence value. Another party is much less likely to overtly steal your valuable information assets if they signed an NDA.

If you have concerns about the misuse of your confidential information, then you can include an audit rights provision in the NDA. Although viewed as aggressive, this provision would give you the right to audit a Recipient’s premises or information databases to confirm compliance with the NDA. This provision is often included when the information shared is highly sensitive. Here is what it might look like:

“Audit Right. During the Term and for Survival Period, at the Disclosing Party’s three business day’s prior written request, the Recipient must provide to the Disclosing Party or its designated agents full access to the Recipient’s premises to inspect and audit the relevant books, records, procedures, and practices of the Recipient to verify the Recipient’s compliance with the terms and conditions of this Agreement. The Disclosing Party will conduct an audit only during the Recipient’s normal business hours and in a manner that does not unreasonably interfere with the Recipient’s business operations.”

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