Non-Disclosure Agreement (NDA)

Non-Disclosure Agreement (NDA)

Investopedia / Tara Anand

What Is a Non-Disclosure Agreement (NDA)?

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.

Key Takeaways

  • An NDA acknowledges a confidential relationship between two or more parties and protects the information they share from disclosure to outsiders.
  • The NDA is common before discussions between businesses about potential joint ventures.
  • Employees are often required to sign NDAs to protect an employer's confidential business information.
  • An NDA may also be referred to as a confidentiality agreement.
  • There are two primary types of non-disclosure agreements: mutual and non-mutual non-disclosure agreements.

Watch Now: How Does a Non-Disclosure Agreement (NDA) Work?

Understanding Non-Disclosure Agreements (NDAs)

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.

NDAs are also commonly 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.

Special Considerations

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.

The Non-Mutual Agreement

This type of agreement usually applies to new employees if they have access to sensitive information about the company. In such cases, the employee is the only party signing the agreement that is prevented from sharing confidential information.

The Disclosure Agreement

Increasingly, individuals are asked to sign the opposite of a non-disclosure agreement. For example, a doctor may require a patient to sign an agreement that the patient's medical details may be shared with an insurer. This provides one party with the authority to share personal information and prevent them from being sued for doing so.

An NDA is a legally binding agreement; a violation can lead to legal penalties.

Requirements for an NDA

NDAs may be customized to any degree but there are six major elements that are considered essential:

  • The names of the parties to the agreement
  • A definition of what constitutes confidential information in this case
  • Any exclusions from confidentiality
  • A statement of the appropriate uses of the information to be revealed
  • The time periods involved
  • Miscellaneous provisions

Defining "Miscellaneous"

That last "miscellaneous" item might cover details such as the state law or laws that apply to the agreement and which party pays attorney fees in the case of a dispute.

Templates for non-disclosure agreements and samples of standard agreements are available from a number of legal websites.

Advantages and Disadvantages of Having an 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.

When entering into a non-disclosure agreement, make sure that confidential information and trade secrets are distinguished from each other. The latter usually has an indefinite period of confidentiality.

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.

  • Information kept private

  • Clarity on what information can and cannot be shared

  • Low cost to create

  • Outlines consequences

  • Can create an atmosphere of mistrust

  • Risk of deterring top-tier talent from joining the firm

  • Can possibly sour the relationship with current employees

Real-World Example of an NDA

Apple is one of the most private companies in the world. The company keeps its technology and future products closely guarded until the company is ready to release them. It does this to deter competitors from stealing trade secrets and copying its products, as it has been a pioneer in technology for most of its life, and also to generate buzz as a marketing ploy.

In an article from CNBC from Jan. 2021, carmaker Hyundai confirmed in a statement that it was in talks with Apple regarding cars. This, of course, raised suspicion that Apple is possibly entering the car market or creating a product related to automobiles. Hyundai then released a follow-up statement that removed any mention of Apple.

Apple insists on secrecy with all of its relationships and makes any partner sign NDAs. Apple tells its partners that they cannot mention the name "Apple" in any manner, and Apple has threatened partners that have leaked information with monetarily hefty lawsuits.

What Happens If You Break a Non-Disclosure Agreement?

If you break an NDA, you will be susceptible to the consequences outlined in the contract. Breaking an NDA is not considered a crime, however, depending on what was violated, it can be a crime, for example, if the issue is theft of trade secrets. Usually, a person will be sued if they break an NDA, which may result in a monetary fine, termination of employment, or the return of an asset, depending on what was agreed upon.

How Long Does an NDA Last?

Every NDA is unique so each one will last a different amount of time. Common timeframes range between one year to 10 years, however, depending on the information that is to be kept private, an NDA may be indefinite. For an NDA to be enforceable in certain states, it must not be too open-ended or generic, or the courts will throw it out.

How Much Does an NDA Cost?

The cost of an NDA can vary depending on the complexity of the agreement. The cost of creating one typically ranges from $175 to $1,500.

What Is an NDA Template?

An NDA template is a template of a non-disclosure agreement that an individual or company can follow to create their own NDA. The template will have the general legal information and blanks that can be filled in to create a unique NDA between two or more parties that is applicable to their relationship.

NDA templates are easily found online through an Internet search. There are many sites that offer NDA templates for use.

What Happens If You Violate an NDA?

If you have signed an NDA and violated it by disclosing confidential information illegally, you can be subject to lawsuits from the other party to the NDA as you have breached the contract. You may also be sued for intellectual property violations such as copyright infringement and breach of fiduciary duty. A court may levy financial damages and associated legal costs. If an NDA was a condition for employment, you may also be terminated from your job.

The Bottom Line

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.

Article Sources
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