Businesses of all shapes and sizes use non-disclosure agreements. Employees, freelancers, consultants, partners, investors and even temporary staff are often required to sign an NDA before undertaking work or entering into negotiations. Yet, these contracts are often misunderstood. We’ve all heard stories of NDAs being used to cover up morally questionable behaviour. Equally, there have been cases where NDAs have not been used and this has led to loss of business and long legal battles.
In business, your biggest assets are often ideas and information, both of which need to be protected because if somebody else can take these then your business could be in trouble. In this article, we will explore:
- What an NDA is
- How it can (and can’t) protect your business
- Whether you need an NDA
- What happens when an NDA is broken
- Whether you can draft a non-disclosure agreement yourself
What is A Non-Disclosure Agreement?
A non-disclosure agreement (NDA), sometimes referred to as a confidentiality agreement, is a contract between two or more persons designed to maintain confidentiality. Usually, specific information, plans or ideas. The aim of an NDA is to protect the competitive advantage of the company.
Although an NDA can protect against corporate espionage, non-disclosure agreements are usually used to emphasise the importance of confidentiality. Establishing expectations between the party/parties entering into the agreement.
Why Might I Need An NDA For My Business?
There are several reasons why you might need an NDA for your business. Operating with non-disclosure gives a competitive advantage that enables both smaller and larger companies to conduct business without fear that ideas or opportunities may be stolen. Yet, there are many other reasons NDAs may be required.
An NDA may be established between a business and:
The signing of non-disclosure agreements may be requested prior to work being undertaken, or initial discussions taking place. Applying an NDA to a discussion does not necessarily mean the parties may go on to work together. For instance, an NDA may be used when discussing sensitive information with potential suppliers. However, the company may decide not to work with that supplier and the supplier will still be obligated to keep disclosed information confidential, as agreed.
Whilst requesting an NDA can feel uncomfortable, particularly for smaller less established businesses, doing so does not imply a position of distrust. Rather, having an NDA in place facilitates trust so that all parties may feel protected during negotiations and discussions. The security of having a confidentiality agreement in place can help as all parties feel empowered to talk openly and share vital information.
How Does An NDA Protect My Business?
NDAs are legally binding and used by new as well as established businesses. As a new business, it's important, even in the initial stages, to protect your trade secrets. For example, if you were a digital start-up building an app you might have to outsource all or part of the development. In this case, you might request the agency or freelancer carrying out the work sign an NDA before beginning. This would make clear that they are not to discuss the project outside of the business. Protecting you from a competitor learning of your product in development. Essentially, an NDA is a contract that protects ideas and plans from those who might take advantage of or seek to disrupt your business.
Larger businesses with multiple staff will often use NDAs to ensure sensitive information is shared only amongst specific personnel within the company. Information may relate to product development or plans to launch new services that the company wishes to keep secret. The company may need to keep this hidden from competitors but also from customers.
Organisations may also operate under NDAs when seeking investment as this often requires sharing a significant amount of important information, including financial reports and future growth plans.
What Are The Benefits Of An NDA?
Aside from securing your business against competitors, NDAs can also give you a marketing advantage. Companies may wish to keep the development of new products or services secret for a variety of reasons. One is that when customers learn of products in development, they can stop buying existing products. For instance, in software sales and technology. NDAs ensure product launches and other announcements are made at the opportune moment.
Businesses regularly ask manufacturers to sign NDAs to protect intellectual property in the development stage. These types of NDAs are used to protect recipes for food manufacturers or outlets, processes in manufacturing medicines or cosmetics, algorithms in IT development projects and many other formula-based secrets.
The downside to this is that it can limit your ability to patent your product. Due to patents being publically available documents, sometimes businesses are faced with the decision to either patent their product or to use an NDA. If making this decision, you’ll need to consider which option best protects your creation from being copied.
KFC is a good example of this. Their ‘secret’ recipe chicken is protected by Intellectual Property Law (and likely an NDA or two) as opposed to a patent. This is largely because, although a patent would also stop other businesses from copying the recipe, it would make the recipe available to the public who could then recreate the product at home.
Employee Non-Disclosure Agreements
Employees may also be asked to sign NDAs. However, it is worth considering if this is necessary since the relationship between employer and employee is different from other business relationships. Some argue that for a productive working relationship, trust must be assumed. Therefore, an NDA risks disrupting the dynamic.
Employees and/or contractors may feel that signing an NDA will mean they’re unable to voice concerns or report questionable behaviour. Existing employees have been known to resign when presented with an NDA. Whereas potential talent may reject employment offers if asked to sign an NDA. Deciding whether or not to request non-disclosure agreements for employees is a matter of balancing the need for confidentiality against the risk of losing out on talent.
Many companies opt to include a non-disclosure clause into another agreement, rather than creating a separate contract. For example, within an employment contract or as part of a settlement agreement, in the case of redundancy. Non-disclosure agreements are often used in more general legal documents when onboarding or terminating employment. Inserting NDAs within these contracts raises fewer red flags than a separate non-disclosure agreement.
However, there are some cases when NDAs for employees are required. Such as for those who will be handling sensitive company information or working on projects you want to keep from the public.
When discussing sensitive company information, it is also well worth reminding employees that information is confidential. Often problems arise when employees are not aware of the potential harm that discussing company projects outside of the organisation can do. So, being transparent about what information can and can’t ‘leave the building’ is also highly important.
Can I Write A Non-Disclosure Agreement?
Businesses or sole traders may draft their own non-disclosure agreements. There is nothing to prevent a business from writing, using and enforcing their own NDA so long as they are lawful. However, there are a number of other factors to consider, including whether an NDA is reasonable or even necessary.
A good lawyer will be able to advise on whether an NDA is likely to have a positive or negative effect on the business. They can help you decide when and how to use your NDA and what the penalties should be if confidentiality is broken. They will be able to draft you a professional NDA that will hold up in court or help you insert NDA clauses into existing contracts.
If you decide to draft your NDA yourself, it’s essential that you check what you can and cannot include. For instance, anything that may enable discrimination or prevent employees from raising concerns can not legally be enforced. It can also damage your company’s reputation. It goes without saying that no NDA may request the covering up of illegal practices, yet you must ensure nothing within the contract can even be interpreted this way. Therefore, research and time should be employed when drafting an NDA. Utmost care should be taken and it may be worth having somebody with a legal contacts background check your agreement before you present it to clients, investors, partners, suppliers or employees.
What Happens When An NDA Is Broken?
Non-disclosure agreements are legally binding contracts. However, they are also expensive to take to court. First and foremost, if company secrets are exposed and you suspect an NDA has been broken you’ll have to prove the source of the leaked information. In some cases, this may be obvious. For example, if a manufacturer patents or launches your product themselves. However, if a competitor learns information about your business, it may be hard to find and prove where this information came from.
Being potentially difficult to uphold does not make non-disclosure agreements less necessary. Not to mention, they also work as a strong deterrent. NDAs also remind parties of the sensitivity of information when entering into discussions, as information may be shared naively, not maliciously.
NDAs can be necessary to prevent former employees from sharing trade secrets. Whether departing on good or bad terms, former employees may be intending to work in the same industry and could even end up in the employment of a competitor. Although non-compete clauses should prevent them from taking clients with them, an NDA stops them from sharing sensitive company information. Details of the settlement agreement itself are often protected by the NDA too.
An NDA can be legally broken if done so to expose illegal activity or malpractice. Non-disclosure agreements, like most contracts, aim to serve to interests of all parties. Therefore, although there have been reports of NDAs being used to silence or intimidate, this is not a lawful use of the contract and make the agreement unenforceable.
However, when a reasonable NDA is broken the penalties set out in the agreement can be enforced. These may amount to damages including loss of business or profits. In some cases, these may even amount to criminal charges.
For these reasons, NDAs should be, and generally are, taken very seriously. Hence, why so many businesses use non-disclosure agreements to protect their business.
Do you need a non-disclosure agreement drafted or checked over?
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