To achieve growth and to be able to operate, companies need to enter into different business relationships. When evaluating such potential business relationships, companies may need to disclose to and/or receive from the other party non-public information. To maintain its competitiveness, a company must keep its non-public information, such as innovative ideas, currently active working projects, pricing, customers, business plans, new business and product ideas and other sensitive information a secret so they don’t fall into the hands of the competition nor give the other party a competitive advantage. This isn’t just the case with large corporations, even small corporations and startups need to keep their profitable (and often revolutionary) ideas under wraps.
In these cases, an NDA or a non-disclosure agreement can help keep the lid on the sensitive ideas and other pieces of information. These agreements are often called NDAs, CDAs or confidentiality agreements, confidentiality clauses, and confidentiality statements within larger legal documents.
In this article, the team at Lex Moderna will strive to shed more light on how these legal frameworks work and how businesses and individuals can keep their intellectual property and other sensitive information safe.
More About Non-Disclosure Agreements
An NDA is usually used when confidential information is disclosed to creditors, advisors, potential investors, employees, suppliers, or any other stakeholder who might need access to said confidential information.
A written and signed NDA is a unilateral or mutual agreement between the two parties, serving as a trust that prevents intellectual property or other sensitive data theft. The exact confidential information will usually be written out in the agreement, and some of these NDAs will bind the person to be secretive to a specific (often indefinite) time period to prevent the divulgement of the information that’s described in the agreement.
When parties fail to sign an NDA, the information told in trust can be made public accidentally or on purpose. Even worse, it can even get exploited for malicious purposes.
The potential penalties for breaking these mutual or unilateral agreements should also be established in the documents themselves. They may include damages originating from loss of business opportunities and profits or even those from criminal charges.
When to Use NDAs
Typically, these agreements are used when business owners discuss secret, sensitive, or proprietary information with outside experts. Sharing exclusive information can be immensely crucial when looking for potential investors or business venture partners. It is also essential in obtaining new clientele, new providers, business partners or even when hiring new employees.
To protect the people with whom the sensitive information is disclosed, these NDAs have long been the go-to legal framework to ensure mutual trust and to prevent the information from leaking out and possibly undermining profitability or business reputation.
The information might include proprietary formulas, secret recipes, and revolutionary manufacturing processes. It can also be sales contact or client lists, non-public accounting information, or anything else that sets a business apart from its competitors.
Let’s say a company wishes to raise money from certain investors or venture capitalists and fear that its excellent business idea will be stolen or exploited instead of actually getting the needed funds. In these cases, a signed and verified non-disclosure agreement can help deter the theft of intellectual property. Without an NDA, it isn’t easy to prove that there was a revolutionary business idea in the first place.
Also, when a company wishes to hire outside experts who will be required to handle sensitive data, it may sign a non-disclosure agreement with these experts to ensure they don’t disclose any of those sensitive details at any given point. On that end, regular employees may also have to sign such an agreement when working on new projects that the company aims to keep a secret because any information leakage may damage the company and the value of the project.
Permitted Purpose
Once again, even when NDAs are pretty standardized, when negotiating an NDA, it is crucial to weight the circumstances which make the NDA necessary, whether confidential information will flow both ways between the parties or only one way and to specifically describe the purpose for which the other party may use the confidential information disclosed under the NDA.
Things NOT Included in Non-Disclosure Agreements
Naturally, no business should or can keep all of its dealings confidential. The company’s address and information filed with the Securities and Exchange Commission should be part of the public records and can’t be included in NDAs.
On the other hand, courts will usually have a certain amount of freedom when interpreting the scope of these agreements, depending mainly on their language. For example, one party in the mutual or unilateral agreement can prove that they had prior knowledge of the info covered in the contract before signing it; or, if they can prove that they received the information outside the agreement, they may be able to avoid negative judgment.
In addition, not all knowledge can be protected in these agreements. If the info is revealed because of court orders, the aggrieved party may lose its right to legal recourse, to the extent disclosed in response of such court orders.
Types of Agreements
The content of these agreements will usually be unique, referring to specific information, details, permitted purpose and proprietary information determined by the parties involved and the given matter. Still, typically, there are two primary NDA types: mutual and unilateral.
Mutual agreements are usually put to use between businesses that are engaged in joint ventures where sharing proprietary information is required. For instance, if a chip manufacturer knows about a piece of advanced technology going into a new electronic device, they may have to keep it a secret. In the same contract, the phone company may also need to keep the chip tech a secret, too. These NDAs are crucial in business transactions and other deals such as corporate takeovers or mergers.
A unilateral agreement, on the other hand, is a legal agreement that is established between a party and a business when, usually, an employee agrees not to reveal any confidential and sensitive information disclosed on the job. Most NDAs are unilateral, protecting trade secrets, information obtained through research, and more. For instance, corporate and contract researchers in the private sector (or research professors at universities) may also sign these contracts, giving rights to the research conducted to the business or university supporting them.
In Conclusion
All in all, non-disclosure agreements can be described as crucial legal frameworks that aim to protect confidential and sensitive data from being exploited by the recipients.
In most cases, startups and companies use these agreements to ensure that their valuable business ideas won’t be exploited by the people they share them with and potentially sell them to competing companies.
Those who breach the NDA will usually be subject to penalties and lawsuits commensurate with the value of lost business opportunities or profits. Depending on the specific case, criminal charges may also be filed.
There are unilateral agreements where only one side is required to keep the information a secret. There are also mutual agreements where both parties are sworn to secrecy to protect each other’s proprietary information.
Legal Assistance Within Arm’s Reach
Keeping your sensitive information a secret is vital for gaining a competitive edge in the business world. Besides joining hands with the right business partners, forging the most precise and legally comprehensive documents is also essential. On that end, you can always rely on our staff of skilled attorneys to get you on the right track. Give us a call today.