Non-disclosure agreements, or NDAs, are a commonplace agreement type. Sometimes they are negotiated but are usually just signed by both parties without much review. They are often implemented in the early stages of business discussions to allow for the free exchange of information, such as pricing models, customer lists, revenue, or other proprietary elements. While NDAs are common, do you know all the key elements of a non-disclosure agreement?
Let’s go over some of the essential components of an NDA, keeping in mind that nothing that follows is legal advice nor should be treated as legal advice.
Identify the Parties
The first section of the NDA identifies the parties. This includes:
- the name and address of each party
- a contact person or representative for each party
- signatures and date
Identify the Confidential Information
Confidential information is, in general, any information that is not generally known or available to the public. In other words, if you can make it public without consequence, it's not confidential. Confidentiality is pivotal to most NDAs; if someone else has access to your confidential information and uses it for their own purposes (or even just discloses it), then your NDA may be breached. You should also look at what isn't considered confidential information when negotiating with others. The following is a list of areas you may want protected with an NDA:
- Trade secrets, include things like formulas or recipes or knowledge related to manufacturing processes
- Source code/intellectual property, such as software
- Customer lists, pricing models/strategies
- Market research data, including surveys and focus groups
- Competitive strategies or tactics
Define Confidential Information Exclusions
After defining what confidential information is, it's important to define what it isn't. It can be anything and everything. An NDA will not explicitly list all the things that might be confidential information, but you should still consider whether any of your business secrets or other sensitive information could be at stake if they were shared with the other party.
For example: If your company has recently developed a new product meant for global distribution, you would want to make sure this wasn't considered "confidential" by the other party in their NDA.
If there are certain pieces of information you don't want shared with others (for whatever reason), then don't include those details in either document.
Describe How the Confidential Information Must Be Handled
Most NDAs contain language that more or less requires you to treat the confidential information with care and discretion. This requirement ensures that the other party's trade secrets, proprietary information, or other confidential data is not accidentally disclosed or lost. This can be as straightforward as keeping hard copies away from prying eyes, but it also extends to digital security measures, such as password protection and encrypting files.
The NDA may also contain language making it clear that sharing the information outside of those who are authorized by both parties is prohibited. If a person working under your supervision comes across something they believe belongs in their purview (such as an employee who needs training), they should confer with you before taking any action regarding it.
Finally, if there are any documents or records containing confidential information that must be kept for legal reasons after an agreement terminates (e.g. non-compete agreements), these should also be handled with care to avoid destroying evidence needed in any litigation between former partners or clients.
Address Permitted Disclosures
You may disclose confidential information to your employees, contractors, or agents who need to know it to perform their duties. You may also disclose confidential information to:
- Legal and accounting advisors
- Investors who are in possession of material, non-public information about your company
- Regulators where required by law or applicable regulations
You may disclose confidential information related to a proposed merger, acquisition, financing, or similar transaction involving a third-party only after you have taken reasonable steps to ensure that the other party has entered into an NDA and agreed not to use or disclose any confidential information without consent.
Specify the Non-disclosure Agreement's Term
The term of the NDA is another important part for consideration. An NDA may be effective immediately or only after a certain period has passed, such as one year from its signing date. If you plan to use the information you are receiving from other parties in your business venture, be sure to specify where you'll use it and for how long. You might also want to include language in the agreement that can help take care of loose ends such as what happens if one party wants to terminate it early or renegotiate terms with another party at a later point (such as if someone else takes over their company).
Introduce Remedies for Breach
An NDA can outline the remedies that a signer may be entitled to if they breach confidentiality, non-disclosure, or non-use.
Remedies for breach of confidentiality include monetary damages and injunctive relief (i.e. court orders requiring action). For example, if you disclose confidential information without permission, you could be ordered to pay damages in an amount determined by a court. Or the court may order that you have no right or ability to use or disseminate any confidential information disclosed by the other party.
CLM Is Here to Help
Given how often NDAs are asked for and reviewed and how heavily they are relied upon to protect a company’s confidential information, they are a great use case for a modern contract management solution. They can help you keep track of what NDAs exist, with what companies, what types of information they protect, and for what period they protect such information.
This post is just an overview of the anatomy of an NDA. The best way to learn more is by reading one. You can find examples and templates on the internet, but be sure they are written by experienced attorneys who understand your industry and the legal issues that you may encounter.