NDA 101: What is a Non-Disclosure Agreement?

One common way to protect the secrecy of confidential information provided by one party to another is by using a Non-Disclosure Agreement (NDA), also known as a confidentiality agreement. The principal situations in which an NDA is appropriate are those in which you wish to convey something valuable about your business or idea, but still want to ensure that the other party doesn’t steal the information or use it without your approval. NDAs are commonly used in business relationships to protect trade secrets, between employers and employees to protect confidential information, and they are also used quite often in the entertainment industry to protect ideas before being shared. Although the concept is simple—I’ll tell you my great idea if you promise not to steal it from me—in practice, things are a bit more complicated. To be effective at all, an NDA must include some pretty specific language. And even if the NDA contains that language, it still might not be effective if the information isn’t considered unique, i.e., novel and original.

A Non-Disclosure Agreement is defined as a legal contract between two or more parties that signifies a confidential relationship exists between the parties involved wherein the parties agree not to disclose confidential information that they have shared with each other as a necessary part of doing business together. The confidential relationship often refers to information that is to be shared between the parties but should not be made available to the general public.

Though NDAs may be customized to any degree, there are particular terms that are considered essential to include. These are sections that detail the parties to the agreement, the definition of what constitutes confidential information, the exclusions from confidential information, the obligations of the receiving party, the time periods involved, and what happens if a party breaches.

The parties to the agreement section at the beginning of the NDA is simply a description of who is involved. A NDA can be one-sided or mutual. The one-sided agreement is when you are contemplating that only one side will be sharing confidential information with the other side. The mutual NDA form is for situations where each side may potentially share confidential information.

The definition of confidential information section lists the types and categories of confidential information protected under the agreement and should state that such information is unique or novel while not disclosing the specific information. NDAs will typically include a laundry list of types of items which are covered, including unpublished patent applications, ideas, know-how, schema, financial information, verbal representations, customer lists, vendor lists, business practices/strategies, etc. For example, an NDA for an exclusive designer’s clothing boutique might include a statement such as this: “Confidential information includes customer lists and purchase history, credit and financial information, innovative processes, inventory and sales figures.”

At the same time, nondisclosure agreements often exclude some information from protection. Exclusions might comprise information already considered common knowledge or data collected before the agreement was signed.
Additionally, NDAs explicitly spell out a time period for which the person receiving the information is to keep it secret and what they can do with the information provided by the disclosing party.

Lastly, the agreement should set forth what happens if a party breaches the agreement. For example, if an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the disclosing party for monetary damages.

The NDA may also include miscellaneous sections to cover any other matters deemed important, such as which state’s law to apply to the agreement and which party pays attorney fees in the case of a dispute.

NDAs are an excellent tool to confirm that confidential information stays protected in a variety of situations. However, it is important to be aware of how these legal agreements work before signing or creating a document. Make sure and consult an attorney.