In numerous industries, non-disclosure agreements (NDAs) are an essential aspect of conducting business. They aid in the smooth exchange of ideas or information while reducing the chances of confidential data being used improperly. This article aims to assist you and your team in effectively managing the NDA process.
What is an NDA and why is it important?
A non-disclosure agreement (NDA), commonly referred to as a confidentiality agreement, is a legally binding contract that establishes a commitment to maintain secrecy and privacy among the signing parties. As per the agreement's provisions, one or more parties gain authorized access to sensitive or confidential information but are obligated not to disclose such information to any unauthorized third parties.
This information can encompass:
Trade Secrets: Valuable commercial information that grants a business an edge over competitors lacking such knowledge.
Proprietary Research: Non-public information or research (e.g., financial data or research outcomes) considered the property of the holder.
Intellectual Property: Creations of human intellect safeguarded by law against unauthorized use by others. NDAs are commonly executed when two parties seeking to establish a business partnership require access to additional information about each other. NDAs enable your organization to safeguard its competitive advantage and provide legal remedies if the prospective partner breaches the NDA's terms.
The Review Checklist
Here, we have compiled a checklist of crucial components to incorporate when drafting an NDA, accompanied by an explanation of their significance. Prior to sending the NDA to the recipient, ensure that you either check off each item on the list or comprehend why it may not be applicable to your specific circumstances.
Signing Parties: Clearly specify the entities that are obligated to adhere to the agreement's terms. Provide the complete legal names of all individuals and organizations involved.
Type of NDA: Non-disclosure agreements can come in various forms, including:
Unilateral: In this scenario, one party (referred to as the "disclosing party") discloses confidential information to another party (referred to as the "receiving party").
Bilateral: Both parties mutually agree to exchange confidential information with each other.
Multilateral: Three or more parties anticipate an agreement where all parties share confidential information among themselves.
Before sending the NDA, ensure that you have identified the appropriate type of agreement based on your specific circumstances.
Definition of Confidential Information: This section holds significant importance within the document. It is crucial to clearly define what you consider as "confidential information" to establish the validity of the agreement. For instance, a restaurant's definition of confidential information may encompass customer lists, payment card data, recipes, and financial reports. Additionally, it is essential to exclude certain information from this definition, such as information already in the public domain or information already possessed by the recipient.
Stated Purpose: The document should explicitly state the purposes for which the information is being shared and restrict its usage solely to the specified reasons. For example, if two companies are contemplating a merger, the confidential information they share, such as financial reports, should be utilized exclusively for each party's decision-making process regarding the merger.
Confidentiality Safeguards: The party disclosing information should explicitly indicate whether the information being sent to the receiving party is confidential or not. The receiving party must take reasonable measures, such as robust IT security, to ensure the confidentiality of the information. Additionally, the disclosing party may choose to implement certain safeguards, like conducting audits, to verify that the receiving party is not improperly sharing the information.
Start and End Dates of the Partnership: It is crucial to specify the start and end dates of the NDA to ensure its effectiveness. The start date should be on or before the day when the parties began exchanging confidential information.
Length of Time for Secrecy: The effectiveness of the NDA can be compromised if the partner is allowed to disclose the information immediately after terminating the business relationship. Most NDAs typically remain in force for several years following the conclusion of the relationship. However, the duration may vary depending on the type of information shared. For instance, confidential information related to certain technologies may lose its value after a year or two, while other information may remain valuable for a longer period.
Disclosure of the Agreement: Some NDAs may include clauses that prohibit the signers from acknowledging the existence of the document itself. It is important to decide whether you want to include such a clause.
Jurisdiction: An NDA holds no value if it is not legally valid in the jurisdiction where it is intended to take effect. Clearly define the city or state that will handle any disputes or legal cases related to the agreement.
Determine the specific conditions that result in the termination of the agreement.
Clarify the consequences if any party wishes to terminate the agreement prematurely.
Outline the procedures for returning confidential information between the parties.
Define the obligations of the receiving party towards the disclosing party once the agreement has expired or is no longer in effect.
Injunction: If the receiving party intends to violate the NDA, monetary damages alone may not sufficiently compensate the disclosing party. Including an injunction clause empowers the disclosing party to seek a court order to prevent the disclosure of confidential information.
Remedies: Breaching the NDA can have severe consequences for the disclosing party, potentially resulting in significant financial losses or even business closure. It is important to specify the penalties, both financial and legal, for the unauthorized disclosure of confidential information. Additionally, consider whether the penalties differ depending on whether the breach was accidental or intentional. It is also worth addressing whether there are penalties associated with early termination of the agreement.
Non-Compete Clause: Apart from an NDA, the disclosing party may also require the receiving party to sign a separate non-compete agreement or include it as part of the NDA itself. The non-compete clause prohibits the receiving party from utilizing the confidential information to engage in business activities that compete against the disclosing party or hiring any employees of the disclosing party.
The above checklist is intended to be used as a guide for the purpose of an NDA review. To ensure a comprehensive and thorough review of an NDA, it is best that you seek professional help.
We provide free consultation on this topic and all other forms of contract review for that matter. Should you wish to reach out to us on this, please do so by emailing us at firstname.lastname@example.org or contacting us at +60126582798.