What is a non-disclosure agreement?
In its simplest form, a non-disclosure agreement (“NDA”) is an agreement that creates a legal obligation of privacy or confidentiality among the parties to the agreement to protect confidential or proprietary information shared between the parties. It is generally used when parties are entering into, or considering entering into, a business agreement and trade secrets or other highly sensitive or confidential information (i.e. financial information) will be disclosed by one party to the other (a one-way agreement), or by both parties to each other (a two-way agreement).
Non-disclosure agreements are also often used in conjunction with, and as part of, employment agreements to ensure that employees of the business who have access to proprietary business information and/or trade secrets do not share or disclose that information to outsiders.
Who signs the agreement?
The non-disclosure agreement should include the full name and designation or title of the parties to the agreement, and should be clear as to whether the parties signing the agreement are signing as individuals or on behalf of a company or organization. If the agreement is being executed and entered into on behalf of companies, the parties should ensure that the signatories to the agreement have the authority to bind the organization.
What kinds of information do NDAs protect?
Some examples of information that is typically covered by a non-disclosure agreement include technical information, financial information, mechanical and engineering information, customer and client lists, passwords, software code, business processes and procedures, test results, product specifications, and others.
In addition to identifying the information that the agreement covers or protects, a good non-disclosure agreement will also specify what information is excluded from the agreement – usually information that is publicly available, is obtained by the parties from another source, or is otherwise not sensitive or confidential.
Obligations of the parties
The non-disclosure agreement should also define the obligations the agreement place on the parties, and the consequences that will be imposed if a party breaches the agreement. An agreement will typically limit both who the information can be disclosed to and how that information can be used. A non-disclosure agreement is typically violated when one party shares the other party’s confidential information with a third-party and/or when the party receiving the confidential information uses that information for its own benefit outside what is contemplated in the agreement.
If there are circumstances under which the party receiving the confidential information is permitted to disclose that information to third parties—for example if ordered to do so by a court or for other purposes for the benefit of the disclosing party, such as to obtain funding from investors—those circumstances should also be fully outlined in the agreement.
The non-disclosure agreement can also include a time limit and other guidelines regarding when the agreement expires. In some cases, the obligation to keep the information received confidential will expire after a particular period of time. In other cases, the agreement will require that the information be returned upon expiration of the agreement and/or kept secret forever—for example, in the case of a trade secret, business process, or secrete ingredient or formula.
Consequences of breach of the agreement
In addition to outlining the circumstances under which the agreement will be considered breached by one of the parties, the non-disclosure agreement should also identify the consequences that will follow once the agreement has been breached. The agreement can identify a specific dollar amount to be paid by the breaching party in the form of monetary damages or set a formula for determining those damages. Additionally, the agreement should almost always include a provision providing that the non-breaching party is entitled to injunctive relief to stop or prevent the breaching party from further breaching the agreement.
Non-disclosure agreements can be complex and often impose significant obligations and restrictions on parties that enter into them. As a result, a lawyer should be consulted whenever a party is discussing, negotiating, and/or entering into a non-disclosure agreement.
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