A non-disclosure agreement (NDA) is an agreement document that creates a confidential relationship between parties who will be exchanging confidential information. They are sometimes called secrecy agreements or proprietary information agreements.
It protects sensitive information such as company financial information, trade secrets, and other company information. Typically, the NDA will be integrated into other principal agreements relating to the subject matter of the NDA such as proposals, contracts, representations and agreements.
It is always a good idea to separate trade secrets from confidential information in the NDA, this is because trade secrets usually have a longer protection period by law. In addition, after NDAs expire, intellectual property rights such as copyright or patents may remain to protect trade secrets.
The NDA must be supported by a fair consideration such as payment for service or potential employment.
What is Confidential Information?
This is the information that the NDA seeks to protect. Information sought to be protected by an NDA must be specific so that there is no ambiguity, and for the courts to consider the agreement reasonable.
Examples of information protected by NDAs include trade secrets, financial information, customer information, intellectual property, product formulae, product information, business plans, contracts with other organizations and computer codes or access processes.
Sometimes, defining confidential information is hard because a whole lot of information is involved, especially in unilateral NDAs. In such situations, a company can provide for exclusions of confidentiality.
This exclusion of confidentiality states that all information shared is confidential except for certain information which will be expressly listed. This allows the company to catch the exceptions they would normally have missed if they had defined confidential information only.
NDAs should always be in writing so that the information protected is easy to identify and for the written agreement to serve as evidence in case of enforcement action or potential breach. For example, in Texas, the Texas Uniform Trade Secrets Act (TUTSA), which was adopted in 2013 specifies that an NDA must be written and signed by the parties. The law also goes on to state that the document must define the information protected and specify the uses of that protected information. The information should still qualify as a trade secret.
The information disclosed must still be valuable, secret and owned by or in control of the disclosing party. Also, an NDA should not seek to prevent a disclosure demanded by law, for example, an NDA to prevent a person from reporting a crime which the person is legally obligated to report will not be enforceable.
The scope, duration and restrictions in the NDA must be reasonable. For instance, an NDA seeking to restrict an employee forever from applying all skills he acquired in a workplace after leaving that employment may not be considered reasonable.
Types of NDA
NDAs may be unilateral or bilateral/mutual or multilateral.
In unilateral NDAS, only one party receives information from the other party and the former bears the obligation to safeguard such information. Examples of unilateral NDAs include those for employing new staff or enlisting a project expert.
In a mutual or bilateral NDA, information is exchanged between both parties and both parties are to keep the information exchanged secret. This is common during negotiations for proposed business collaborations for projects, mergers, acquisitions and selling of a business.
In multilateral NDAs, there are more than two parties exchanging information to do business together. An example is a group of companies trying to come together for a joint venture.
Parties to non-disclosure agreements
The parties to the NDA must be parties who have a legitimate interest to protect in the subject of the NDA; these parties with interest are also the only ones that can be bound by the NDA.
Depending on the type of NDA, the classification of parties differs.
The disclosing party: this is the party that already has access to the sensitive information that is to be protected by the NDA. This could be an employer who wants to take in an employee or a company that wants to give an independent contractor access to some of their resources such as data to execute certain tasks.
The receiving party: this is the party obtaining information from the disclosing party and he bears the greater burden of maintaining the confidentiality of the information given by the disclosing party.
Both parties are usually charged with maintaining the confidentiality of the information, limiting third-party access to the information and limitation of the use of the information to the purpose stated in the agreement.
In mutual and multilateral NDAs, the disclosure of information and the obligation to maintain confidentiality goes both ways. This usually entails the exchange of information between parties involved, so no party is solely the receiver or discloser.
Pros and cons of non-disclosure agreements
NDAs help put parties at ease to negotiate freely with access to full information without worrying about information leaking. Since sensitive information is necessary to the negotiations but disclosing parties may suffer harm if this information leaks, an NDA works to put parties at ease and spell out the consequences of a breach.
An NDA could also impact future contractual obligations or business opportunities. For example, where an NDA covers financial information but one party later seeks funding from investors, the party may need to disclose this financial information. But since an NDA exists on it, the business opportunity may be lost. It may also seem like it makes a business relationship start with mistrust. Some talented potential employees may even avoid working with a company because they may not be able to talk about their work under the NDAs which could make them unable to demonstrate their capacity to future employers.
Remedies for breach of a non-disclosure agreement
NDAs are contracts too. So when they are breached, many remedies that apply in regular contracts can apply. Typically, these remedies usually include injunctive relief, damages, and termination of the agreement for which the NDA was made.
For instance, the disclosing company may demand damages, the damages will be quantified based on the loss that the leaking of the trade secret has caused. Injunctive relief may also be gotten by a disclosing party against an erring party to stop further disclosure or use of the confidential or proprietary information. Punitive damages may also be awarded where the disclosing party shows intentional harmful conduct by the receiving party, such as a plan to fraudulently obtain information from the very beginning.
Duration of an NDA
Some NDAs state the period for which the confidentiality agreement will be in force while some do not. Some validity periods range between one to ten years, depending on the reason for which the NDA is made.
hose who do not state a period usually relate to technological research and development. This is because the information in the agreement will later legally become public knowledge and that means that the non-disclosure obligation is no longer in force.
On the other hand, an NDA about a project subcontracted to a contractor may have an indefinite validity timeline if the company does not wish to disclose that it collaborated with a contractor on the project.
In Texas, an action claiming relief for breach of an NDA or misappropriation of trade secrets must be brought within three years from the date of the alleged misappropriation or breach.
When information should be returned or destroyed under an NDA
NDAs are usually made to support the disclosure of information for another contract. For example, an NDA may be made between two companies before negotiations for a merger begins, an employee may also be bound by an NDA on his contract of employment. If the principal agreement is canceled or the parties did not proceed with it, the receiving party has to return the information protected under the NDA. For information that is contained only in documents, the disclosing party may request that the receiving party destroy the information. It is usually better to have a clause for the destruction or return of information in the NDA so that if negotiations fail, the sensitive information still stays protected.
The law covering NDAs is complex, so it is always good to review it with a lawyer before signing. The peculiarities of each case determine its enforceability. To speak to a Texas Attorney, call 832.205.8144 or schedule an appointment with us at Treb.cliogrow.com/book