The Basics of Nondisclosure Agreements

By Suzanne Kearns

4 min read

Sometimes you have to share confidential information about your business with others, but when those occasions arise, you should do all you can to protect it so the other party can’t use it to make a profit, or to harm you or your business. That’s where a nondisclosure agreement (NDA), also known as a confidentiality agreement, comes in. Here’s a brief overview of how to use this important document.

When to Use a Nondisclosure Agreement

Any time you share confidential or proprietary information with other parties and want to ensure they don’t use it without your approval, you should consider using an NDA. Here are some situations that may necessitate the use of this document.

  • Contracting with consultants, freelancers, or other business professionals who will have access to confidential information.
  • Sharing a business idea or invention with a prospective distributor, supplier, partner, or investor.
  • Releasing financial, marketing, or proprietary operations information to someone interested in buying your business.
  • Presenting new technology or a new product idea to a possible buyer or licensee.
  • Sharing confidential information with employees who need the information to do their jobs.

The NDA Basics

There are six important areas that are usually included in an NDA. They are:

  1. Define what constitutes “confidential information”: Ben Rose, founder of The Law Offices of Ben M. Rose, PLLC says it’s necessary to define “confidential information” thoroughly. “It is not enough to simply reference generic terms like ‘intellectual property’ or ‘proprietary information,'” he says. “You should know your business well enough to know what you are protecting.” You will need to define what is considered confidential without divulging any of your secrets. (Remember, the NDA documents themselves are not always confidential, so other people might see yours). For instance, if you were showing a new product design to a manufacturer, you would state that the design processes, financial information, and raw product sourcing are confidential, but not list any of the details in the agreement.
  2. Exclusions from confidential information: These are based on law, and many NDAs contain them. With them, the party receiving the confidential information has no obligation to protect it under certain circumstances. For instance, if the receiving party discovered or created the information independent of and prior to involvement with the disclosing party, the receiving party would still be allowed to use it.
  3. Obligations of the receiving party: Rose says you should define the purpose of disclosure and limit the other party’s use of the information to that purpose alone. “It is easier to identify misuse and improper disclosure if you already have a limited use or purpose defined,” he says. For instance, if you want to prohibit the other party from using the information, in addition to keeping it confidential, you should state that in this section. In addition, most state laws require that the receiving party can’t breach the confidentiality, induce another to acquire the confidential information by improper means, or induce another to breach the confidentiality.
  4. Establish time periods: Some NDAs require the receiving party to keep the information confidential for a certain time period. This can either be established in years — five years is common in the United States — or by a future event, such as when the product is made public.
  5. Identify who is responsible if there is a breach: Rose advises small-business owners to consider indemnity provisions that would put the burden on the breaching party in the event they disclose confidential information.“They should also make sure the NDA is applicable to not only the third party, but their employees as well.” he says. “Based upon recent precedent, I always recommend having a master NDA with the prospect company and individual NDAs for each of their employees touching the project. Even if you do not take that step, which some business owners may consider overkill, you should clearly include employees, subcontractors, and similar positions in your agreement.”
  6. Miscellaneous provisions: There are some important miscellaneous provisions that should be included in the NDA to further protect your rights. For instance, you should clarify which state will have jurisdiction if the agreement is breached, whether or not the parties will use arbitration if there is a dispute, and who is responsible for attorney’s fees in the event of a dispute. In addition, you should include a severability clause stating that if any provision of the NDA is found to be invalid, the rest of the agreement will still be enforced. Finally, include information about how any confidential information should be destroyed (shredded, etc.) at the end of the agreement.

How do you Enforce a Nondisclosure Agreement?

If the other party uses your confidential information without your permission, you should hire an attorney who is familiar with intellectual property law as well as state and local laws. The attorney will help minimize your risks, collect evidence about the breach, ask the court for an injunction to stop the party from making disclosures, and in some instances, sue them for damages. But the key to being able to protect your confidential information according to Rose is to properly draft the NDA from the start.

“Make sure you know what laws affect businesses in your particular jurisdiction and whether there are any specific state or federal regulations that may require specific measures to protect particular types of information,” Rose says.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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