Understanding Non-Disclosure Agreements: What You Need to Know

Non-disclosure agreements (NDAs) are among the most common legal documents in business today. Whether you're starting a new job, discussing a potential partnership, or hiring a contractor, you may be asked to sign an NDA. But what exactly are these agreements, and what should you look for before signing?

What is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legally binding contract that establishes a confidential relationship between parties. The party or parties signing the agreement agree that sensitive information they may obtain will not be shared with others.

NDAs serve several important purposes:

• Protecting sensitive information such as trade secrets, proprietary processes, or client lists
• Preserving the confidentiality of new ideas, products, or services before they're publicly released
• Establishing clear guidelines about what information can and cannot be shared
• Creating legal recourse if confidential information is improperly disclosed

Types of Non-Disclosure Agreements

There are three main types of NDAs, each serving different purposes:

1. Unilateral NDAs

A unilateral (one-way) NDA is used when only one party will be sharing confidential information. The receiving party agrees not to disclose the information. This is common in employer-employee relationships or when hiring contractors.

2. Bilateral NDAs

A bilateral (mutual) NDA is used when both parties will be sharing confidential information with each other. This is common in partnerships, joint ventures, or mergers and acquisitions discussions.

3. Multilateral NDAs

A multilateral NDA involves three or more parties where at least one party is disclosing information to other parties, and at least one party is receiving information. This reduces the need for multiple separate bilateral NDAs.

Key Elements to Watch For in an NDA

Before signing an NDA, you should carefully review these critical components:

Definition of Confidential Information

This section defines what information is considered confidential under the agreement. Be wary of overly broad definitions that could restrict you unnecessarily.

Exclusions from Confidential Information

This section outlines what information is not considered confidential. Standard exclusions include:

• Information that was already public
• Information you already knew before the disclosure
• Information you receive from a third party without confidentiality obligations
• Information you develop independently

Obligations of the Receiving Party

This section outlines what you can and cannot do with the confidential information. It typically includes:

• How you must protect the information
• Who you can share the information with (if anyone)
• What purposes you can use the information for

Time Period

NDAs should specify how long the confidentiality obligations last. This could range from months to years or even indefinitely for trade secrets.

Remedies for Breach

This section outlines what happens if you violate the NDA. Common remedies include:

• Monetary damages
• Injunctive relief (court orders to stop certain actions)
• Specific performance (court orders to perform certain actions)

Potential Pitfalls to Watch For

Non-Compete Clauses

Some NDAs sneakily include non-compete clauses that could prevent you from working in your field. Always check if the NDA contains restrictions beyond just confidentiality.

Overly Broad Scope

If an NDA's definition of confidential information is too broad, it could restrict your ability to use knowledge and skills you already possessed.

Unreasonable Duration

While some information may warrant perpetual protection (like trade secrets), most confidential information loses its value over time. Be cautious of NDAs with unreasonably long durations.

How to Protect Yourself When Signing an NDA

1. Read carefully: Never sign an NDA without reading it thoroughly.
2. Seek clarification: If something is unclear, ask for an explanation.
3. Negotiate: NDAs are often negotiable, especially regarding scope and duration.
4. Consider legal advice: For high-stakes situations, consult with an attorney.
5. Document pre-existing knowledge: If you already know some of the "confidential" information, document this before signing.