Non-Disclosure Agreements Explained
This is the third in our 3-article series on restrictive covenants. Read our first article on Non-Competes here, and read our second article on Non-Solicits here.
Nondisclosure agreements, also known as “NDAs,” protect against the unwanted disclosure and dissemination of valuable, confidential information. In the corporate context, NDAs help businesses protect their competitive advantage and market share.
NDAs can be unilateral or mutual. Unilateral agreements are typically between an employer and an employee. In these agreements, the employee agrees to not reveal the employer’s confidential information. Mutual agreements, on the other hand, are typically between businesses. Both parties, in mutual agreements, agree not to disclose the confidential information of the other.
Non-Disclosure agreements will generally define what constitutes “confidential information,” the obligations of the employee or business partner in keeping the information confidential, the time period of effectiveness, consequences of contract breach, and any exclusions to the NDA.
To be enforceable, the NDA must (1) be reasonable in scope, (2) include consideration, (3) protect information that is actually confidential
1. Reasonable in Scope
NDA agreements are tested for reasonableness to determine if they are enforceable. Courts consider the nature of the confidential information, the time period the information must remain secret, the impact on the receiving party, and public interest. Additionally, an NDA should not be vague. Often, overly-broad or non-specific NDAs are not enforceable.
Consideration is required for most contracts in business. In the case of a new employee, the employee gains employment, while the employer gains the confidentiality of their business information. For businesses, the sharing of information in contemplation of a potential joint venture, merger, or partnership can constitute sufficient consideration.
3. Confidential Information
If a court does not deem the information in question as “confidential” or “valuable,” the agreement will not be enforceable. “Confidential” information cannot be common knowledge, anything in the public domain, or knowledge gained prior to signing the NDA. Customer lists, trade secrets, or intellectual property are often considered confidential.
NDAs can only be enforced against the parties in the contract. In the event it is necessary to share confidential information with a third-party for business reasons, the NDA still only applies to the contracted parties. To solve this issue, the disclosing party will require the receiving party to sign a separate NDA or confidentiality agreement with the third-party before sharing any confidential information.
IMPORTANCE AND IMPLICATIONS
NDAs are very important for a multitude of reasons: (1) they give the employee or independent contractor notice of confidential information that needs protection; (2) they are usually enforceable if crafted correctly, and (3) they can help increase the enforceability of associated Non-Compete agreements.
Should any receiving party sign an NDA and disclose an employer’s confidential information, they may be subject to both breaches of contract and misappropriation of trade secret claims (depending on the type of information disclosed). A valid NDA may even result in monetary damages or an injunction.
While useful, NDAs only provide recourse when actual disclosure and dissemination of information has occurred. Unfortunately, this often isn’t easy to determine.
Non-Competes, Non-Solicits, and NDAs can be difficult to execute without legal counsel. It is important to consult an attorney before drafting or enforcing these agreements.
Saper Law helps both businesses and employees negotiate restrictive covenants. Contact Saper Law at 312-527-4100 or book a consultation here.