Is A Non-Disclosure Agreement Right For My Company?

Your business shouldn’t be an open book if you want it to be successful. You need to keep some information confidential because disclosure may help your competitors. One way to control that release is through a non-disclosure agreement (NDA), which limits what a party can disclose about valuable information. Below, our friends at Focus Law LA discuss NDAs in depth.

What Is A Non-Disclosure Agreement? 

An NDA is a stand-alone agreement, or it can be part of a larger contract, which should prevent a party from sharing confidential or proprietary information with outside parties. It creates a confidential relationship that is legally binding if the agreement is properly drafted and executed. It’s subject to all contract limitations, so you can’t just make one up and assume it’ll be legally enforceable.

Non-compete agreements limit who an ex-employee can work for after they leave your company. They’re unenforceable in some states, and the Federal Trade Commission has. An NDA can provide some of the protections of a non-compete if that type of agreement isn’t an option. Depending on where you are, you could ask an employee to sign an NDA (which can apply during employment and for a time afterward) and a non-compete agreement (which only applies after they leave).

Who Could Agree To An NDA?

It could be anyone or any company with access to trade secrets, confidential, intellectual property, and proprietary information. It could apply to employees, outside contractors (like an IT service, marketing company, attorney, or accountant), a bank considering you for a loan, and a party reviewing your company if they’re considering buying it, investing in it, or forming a joint venture with you.

What Could An NDA Cover?

The subject of an NDA would depend on who the other party is, what they do for your company, and what information they have access to. It should have the following:

• The names of the parties agreeing to it
• The information covered by it
• The information not covered by it
• A description of how the covered confidential information may be used
• The term or length of the agreement
• The state law used to interpret and enforce the agreement
• How disagreements can be resolved
• If there’s a dispute, who will be required to pay a party’s attorney’s fees and legal costs, and under what circumstances
• Whether there will be mandatory arbitration instead of litigation
• The amount of liquidated damages (the total or minimal amount of recovery a successful party can receive if they seek the NDA’s enforcement)

The rights and obligations in the NDA must be legally enforceable, or there’s no point in including them.

When Are NDAs Unenforceable?

NDAs are contracts subject to statutory and common laws used to interpret and enforce them. In addition to prohibitions applying to contracts in general (including a party must have the capacity to enter into a contract, it can’t involve illegal activities, the terms are unconscionable, and the NDA was signed under duress) there are limitations specific to NDAs:

• The party wanting to enforce the NDA previously disclosed the information to others
• The confidential information would become public no matter what the disclosing party did
• The time frame is unreasonable
• The protected information’s description is too broad or vague
• Releasing protected information can’t be prohibited if it’s to a government agency that enforces laws or it’s part of a criminal investigation

Given the potential pitfalls in enforcing an NDA, it’s wise to consult with a trade secret litigation lawyer to discuss whether your company should use one and, if so, what language should be included.