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A non-disclosure agreement (NDA), also called a confidentiality agreement or a confidential disclosure agreement (CDA), is a legal contract that establishes a confidential relationship between multiple parties who agree not to share business information they receive with third parties.

Types of information protected by an NDA include the following:

  • Trade secrets,
  • Intellectual property,
  • Research and development,
  • Proprietary software,
  • Business processes,
  • Financial information,
  • Customer lists,
  • Marketing strategies,
  • Deal details between companies, and
  • Other sensitive information.

This page gives a broad overview of the legal requirements for NDAs with links to more detailed articles that can help you answer specific questions. Because employment laws vary by state, we suggest consulting an employment attorney in a city near you to give you the best advice about your unique circumstances.

When to Use a Nondisclosure Agreement

Businesses use an NDA in the following three everyday business situations to protect one or both parties to the agreement:

  1. When a company wants to protect its business interests before negotiating with another party;
  2. When the employer wants to ensure an employee or contractor who will have access to proprietary information maintains confidentiality; and
  3. When a company wants to protect itself before negotiating with a potential investor.

What Are the Types of Nondisclosure Agreements?

There are two types of nondisclosure agreements: mutual and non-mutual agreements.

A mutual NDA is an agreement where both the disclosing party and receiving party agree to maintain confidentiality. Agreements between companies discussing doing business together, such as a joint venture, are mutual.

A non-mutual agreement is a unilateral agreement that only prevents the receiving party from sharing information. An NDA signed by an employee or contractor with access to sensitive data is a non-mutual agreement.

Even though the NDA an employee signs with an employer is a unilateral agreement restricting the employee from sharing private information, state privacy laws may protect the employee from the employer disclosing their personal confidential information. Employees can also sue their employer for invasion of privacy in certain situations.

While NDA and a confidentiality agreement are typically interchangeable, in Florida, an NDA refers to a non-mutual agreement. In contrast, a confidentiality agreement in Florida refers to a mutual agreement.

What Are the Requirements for a Nondisclosure Agreement?

Nondisclosure agreements often need some customization to address any given situation. However, there are six elements considered essential in an NDA.

  1. The names of the parties to the agreement;
  2. A definition of confidential information;
  3. Any exclusions from confidentiality;
  4. The appropriate uses and dissemination of the confidential information the company will disclose;
  5. The period covered by the NDA; and
  6. Any miscellaneous provisions such as state laws regarding NDAs, severability, amendments, waiver of rights, or dispute resolution.

The drafter must include as many details as possible in the NDA so the contract’s parties know what information they cannot share and the consequences of violating the agreement. A lack of specificity in an NDA could potentially open the employer to a wrongful termination claim from a former employee fired for violating an NDA.

Most confidentiality and nondisclosure agreements are in writing, dated, and signed by an authorized representative of all parties. While state law may allow for oral contracts, it is crucial for business contracts to be in writing in case of a dispute.

What Are the Pros and Cons of Nondisclosure Agreements?

An NDA’s primary advantage is its low-cost protection against confidential business information finding its way into the market. If someone leaks information about research and development, a pending merger, the company’s finances, or other such information, the company risks embarrassment in the community or can lose a competitive advantage.

A well-drafted NDA also clarifies what the parties consider confidential information and the consequences for violating the agreement. Certainty on these matters can make a business relationship more productive.

A disadvantage of an NDA is that it creates an atmosphere of mistrust between the parties. Some may view an NDA as an assumption by one party that the other party will steal confidential information.

An NDA requirement may also deter top-level talent from working for a company because they do not want the headache of being careful about how they talk about their job.

What Happens If One Party Violates a Nondisclosure Agreement?

A valid NDA is a binding contract, so any party that violates the agreement is subject to the punishment outlined in the agreement or liable for breach of contract. The receiving party could be sued in court, subject to a fine, or terminated from employment.

Violating an NDA is not a crime in most cases; however, violating the agreement may be a criminal offense depending on the nature of the disclosed information.

State laws vary on how long a party has to file suit for violating an NDA. Washington D.C., for example, generally requires the disclosing party to file the lawsuit within three years of the alleged breach.

How Long Does a Nondisclosure Agreement Last?

The time period covered by an NDA depends on the situation. Some NDAs expire after a year, while others can last ten years or more. An NDA can even be indefinite depending on the information it is protecting.

States vary in how stringently they enforce NDAs. For instance, Texas courts apply stricter requirements to non-compete agreements than to an NDA. Texas courts may construe an overly broad NDA as a non-compete agreement if the NDA’s effect is to restrict the employee’s ability to use general knowledge, skill, and experience in working for a competitor of their former employer.

Nondisclosure agreements fulfill a critical business objective. They allow businesses to obtain financing, outsource specific jobs to experts, and negotiate the sale of their business with the knowledge that essential business secrets will remain confidential and will not be used to compete with their business interests.

While there is no shortage of NDA templates on the Internet, because of their importance in protecting the business against unauthorized disclosure of confidential business information, anyone writing an NDA should consult an employment law attorney.

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