A Non-Disclosure Agreement (or "NDA") is an agreement under which a party (the "Recipient") agrees not to disclose proprietary and confidential information ("Confidential Information") that it receives from another party (the "Owner"). This type of agreement may be useful in a variety of circ*mstances. For example, a company might choose to share information with a web marketing consultant for the purpose of improving its online sales through its website. In such a situation, the company would probably be sharing product and customer information with the marketing consultant and would want to protect this information from disclosure by the consultant to third parties by using a Non-Disclosure Agreement.
Non-Disclosure Agreement templates contain a variety of clauses with legal terms that can be confusing. We’ll cover the most common clauses below and explain what they mean.
Confidential Information
In a Non-Disclosure Agreement, confidential information is the data or information the parties want to protect. It can be business-related, such as proprietary information (trade secrets) or business financial records. It could also be personal information, such as bank statements or tax returns.
Confidential information can be written or oral and might be received directly or indirectly. The information that an NDA seeks to protect can be very extensive or extremely limited, based on the document’s language.
Examples of confidential information might include:
- Pricing or discount structures.
- Technical data or designs.
- Customer lists or sales leads.
- Research and related information.
- Business plans or records.
- Inventions or new product ideas.
In the employment context, confidential information is usually internal information about a company. Employers might use a Non-Disclosure Agreement to protect their business practices, such as how they make their products or perform their services. In that situation, even observations are protected, not just communications or documents.
However, confidential information is not automatically confidential simply because one party says it is. Instead, confidential information cannot be information already public knowledge or that a party lawfully received from another source. An NDA might also include specific descriptions of data that is not considered confidential information.
In some Non-Disclosure Agreements, confidential information must be marked as “confidential” by putting the word on the top of the document in a conspicuous way. However, not every NDA uses this marking method. Some agreements will state that every document or any information received is confidential, so there is no need to mark everything.
Protection of Confidential Information
Every Non-Disclosure Agreement aims to protect the disclosure of confidential information. Parties cannot share with others the specific confidential information that the NDA seeks to protect. However, sharing might be permitted if the third party that receives the information also agrees to the terms of the Non-Disclosure Agreement.
Once a party receives confidential information under an NDA, they have an affirmative duty to protect that confidential information. That means more than just not sharing the information. They must also take steps to keep the data safe so that other parties cannot access it. In some situations, that can mean ensuring that they have digital protections on computers or keeping confidential information in a locked location.
Protection of confidential information also generally requires that the receiving party notify the providing party if there has been a data breach or any other action that would expose the information to someone that should not have it. Copying, modifying, and methods of disclosure might be addressed as well.
Unauthorized Disclosure of Information - Injunction
A Non-Disclosure Agreement specifically requires the parties to keep information safe and confidential. If it is shared, there are consequences. Specifically, the sharing party might be legally liable for any damages caused by sharing the information.
In most cases, the party who owns the confidential information can also request an “injunction” from the court. An injunction is a court order that stops a party from taking a specific action. To receive an injunction, the party requesting it must show that they would suffer irreparable harm if the action does not stop.
Consider an example. Imagine an employee signed an NDA as part of their employment. The employee decides to quit and start his own business. He takes a confidential client list from his prior employer. He starts calling those individuals and offering the same services provided by his previous employer at a slightly lower rate—because he knows what those clients were paying for services from his prior employer.
In that situation, the employer can file a legal complaint asking the court to issue an injunction to stop the employee from stealing its clients and violating its NDA. The injunction request would likely be granted because the employer’s business would be significantly harmed if the employee did not stop his actions. If the employee ignores the court order, he could be fined and even imprisoned in some cases.
Non-Circumvention
In some situations, one business shares its client information with another business or person to further its business. A common example is when a company uses a third-party contractor to perform part of its services, such as in the construction context.
For instance, a company called “Maintenance Company” might have an ongoing relationship with a client where the client pays for maintenance and cleaning services. Maintenance Company then hires various other companies to fulfill their contract obligations, such as an elevator repair company, a cleaning company, an electrician, etc.
A non-circumvention agreement would prevent, for example, the cleaning company from reaching out to the client directly to provide services. Instead, the cleaning company has to go through Maintenance Company when it comes to anything related to the client. The cleaning company cannot go behind Maintenance Company’s back to solicit business from the client under a non-circumvention agreement.
Non-circumvention clauses are commonly used in Non-Disclosure Agreements because a company has to disclose the identity of some of its clients to work with another business occasionally. The NDA then protects not only the identity of clients but also the business model of a company that uses third parties to service its clients.
If a party violates a non-circumvention clause, they must often turn over those commissions, funds, or other benefits to the party providing the information.
Return of Confidential Information
There is a clause in many NDA forms that require the return or destruction of confidential information when the NDA’s term is over or when the business relationship between the parties ends. This clause further protects confidential information by ensuring it is destroyed or returned when a party no longer needs it.
A return of confidential information clause also usually applies to any copies or duplicate information a party creates. While this type of clause is most often invoked at the end of the relationship between the parties, it can be “on demand” as well. That is, the providing party can specifically ask that the information be returned at any time.
This clause might also require a signed affidavit or statement from the receiving party that they have turned over all confidential information that was in their possession.
Relationship of Parties
Most NDAs will include a clause limiting or restricting the parties' relationship. For example, in the employment context, a relationship clause might specifically state that the NDA does not create an employment contract and that the employee is still an “at-will” employee.
In other contexts, the relationship clause might state that no employee/employer relationship is created because of this agreement. It might also state that there is no joint venture or partnership as well.
This clause helps the parties stay on the same page about their relationship. For example, it is much harder for an individual to argue that they thought they were an employee because of an NDA when the NDA specifically defines the relationship between the parties.
No Warranty
A section of an NDA form might include a short “no warranty” clause. This section generally sets out that the party providing information does not warrant the information provided. In most cases, the warranty applies to whether the information is accurate or comprehensive. The no warranty section might specifically state the information is provided “as is” and is provided only for a specific purpose.
Limited License to Use
Some NDAs provide specific restrictions about how the disclosed information can be used. This type of clause deals specifically with intellectual property rights. Because the confidential information disclosed often falls under several intellectual property rights protections, this section spells out that the receiving party can use the information without violating those rights.
This section also often specifically sets out that the party receiving the information only has a license to use it and does not own the intellectual property rights. It usually includes an acknowledgment that the receiving party is aware that the providing party owns the intellectual property rights to the confidential information as well.
Indemnity
The term “indemnity” means that one party will reimburse or cover the costs associated with any damages related to a particular agreement or action. In the context of an NDA, the indemnity clause generally sets out that the receiving party will reimburse (or indemnify) the providing party if there is a breach of the agreement and a third party makes a legal claim about it.
Essentially, if one party shares information that they should not have shared, and it results in damages to a third party, then the receiving party is responsible for those damages. This removes any risk that the confidential information harms a third party when the receiving party shares that information.
Attorney’s Fees
If the NDA is violated, the party trying to enforce it might need to involve the assistance of an attorney. Because litigation can be costly, the NDA might include a provision that requires the violating party to pay attorney fee expenses to the other party. This term can be very valuable in the event of a breach of the agreement.
However, remember that not every state allows attorney fee provisions in contracts. Be sure the NDA you use is tailored to the laws in effect in your state.
Term
The term provided in an NDA sets out how long the NDA is effective. The term can be for a certain period (such as five years), or it can set out that it will terminate a specific period after something occurs. For example, if the NDA is used in the employment context, the term might be for a year after the last date of employment.
The term can be very long when an NDA is used to protect business information or trade secrets. In fact, some provisions might state that the trade secret is protected until it is no longer considered a trade secret. In some cases, that might mean the information will be protected under the NDA indefinitely.
Keep in mind that the term in the NDA should be the time that the NDA is effective. It does not affect the relationship between the parties directly. The relationship term might affect the term of the NDA, but they are not the same concept.
General Provisions
A general provisions section is a “catch-all” section that incorporates some necessary terms that do not fall into the other sections. For example, it might include a provision that any amendments (changes) to the agreement must be in writing and signed by both parties. It might also set out which state’s laws should apply to the agreement and where a lawsuit should be filed if there is a breach of the agreement. It also often contains a “severability” clause, which states that if any section of the NDA is invalid or void, then the rest of the contract will remain valid, and the court will only ignore that invalid section.
Whistleblower Protection
A whistleblower is someone who reports illegal or unethical activities, usually an employee reporting an employer for violations of state or federal law. In some circ*mstances, an NDA might discourage individuals from reporting these violations for fear of breaching the NDA.
A whistleblower protection clause in an NDA essentially provides that it is not a breach of the NDA to act as a whistleblower. In some cases, this clause is required by law. For instance, the Whistleblower Protection Enhancement Act of 2012 applies to federal employees. It requires that every NDA between the federal government and its employees must contain a clause that sets out that the NDA does not limit or trump an employee’s right to be a whistleblower.
Certain additional industries and some states may also require this type of provision as part of an NDA.
