What is a Non-Disclosure Agreement (NDA)?
A non-disclosure agreement (NDA) is a type of agreement wherein the signatories agree to keep certain information confidential, subject to the limitations set out in the contract. A standard NDA contains an operation section which defines the confidential information and stipulates that the information must be kept confidential; a confidentiality provision which specifies that the recipient of the confidential information will not use it, disclose it to others , or reverse engineer it; and a term or duration provision of confidentiality, which states how long the confidential information must remain confidential.
In practice, no two NDAs are the same. Businesses will often have custom NDAs, which reflect their own individual requirements. The document may also be styled as a confidentiality agreement, but it will still function as a non-disclosure agreement.
The primary purposes of an NDA are as follows:
Breaking Down a Non-Circumvention Agreement
In some situations, individuals or companies may have a need to share confidential information with one another, but may also have concerns that the party with whom they are sharing information may use that information to circumvent the other party. It is in these situations where a non-circumvention agreement may be required.
A non-circumvention agreement is an agreement wherein the parties agree that confidential information they receive from the other party will not be used for improper gain. In this way, the non-circumvention agreement provides the same level of protection as the NDA in that it protects confidential information from being disclosed to other parties without permission. However, in addition to protecting confidential information, a non-circumvention agreement goes further by providing the parties additional protection in the event that one or more parties to the non-circumvention agreement attempt to circumvent the other party through their own actions. For example, in the case of each of the agreements discussed above, the party with the NDA may disclose confidential information to a competitor in violation of the NDA and in violation of their corporate purpose for which they were created. However, in the case of the non-circumvention agreement, if the other party uses the confidential information in violation of the non-circumvention agreement, it may also do business with or attempt to acquire the company for which the information was originally shared without consent of the other party, thereby circumventing the party disclosing confidential information. To the extent that confidential information was required to make introductions or obtain access to facilities, products, services, etc., the disclosure of such confidential information for the purpose of these activities would be an additional form of circumvention. Thus, in this case, the NDA would not provide the party the same protection as the non-circumvention agreement in that the other party may still use the confidential information for these purposes not related to the purpose for which the information was provided and may not be held accountable for its actions in accordance with the terms of the NDA while the non-circumvention agreement would provide this protection.
For these reasons, you typically see non-circumvention agreements used in situations involving joint ventures and/or mergers and acquisitions where individuals or companies have a need to share confidential information with one another and want to ensure that the other party does not use that information to circumvent the other party.
Provisions in NDAs and Non-Circumvention Agreements
Most NDAs and non-circumvention agreements will contain the following clauses:
Confidentiality Obligations. This section of the agreement is the most critical, as it sets the stage for what can be disclosed to whom. It should list any limitations on the parties’ ability to use, publish or otherwise disseminate information the other party informs them is confidential. A well-written confidentiality clause will contain prohibitions against the disclosure of confidential information to third parties, as well as restrictions on how the company or the other party may use the confidential information. The clause defines what confidential information is, such as drawings, designs and processes, and expresses the agreement that confidential information will be maintained as strictly confidential.
Penalties for Breach of the Agreement. NDAs and non-circumvention agreements should impose specific monetary penalties in the event a party fails to adhere to the terms of the agreement. While the actual amount of those penalties can vary widely, NDAs should generally provide for the payment of lost profits, future lost revenues, punitive damages, actual damages and attorneys’ fees for breach of the agreement.
Advantages of NDAs and Non-Circumvention Agreements
For individuals and businesses, the benefits of using NDAs and non-circumvention agreements are abundantly clear. Confidentiality agreements can do a lot to prevent your proprietary information from being misappropriated or mishandled by other parties. When it comes to businesses, confidential information is often the only thing that keeps them afloat and prevents competitors from taking over their market share.
Non-disclosure agreements also go a long way to building a sufficient level of trust between marketplace players. For businesses seeking to form joint ventures with other industry players, trust is often important. A hastily executed deal without proper safeguards in place can lead to future disputes that do irrevocable damage to business relationships.
There are many times when business partners are privy to important confidential information – information that the public has yet to see. It’s important to create legal safeguards to prevent the accidental release of important confidential information, whether or not the "secret" is in the form of trade secrets, technology or any other form of proprietary information. By creating NDAs and non-circumvention agreements that are legally binding and bindingly enforceable, division of labor becomes much easier to manage.
Disadvantages and Other Considerations
The effectiveness of non-disclosure and non-circumvention agreements can be limited by careful drafting. Additionally, if terms are ambiguous or not well-understood by the parties, then the NDA may be abused once signed. For example, some NDAs require a party to "immediately return" any confidential information if unsuccessful. However, there may be issues if a party has not yet had time to delete or dispose of the information, or present it to a particular division or department. Those contractual obligations should be carefully examined. That analysis is similar to Intellectual Property (IP) agreements that limit a party’s use of trademark or other IP. It is best practice to obtain a good faith or rule of reason standard, rather than an absolute injunction standard.
The effective use of any non-circumvention or non-disclosure agreement is thus directly proportional to the strong and effective drafting which captures the parties’ intent, while not being so broad or ambiguous as to limit ordinary activities. For example, for start-up companies in competitive technology fields , the standard limitations of use language of "proprietary information" and the "like" may not be enough to stop a bad actor from reviewing company information. This could lead to violations of privacy and trust.
Also, NDAs and NCAs are often abused by non-users who could violate such terms without facing legal consequences. In most licensing and distribution contracts, the terms for NDAs and NCAs are easier to enforce from a legal perspective. However, NDAs and NCAs are sometimes abused by employees that create "shadow" companies.
Sometimes, NDAs and NCAs are simply not honored by excluded parties. Companies that discover this may be forced to pursue formal litigation, which may include filing a request for a preliminary injunction and/or a temporary restraining order (TRO).
If an employee violates the NDA or NCA, such conduct would be subject to extensive damages if the company had documented the term correctly. Alternatively, NDAs and NCAs might not be honored because the relevant executive or department manager did not have the responsibility to require compliance.
Legal Enforceability and Compliance Issues
Many factors affect the legal enforceability of non-disclosure and non-circumvention agreements, regardless of the terms contained in the agreements. Jurisdictional issues and compliance with local laws can make certain provisions of an agreement unenforceable in a particular jurisdiction. For example, some jurisdictions do not enforce confidentiality provisions in agreements unless the information is patented or some other requirement is met. It is important to obtain local counsel for the local jurisdiction where enforcement may be necessary.
How to Draft an Effective NDA and Non-Circumvention Agreement
When faced with deciding which documents were necessary with a particular company or individual, I often have clients electing to do either too little or more than is necessary and undercutting their business opportunity and/or repelling others.
I believe that, if you will be discussing proprietary information and competitive business practices, it is well worth the time and cost of preparing a non-disclosure agreement. Any time that you enter a new business opportunity, what is learned and created will be immediately shared with your spouse, parents, children, coworkers, friends, service providers, and social media sites, just to name a few. Once your proprietary business information is out in the world, it can never be reclaimed – no matter how much cash you throw at the problem.
Once you’ve been introduced or have met, you’re ready to provide your proprietary information to the person or entity with whom you’re going to potentially do business. It has been my experience that all parties are actually ready to get down to business and sign agreements under which neither party will exploit the intellectual property and business practices that are going to be shared during the course of their relationships. This is true in almost all cases, with rare exception . It’s also worth remembering that these agreements are making it clear that the information shared is protected by confidentiality requirements and that no one is permitted to use the information for their own benefit.
A non-disclosure agreement, commonly called an NDA and also known as a non-circumvention agreement, is just as important as getting a signed confidentiality statement from employees and vendors. No one is going to take you seriously if you don’t insist on protecting your business.
These days, you are required to have a brilliantly drafted non-disclosure agreement which may entail: Do not rely on business friends or even family to prepare these types of documents. It actually may end up costing you more in the long run to have these documents prepared by someone who doesn’t have experience in drafting these agreements, who doesn’t have the background in business law and who doesn’t have the experience in dealing with bad information being used illegally by other companies or individuals. Prepare yourself; talk to your attorney about what you need to protect your business. You must remember, however, that preparation is only part of the puzzle, just as one alone is not strong – you need two parts to make it work.
It is good practice to have these agreements reviewed by your attorney and then revised, if necessary. There is no need to reinvent the wheel – use the information that has been tried and tested.