How to Understand the Structure of a Simple Non Disclosure Agreement

A non-disclosure agreement (NDA) is a common type of legal contract where two parties agree to keep certain information confidential. These agreements are also known as "confidentiality agreements," "proprietary information agreements," or "secrecy agreements." NDAs are generally used when the two parties feel it's to their mutual benefit to share certain information but that further dissemination of the information could harm one or both parties. Non-disclosure agreements can also limit each parties’ use of the confidential information. The most important thing to keep in mind is that the NDA's terms should be as clear as possible. [1]

Part 1
Part 1 of 4:

Understanding the Basics

  1. A non-disclosure agreement is most commonly signed when the parties are interested in entering into a business relationship. In general, NDAs are meant to protect the secrecy of technical or commercial information deemed valuable by one or both parties. The NDA restricts the usage of that confidential information. [2]
    • NDAs are often signed by employees agreeing not to disclose their employer’s confidential or proprietary information.
    • Companies doing business together also use NDAs. Companies often use an NDA when they have entered into contract negotiations or when they are working collaboratively on a project. [3] The NDA can limit what the parties may disclose to third parties as well as what information they may use when manufacturing their own products.
    • Parties can use NDAs to prevent forfeiture of patent rights. Forfeiture means relinquishing rights without any compensation. In some cases, revealing information about an invention forfeits patent rights that otherwise could have earned an inventor money. An NDA can help to retain those patent rights. [4]
    • There may be mutual restrictions, where both parties have to agree not to share the information, or a single-party restriction, where only one of the two is obligated to keep the information secret.
  2. These entities may be companies or individuals (two companies, two individuals, or one company and one individual).
    • The party giving the information is called the "discloser" or “disclosing party.”
    • The party receiving the information is called the "recipient" or “receiving party.” [5]
    • The parties will be clearly identified in the beginning of the agreement. [6]
    Advertisement
  3. The non-disclosure agreement is known by other names, such as:
    • proprietary information agreement (PIA)
    • secrecy agreement
    • confidentiality agreement
    Advertisement
Part 2
Part 2 of 4:

Defining the Confidential Information

  1. The term “confidential information” should be defined upfront, so that the reader will understand what it means when it is used throughout the entire agreement. [7]
    • Every industry has its own range of information that could be kept confidential. Common examples include: technical information, financial information, engineering drawings, customer lists, vendor lists, business practices or strategies, prototypes, computer software, test results, tools, systems, and product specifications. [8]
    • The NDA will not protect information or types of information not explicitly outlined in the agreement. For example, if the NDA lists technical specifications and designs as confidential, but does not specify pricing information as protected, pricing information may not be considered confidential under the terms of the contract.
  2. Information that becomes known to the public will often not be covered by the NDA. [9] Typically, the recipient will negotiate that the NDA exclude these items since it would be unfair for the recipient not to be able to use information that is publicly available when its other competitors may be using it.
    • For example, if Company A’s secret BBQ sauce becomes public, then Company B may want to use that recipe in its own products, just as Companies C, D, and F are planning to do. But if Companies A and B have an NDA which restricts its use of Company A’s trade secrets, then Company B would be unfairly disadvantaged in relationship to Companies C, D, and F. To prevent this from happening, Company B will try to exclude publicly-known information from the scope of the NDA.
    • Likewise, if the recipient already has certain information at the time of the contract, it will want to exclude that information. Otherwise, the recipient may be prevented from using its own trade secrets.
  3. A recipient will want to exploit any information it receives legally from third parties, even if the discloser erroneously believes it alone has this information.
    • For example, imagine if Company A believes it has unique proprietary information. Company B signs an NDA with Company A and agrees not to use or disclose this information. But Company A is wrong; Company C also has the information and legally shares it with Company B. Company B will want to exploit this information and not be prevented by the NDA. Accordingly, it will seek to include an exclusion for information legally received from third parties.
  4. [10]
    • This point is particularly relevant for large companies. For example, if a scientific research company employs scientists in different divisions, and one of those divisions is subject to an NDA covering a certain discovery, that NDA will not have an effect if another division of the company makes the same discovery through their own work.
    Advertisement
Part 3
Part 3 of 4:

Setting the Terms of Handling Confidential Information

  1. Generally, both parties to the NDA agree to handle any confidential information received as they would their own. However, this only works if the recipient already has clear, acceptable standards for protecting secrecy. [11] For this reason, the discloser will often research the recipient's standards in advance.
  2. If the recipient has inadequate standards, the NDA should clearly define the confidentiality expectations. [12]
    • These standards might include specific measures for preserving secrecy (such as labeling information "confidential," network security measures, etc.) and a list of individuals with access to the information.
  3. The NDA should clearly state the start and end date for the period of time in which the discloser and recipient may exchange information.
    • This time period may be for the duration of the contract or for a shorter period of time. Companies who collaborate may agree to share confidential information at the start of the collaboration but then stop even though they are continuing to work together.
  4. Include a start and end date for the length of time the information must remain secret. Five years is a typical length of time in US contracts, while European NDAs often extend this period to ten years. [13]
    • Exchange of information may happen during a different time frame than confidentiality. For example, data may be collected for one year, but confidentiality needs to be kept for five years.
    • Using specific start and end dates for the disclosure and confidentiality periods helps avoid ambiguity that can arise when unspecific terms like "a two-year period" are used without additional information. [14]
    Advertisement
Part 4
Part 4 of 4:

Defining Consequences for a Possible Breach of the Non-Disclosure Agreement

  1. These sentences will clarify the remedy sought by the discloser should the recipient breach the NDA. Typically, the discloser seeks:
    • Money for any damages the party suffered as a result of the release of the information.
    • A court order stating the breaching party cannot continue to release the confidential information (an injunction).
  2. Typically, the non-breaching party is entitled to the amount of money that he or she lost as a result of the breach. However, parties can place a predetermined amount of money in the contract in the event of a breach. This would include language to the effect of “If one of the parties breaches this Agreement, the non-breaching party is entitled to $5,000.”
    • Also, the discloser may want greater monetary compensation to punish the recipient for “willful” or “malicious” breach of the agreement. The NDA will define “willful” often as a synonym for “intentional” in order to distinguish it from mere negligent breach.
  3. If a party to the non-disclosure agreement breaches, and lawyers get involved, it is usually customary for each party to pay their own legal fees. However, parties can change the default rule by stating in the agreement that the losing side is required to pay the attorney’s fees of the winning side. This is known as fee shifting.
    • To identify a fee-shifting clause, look for language like the following: “The winning party has the right to collect from the other party its reasonable costs and attorney’s fees incurred in enforcing this Agreement.”
  4. Alternative dispute resolution is a term for various ways to settle a legal dispute short of litigation in court. ADR is usually faster, simpler, more efficient and more flexible than litigation. Also, ADR is a private proceeding, which is good for businesses that deal in sensitive information that could be revealed in litigation, which is a public proceeding. [15]
    • Although the parties to the agreement could decide to use an ADR procedure after a dispute arises, it will be more difficult for them to reach an agreement on ADR procedures at that point. Accordingly, it will be spelled out in the NDA.
    • To locate the ADR clause, look for language similar to the following: “All claims and disputes arising under or relating to this Agreement are to be settled by mediation/arbitration/negotiation, which will be conducted in the state of [whatever state the parties agree on].”
  5. Parties have three common forms of ADR from which to choose to settle their dispute. Types of ADR include:
    • Mediation: a procedure where a neutral third person helps the parties talk through their dispute and come up with a solution that satisfies everyone.
    • Arbitration: this procedure is similar to a trial. An “arbitrator” hears from both sides and then issues a binding decision based on the evidence presented by the parties.
    • Negotiation: occurs where the parties resolve the dispute themselves, possibly with attorneys.
  6. Breaching certain non-disclosure agreements may entail criminal charges. For example, disclosing trade secrets that are subject to a non-disclosure agreement is against both federal and state law. [16] Further, violating a confidentiality agreement to harm the other party to the agreement can be seen as fraud or blackmail.
    • Criminal penalties will not preclude private civil actions, such as a lawsuit, or ADR proceedings.
    Advertisement

Expert Q&A

Ask a Question
200 characters left
Include your email address to get a message when this question is answered.
Submit

      Advertisement

      Warning

      • The contents of this article provide legal information, but not legal advice. Consult a lawyer for legal advice specific to your situation.

      Tips

      • For the protection of both parties, the NDA should include permission of ex-parte injunctive relief. An ex-parte injunction is when a court makes a specific order in an emergency hearing with only one party, without notice to the other party. A full hearing with both parties is held at a later date. [17]
        Thanks
        Helpful 0 Not Helpful 0
      Advertisement

      You Might Also Like

      How to
      Bake a Winter Squash
      How to
      Cope with CPTSD
      How to
      Make Martinis
      How to
      Grow Golden Barrel Cactus
      How to
      Encourage Your Child to Love Learning
      The Ultimate Progressive Dinner Party Guide
      How to
      Make Puff Pastry
      How to
      Cook Arepas
      How to
      Hail a Cab
      How to
      Make Your Own Tortillas
      How to
      Create a Brand Positioning for a Small Business
      How to
      Make Risotto
      How to
      Get a Guy to Stop Calling You
      How to
      Have a Rebound Relationship
      Advertisement

      References

      1. ↑ E. Allen Farnsworth, Contracts: Cases & Materials (University Casebook Series) (pgs. 277; 557-562).
      2. ↑ http://www.extension.iastate.edu/agdm/wholefarm/html/c5-80.html
      3. ↑ http://www.extension.iastate.edu/agdm/wholefarm/html/c5-80.html
      4. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      5. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      6. ↑ http://www.extension.iastate.edu/agdm/wholefarm/html/c5-80.html
      7. ↑ Corporate Counsel's Guide to Technology Management & Transactions, Alan S. Gutterman: Part II. Intellectual Property Rights; Chapter 7. Confidentiality and Nondisclosure Agreements, § 7:4.
      8. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      9. ↑ Corporate Counsel's Guide to Technology Management & Transactions, Alan S. Gutterman:Part II. Intellectual Property Rights; Chapter 7. Confidentiality and Nondisclosure Agreements, § 7:4.
      1. ↑ Corporate Counsel's Guide to Technology Management & Transactions, Alan S. Gutterman: Part II. Intellectual Property Rights; Chapter 7. Confidentiality and Nondisclosure Agreements, § 7:4.
      2. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      3. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      4. ↑ http://www.nolo.com/legal-encyclopedia/nondisclosure-agreements-29630.html
      5. ↑ http://www.tms.org/pubs/journals/JOM/matters/matters-9405.html
      6. ↑ Contracts, the Essential Business Desk Reference, Richard Stim (pgs. 15-16).
      7. ↑ Economic Espionage Act of 1996 and Uniform Trade Secrets Act
      8. ↑ http://www.businessdictionary.com/definition/ex-parte-injunction.html

      About this article

      Thanks to all authors for creating a page that has been read 24,263 times.

      Did this article help you?

      Advertisement