Welcome to the final post in our National Entrepreneurship Week Series. Building a business is one of the hardest things you can endeavor to do. And one of the steps you must take to be successful at it is to build a fence around your ideas. Or, in the words of the great Marshawn Lynch, “Protect your chicken.” There are a number of tools in the toolbox to assist you with this. Our previous post discussed a type of standard agreement: operating agreements. This post will focus on non-disclosure agreements (NDA). 

‍What is an NDA? 

An NDA is a legal contract that limits the use and disclosure of confidential information between two or more parties. NDAs are also known as confidential disclosure agreements (CDAs), proprietary information agreements (PIAs), and confidentiality agreements. They are commonly used when parties are discussing a potential relationship or collaboration and need to share confidential information for evaluation purposes.  

Confidential information can include trade secrets, business plans, customer lists, financial information, and other proprietary information that gives a business a competitive advantage. Therefore, it is essential for businesses to protect this information. 

‍Why an NDA Is Essential to a Business

• Protects confidential information: NDAs are used to protect confidential information from being disclosed to unauthorized parties. 
• Prevents intellectual property theft: NDAs can help prevent intellectual property theft by making it illegal for someone to use or disclose a company’s confidential information without permission.
• Builds trust: Signing an NDA demonstrates a commitment to confidentiality and builds trust between the parties involved. 
• Helps to attract investors: Investors are more likely to invest in a company that has taken steps to protect its confidential information through the use of NDAs. 
• Protects customer and client information: NDAs can be used to protect customer and client information, ensuring that their personal data is not disclosed to unauthorized parties. 

‍Limits of NDAs

• Enforcement challenges: Enforcing an NDA can be challenging, particularly if the information has already been disclosed or the scope of the NDA is too broad. 
• Public interest: In some cases, there may be a public interest in disclosing certain information, such as in cases of illegal activity, public health and safety, or government transparency. NDAs cannot be used to prevent the disclosure of information that is in the public’s interest.
• Limited protection: An NDA only provides protection for information that is specifically identified and defined in the agreement. If information is not covered by the NDA, or if it is disclosed in a way that is not prohibited by the agreement, then it may not be protected.
• Time-limited protection: NDAs are typically time-limited; meaning, they only provide protection for a specific period of time. After the NDA expires, the information may no longer be considered confidential and may be disclosed freely. However, trade secrets may be kept confidential indefinitely.

Of course, not all information can be protected. Public records, including Securities and Exchange Commission (SEC) filings and company addresses, are not covered by these confidentiality agreements. The courts can also interpret the scope of an NDA in ways that one or more participants may not have initially expected. If the information covered in an NDA is revealed in another way—like through a court proceeding or subpoena—then the NDA no longer applies.

Additionally, managing multiple NDAs as an organization can quickly become untenable without standardized language. Reviewing, negotiating, and concluding unique contracts manually can be extremely demanding and time-consuming. A standard, adaptable confidentiality agreement addresses this issue, but only if the organization takes the time or consults with experts to create a standard NDA that meets all its needs.

‍Consequences of Breaking an NDA

The consequences for breaching an NDA can vary depending on the terms of the agreement, the nature of the information that was disclosed, and the jurisdiction in which the agreement is being enforced. Here are some examples:

• Legal action: The party that was harmed by the breach of the NDA can take legal action to enforce the agreement and seek damages for any losses incurred.
• Financial penalties: NDAs often include provisions for financial penalties in the event of a breach. These penalties may be outlined in the agreement itself or determined by a court as part of a legal action.
• Reputation damage: Breaching an NDA can damage a person’s or company’s reputation, particularly if the breach involves sensitive or confidential information. 
• Termination of employment or contract: Breaching an NDA can result in termination of employment or contract, particularly if the agreement was a condition of the employment or contract.
• Criminal charges: In some cases, breaching an NDA can result in criminal charges, particularly if the information that was disclosed was related to national security, government secrets, or other sensitive information.

‍Enforcement of an NDA

Enforcing an NDA can be challenging, but there are several steps that companies can take to protect their confidential information and apply the terms of the agreement. It’s important to remember that the specific steps for enforcing an NDA may vary depending on the terms of the agreement and the jurisdiction in which it is being applied. If you are not a lawyer yourself, consult with legal counsel to ensure you’re following the appropriate procedures and maximizing your chances of success.

At DE, we have drafted, reviewed, and enforced hundreds of NDAs. In our experience, no two contracts are alike; each one is unique to the parties involved and the industry, service, or goods being provided. This is why we highly recommend consulting an attorney when negotiating an agreement with another business of any size or kind. 

Thanks for reading our National Entrepreneurship Week Series! Obviously, we can’t cover everything there is to know about entrepreneurship in five (5) well-written, thoughtfully crafted posts. And of course, the information presented is not exhaustive and should not be applied to your specific situation without careful consideration of your unique circumstances and perhaps counsel from an attorney. But it’s a start.

If you would like to learn more about how we help clients ethically and legally get to “Yes,” schedule your free consultation today to learn how we can help.

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