By: Jeffrey Peters

The Importance of Non-Disclosure Agreements.
A non-disclosure agreement (“NDA”) is a contract specifically designed to protect proprietary business information.  NDAs create a confidential relationship between the party disclosing confidential information, and the party receiving confidential information.  The agreement legally binds both the disclosing and receiving parties to protect the confidentiality of the disclosed information.  NDAs should be signed by all parties to be covered by the agreement. 

Written non-disclosure agreements are essential if you must disclose proprietary information about your business.  Without a non-disclosure agreement, your confidential information could be sold or given to a competitor or used by the receiving party to compete against you.  An NDA will allow you to sue to stop disclosure of your confidential information, and to seek monetary compensation for harm to your business.

What you should include in your Non-Disclosure Agreement.
Every NDA should address four central issues. First, the agreement must define the confidential information protected. An NDA must also define the information that is excluded from protection. Third, it should outline the obligations of the party receiving the confidential information. Finally, an NDA must specify the time period of non-disclosure. However, with these essential matters in mind, it is important to remember that non-disclosure agreements should be tailored to fit the specific parties and circumstances.  You will be able to find many different NDAs on the Internet, but you should always invest in a document that fits your specific needs rather than rely on a one-size-fits-all, generic form.  

The NDA should specify the subject matter of the protected information without disclosing the confidential information. For example, you may define the confidential information simply by stating, “Confidential information is defined as, but not limited to, business development plans and idea, programming code, and marketing plans.” The NDA should also define information not protected from disclosure. This generally includes information made public by the disclosing party, information the receiving party discovers prior to the receipt of proprietary information from the disclosing party, or information developed independently by the disclosing party.

The non-disclosure agreement should state the receiving party’s obligations to protect the information.  It should also specify how the receiving party can use the information, and what the receiving party should do with the confidential information if the relationship between the disclosing party and the receiving party ends.  It is also important for the agreement to specify a reasonable time period for non-disclosure. Requiring the receiving party to protect information for an indefinite period is not reasonable.  In light of the current speed of technological advances, it is unlikely that a disclosing party would need to protect confidential information for a long period of time.
While a non-disclosure agreement can protect trade secrets, you should think carefully before using one to protect this type of information. A trade secret is an idea that is valuable specifically because it is not generally known. If the trade secret is of a nature that you will never disclose it to the public, you should limit disclosure and not rely solely on an NDA to protect this important business information. For example, Coca-Cola’s secret formula is a trade secret that the company will protect indefinitely.  While, in theory, an NDA could protect the confidentiality of the formula, safeguarding this type of information would not be appropriate for a non-disclosure agreement.

Also, keep in mind that each state has its own body of laws, and the NDA should be drafted to comply with your state law.  It is also wise to include a choice of law provision in the agreement. This provision specifies under which law the NDA will be interpreted and the jurisdiction for resolution of disputes.  This is especially important if the signing parties are from different states.  Such provisions will help avoid litigation in an unfriendly jurisdiction and under unfavorable law.

Who should sign your non-disclosure agreement.
Non-disclosure agreements have become as common as business cards in today’s competitive technology business world.  It is not absolutely necessary to require every person to sign an NDA before you talk to him or her about your business. However, you should require an NDA before you disclose information that could harm your company. The list of people who you should require to sign an NDA will be as varied as the people to whom you disclose proprietary information. Your NDA should be tailored for the receiving party, depending on the nature of the information they will receive and how they will use it. It is likely that your investor NDA will differ from you employee NDA

What you should look for when asked to sign a non-disclosure agreement.
If you use non-disclosure agreements to protect your proprietary information, you will probably be asked to sign an NDA, or use a two-way non-disclosure agreement that protects both parties’ confidential information. In either event, you should be extremely careful before signing anything. Read the entire document, and do not sign it until you understand every term and your obligations under the agreement. If any terms in the agreement do not fit your specific situation or obligates you in a way you do not agree with, do not sign the agreement until it has been amended to your satisfaction. You should never accept verbal assurances that unfavorable terms will be interpreted in any way other than their plain meaning or that they will not be enforced. Remember, you are signing a contract and could be held to every obligation contained in the document.

Closing thoughts about non-disclosure agreements.
When sharing confidential information is in the best interest of your business, using non-disclosure agreements can be an efficient way to protect yourself and your property.    The key to successful use of NDAs, like any contract, is to ensure that it fits your specific circumstances.