An NDA is a document that is made in order to keep confidential and sensitive information about the company, business or any product safe and secure. This NDA document is signed and agreed upon by the two parties. One party is the receiver of the product or service, while the other party is the provider of the product or service, which has been chosen by the receiver. Now let’s get into the depths of NDA and gain knowledge on how it is used and what the types of NDA are.
What is an NDA?
A non-disclosure agreement (NDA) is defined as a document or agreement that is a legal contract and legally binding on the parties signing it. This document is made and applied to keep confidential and sensitive information safe and secure. This document is an agreed promise that none of the parties signing this contract will reveal any information about the secret to anyone under any circumstances.
What are the role and responsibilities of an NDA?
What does it do?
- It protects the confidential information and also tells about how much information can be shared publicly, if there is a need at all to reveal the information.
- The NDA agreement is a legal framework for the receiver of the confidential information so that they understand their own obligations to protect it.
- If there is a breach of confidentiality, then an NDA provides all the legal basis for pursuing remedies, which could be financial compensation or any other method through which the breach can be settled.
Why is the NDA important?
- The NDA is important for maintaining cordial business relationships when partnership in a business, negotiations or fund seeking takes place. This is done to safeguard valuable information.
- Through an NDA, the businesses provide safety and security to their trade secrets, inventions and other proprietary information.
- The companies operating in the IT sector or any sector that needs confidentiality, then the companies include an NDA in their employee contracts and protect company secrets.
Key Aspects of an NDA
- The NDA contract consists of all the information about the parties involved and who is agreeing to the confidentiality obligations.
- It very thoroughly and explicitly mentions what information is protected and what is not protected.
- It also sets the length of the time that is to be maintained by the parties to keep the information safe and secure.
- If there is a breach of the agreement at any point in time, then the NDA agreement also outlines the terms and conditions to be applied.
Purpose of a Non-Disclosure Agreement
The Purpose of an NDA is split into two components. These two parts are confidentiality and protection. The information is protected by a confidentiality agreement, which includes everything, from the product specs to client lists. The other commodities that can be included in an NDA are business models, test results, and even embargoed press releases or product reviews.
The NDA also creates a lawful structure to protect ideas and information from being stolen or shared with competitors and third-party apps. The NDA also includes a clause which indicates the actions which will be taken if the contract is breached. The actions of the agreement breach include legal ramifications, lawsuits, criminal charges and even financial penalties. NDAs are made to provide many levels of protection to your business, and even accidental breaches are covered in this agreement.
There are three essential functions of an NDA:
- Identifying protected information: The NDA agreement is made in such a way that it specifies each and every detail of the information to be protected. It also specifies the details about what information can be shared and what has to be kept confidential. This gives both parties flexibility to work freely around the agreement.
- Protecting sensitive information: When both parties sign an NDA agreement, it creates a legal obligation to keep all the sensitive information confidential. If there is any breach of contract, then there will be consequences for these actions.
- Protecting patent rights: Patent rights are mentioned in the NDA because it gives safety and security to the inventorbecausee if by accident there is any leak of information, then it will void the patent rights.
Types of NDAs
Three types of NDAs are used widely by companies and businesses. Scroll down below to know more about these NDAs.
- Unilateral NDAs:
As the name suggests, it is a one-way NDA which requires only one party to disclose the sensitive information to the other party. These one-way NDAs are the most common type of ND, and you will mostly see these types of NDAs in companies which just need to disclose the information to the employees, advisors, clients, partners and other stakeholders.
There are many types of Unilateral NDAs, too. Let’s know about them too.
- Employer-employee NDAs: The employers very often require their employees to sign these NDAs during their time of hiring process. These NDAs are agreements that restrict the employees from disseminating and using any confidential company information, such as trade secrets, business and development plans, pricing data, supply sources, etc.
- Company- Contractor NDAs: These NDAs are used by the companies to restrict the contractors from divulging any means of breach and disclosing crucial information about the company to any outsider. Just like the employer-employee NDA contract, the company-contractor NDA limits and restricts the contractor from sharing or disclosing any information about the company, which could result in reducing the competitiveness of the company.
- Inventor-evaluator NDAs: The inventors can use this unilateral NDA to keep their patent rights safe from the evaluators. They do this in order to protect their inventions from being patented, used or marketed by the evaluators. The conditions that are included in these types of NDA are to restrict the evaluator from using and disclosing the inventor’s:
- Business Operations: This includes the investor’s financial information, vendor information, internal cost information, external business contacts and the methods and manners in which they conduct business.
- Customer Information: This clause includes the name of the customer, their contact information and the data they have provided to the inventor.
- Intellectual Property: This includes the test data and results, the status and details of research and development of services and products, patents, copyrights and trade secrets.
- Service Information: This clause includes all the details about the inventor’s products and services.
- Accounting Information: This information is included in the clause because it pertains to the company’s balance sheet, company liability information, expense reporting and profit and loss statements.
- Seller-buyer NDAs: Sellers of any products use this type of NDA because they do not want their buyers or the customers to reveal any detail about their business, production or manufacturing of their products to any third party or their direct rivals. They also restrict the buyers from revealing any confidential information that they were exposed to during the sale of goods and services. They limit their buyers from indulging in any revelation of information about their business operations, production processes, intellectual property and computer technology.
- Bilateral NDAs:
- Bilateral NDAs are used when both parties engaging in this type of NDA require to sharing of a lot of confidential information about their respective businesses with each other.
- Bilateral NDAs are also called a mutual NDA or Way NDA. Through this agreement, both parties can limit and restrict the other party from sharing any information about the latter with anyone.
- It also includes the condition about how both parties can use and reveal this information. Two-way NDAs are most commonly used in cases when the company goes into mergers, joint ventures, corporate takeovers and acquisitions.
- Multilateral NDAs:
- Multilateral NDAs or multiparty NDAs are taken into action when there are three or more parties that have to agree.
- This agreement is made to have one of the parties reveal the sensitive information about their businesses to the other parties involved in this agreement, and it now becomes the responsibility of these parties to be cautious of what to reveal and what not to reveal about the business.
- These types of agreements remove the need to use unilateral or bilateral NDAs with multiple parties. These types of agreements are generally found in complex, negotiation-heavy deals.
Key Elements of a Non-Disclosure Agreement (NDA)
A non-disclosure agreement helps in protecting the information of the company that is very confidential and is only known by a few trusted employees or just by the top management of the company. However, to make the agreement effective and to keep its efficiency in safeguarding the confidential information, the company needs to add the discussed key elements of an NDA below. These elements that need to be added are as follows:
- Identification of Involved Parties:
- The agreement needs to mention all the parties involved in sharing or safeguarding the information, the disclosing party (the one sharing the sensitive information) and the recipient.
- Along with the names of the companies that have agreed to this agreement, there is a mention of the names of the individuals associated with the company, because in future, if the company seems to be non-existent, then the person associated with the company is responsible for the safekeeping of the information.
- Definition of confidential information:
- An NDA needs to have a proper definition and mention of the protected information.
- It should mention the method or the way of communication (electronic, oral or written) through which the disclosing party has decided to or already has revealed the confidential information.
- This binds and also informs the recipient party of the conditions of the information, which they are supposed to keep confidential and not disclose to any third party.
- Information Ownership:
- There needs to be a clear and specific mention in the NDA that outlines the fact that the recipient party in this agreement is not allowed to claim any ownership of the confidential information listed.
- Through this statement, it is also mentioned that the recipient party has no right over the confidential information at any point in time.
- By making this clause present in the NDA, the disclosing party is just ensuring that it holds and has full access and authority over the ownership of the confidential information even after the termination of the agreement.
- Exclusions not considered confidential:
- This element is especially important for both parties, as there can be any sort of information that the recipient party could already know independently, not through the disclosing party.
- These exclusions are also applied because this helps in court cases when the court puts legal pressure on the recipient to disclose the information by subpoena or deposition.
- In such cases, the disclosing party receives a legal written notice so that they are well informed about and have time to prepare their counter-response.
- Obligations and Requirements of the involved parties:
- It is important to have clear and transparent rules and regulations that are an obligation and at the same time limitations of the NDA agreement.
- The recipient party’s obligation may have an inclusion of a responsibility to take measured and responsible steps to keep the confidential information protected.
- Effective Agreement Period:
- An NDA should not extend indefinitely. It should have a specific number of years mentioned so that the parties who have mutually agreed to come together and agree to the NDA know how many years they are bound to the NDA.
- Most of the NDAs used in companies for their employee NDA agreement last till the employee is serving the company.
- The Businesses, before agreeing to any of the conditions of the NDA, should very carefully consider the lifespan of the agreement and also make sure that the period specified is reasonable and agreeable.
- Consequences of a Breach:
- An NDA should always specify the legal actions and resources which can be taken if there is any breach of the agreement.
- The legal actions or recourse can be an injunctive relief (temporary stay order), costs of litigation and attorney’s fees.
- Some of the non-disclosures go beyond the normal inclusions of the legal actions; these NDAs include the legal state law that is used in the state, which also includes the specific state laws.
What Are the Consequences of Breaking an NDA?
There are consequences to the breaking or breaching of an NDA. The actions that are taken by the disclosing party are either mentioned in the NDA, or the legal actions taken against the recipient depend on the intensity of the damage caused to the disclosing party. Let’s read below about the actions and consequences of breach of an NDA:
The legal Implications of breaking an NDA are as follows:
- Potential Financial Penalties:
- When an NDA is breached by the recipient party, it means that they have to be prepared to face a huge financial backlash for the damages caused to the disclosing party by this breach.
- The Disclosing party can seek compensation in terms of lost profits, the cost of legal proceedings and even punitive damages.
- Possible Legal Actions:
- In addition to the potential financial losses and compensation, the disclosing party can take a legal route to claim back all the harm that has been caused to them.
- The non-breaching party can seek an injunction, a court order that will limit the recipient party from disclosing or using the confidential information for their own good.
- Apart from these actions, the non-breaching party can also go for a lawsuit against the recipient party for the breach of contract or misappropriation of trade secrets, which could result in even more severe consequences.
The impact of the consequences on the Professional Reputation:
- Impact on Future Business Relationships:
- A breach of an NDA can have a massive effect on future business relationships. If you are a recipient and have a lawsuit against you going on for a breach of NDA, then the word travels faster than air, and you may face rejection of business proposals and clients.
- As business relations and contacts and image is all made on trust. So, one small dot or legal case against you, the years of contacts and image built all go down the drain.
- Trust is the core essential thing needed for businesses to run successfully, and breaking an NDA can completely shatter that trust into pieces, which will be beyond repair.
- Damage to Personal Brand:
- Your brand is the closest brand that is associated with you and your professional reputation.
- So if your name is tarnished in the market as a constant defaulter of breaching NDA, then it can severely harm and tarnish your image as a trustworthy and reliable individual.
- Once your brand image and self-worth worth questioned and doubted, it has an immense impact on your business and career, as you will have to build everything from scratch again.
Final Thoughts
An NDA is an agreement that is made and used by almost everyone in today’s business world. The companies use NDA for their employee contracts and make them sign these contracts to restrict them from disclosing any sensitive information about the company. The company use unilateral NDA agreements for employee contracts. The businesses that enter into merger contracts, corporate takeovers, partnerships, joint ventures, etc. they all use the Bilateral NDA agreement. The Multi-lateral NDA agreement is used when there are more than three parties involved in the mutual agreement. For an NDA agreement to work and legally bind successfully and efficiently, it needs to mention important elements like the names of the parties involved, the information to be protected, the duration of the NDA, etc. As it is a legal document, any breach of this contract can have legal consequences and professional and financial losses, which impact the business immensely.
Read Our More Glossary Blogs: HRMS Glossary: Understanding Core Terms in Human Resource Software
