Non-disclosure agreement

Non-disclosure agreement (NDA) is a legally binding contract establishing a confidential relationship between parties, obligating recipients of sensitive information to maintain its secrecy and restricting its use or disclosure to unauthorized parties (Bagley C.E. 2008, p.523)^[1]. Before the startup shares its technology with the potential acquirer, both sign an NDA. Before the consultant sees the client's financial data, she signs an NDA. Before the employee learns the company's trade secrets, he signs an NDA. These agreements create legal obligations where trust alone might be insufficient.

Research estimates that between one-third and one-half of American workers have signed NDAs with their employers. The agreements protect trade secrets, business strategies, customer lists, and proprietary processes. While essential for legitimate business protection, NDAs have attracted criticism when used to silence whistleblowers, cover up misconduct, or prevent employees from discussing workplace problems.

Purpose

NDAs serve protective functions:

Trade secret protection. Companies share proprietary information with partners, vendors, and employees, relying on NDAs to preserve legal protection^[2].

Deal facilitation. Potential mergers, investments, and partnerships require sharing sensitive information. NDAs enable disclosure while protecting both parties.

Employment relationships. Employees often access confidential information. NDAs clarify obligations that continue after employment ends.

Types

NDAs take different forms:

Unilateral NDA

One-way protection. One party (the discloser) shares confidential information with another (the recipient), who assumes confidentiality obligations^[3].

Common situations. Employer-employee relationships, vendor evaluations, and investor presentations typically use unilateral NDAs.

Mutual NDA

Bilateral protection. Both parties share and receive confidential information, each assuming reciprocal obligations.

Business negotiations. Joint ventures, partnerships, and merger discussions often involve mutual disclosure requiring mutual protection^[4].

Key provisions

Effective NDAs include essential elements:

Definition of confidential information

Scope. What information is covered? Overly broad definitions may be unenforceable; overly narrow definitions may leave gaps.

Exclusions. Standard exclusions cover information that was already known, becomes public through no fault of the recipient, or is independently developed.

Obligations

Non-disclosure. Recipients may not reveal confidential information to unauthorized parties^[5].

Limited use. Information may only be used for specified purposes, not for recipient's general benefit.

Protection standard. Recipients must protect information with reasonable care, often defined as the same care used for their own confidential information.

Duration

Time limits. Confidentiality obligations typically last 2-5 years, though trade secrets may be protected indefinitely.

Survival. Certain obligations survive agreement termination^[6].

Remedies

Injunctive relief. Because monetary damages may be inadequate, NDAs typically authorize courts to issue injunctions preventing further disclosure.

Damages. Breach may trigger liability for actual damages plus potentially consequential damages.

Enforcement

NDAs have legal teeth:

Court action. Violations can result in lawsuits seeking injunctions, damages, and legal fees.

Burden of proof. The disclosing party must prove that confidential information was improperly disclosed and caused harm^[7].

Limitations. Courts may refuse to enforce overly broad, unconscionable, or public-policy-violating agreements.

Criticisms

NDAs face challenges:

Silencing misconduct. NDAs have been used to cover up harassment, discrimination, and other wrongdoing. Some jurisdictions now restrict such uses.

Worker mobility. Broad NDAs may prevent employees from using general skills and knowledge in new jobs.

Power imbalance. Employees signing NDAs as condition of employment may not fully understand or have bargaining power to negotiate terms^[8].

Best practices

Effective NDA management includes:

Proportionality. Match NDA scope to actual sensitivity of information shared.

Clear marking. Identify confidential materials explicitly to avoid later disputes.

Limited duration. Avoid perpetual obligations when time-limited protection suffices.

Legal review. Both parties should understand obligations before signing.

Non-disclosure agreement — recommended articles

Contract management — Intellectual property — Trade secret — Employment law

References

• Bagley C.E. (2008), Managers and the Legal Environment, 6th Edition, Cengage Learning.
• Pooley J. (2013), Trade Secrets, Law Journal Press.
• Bloomberg Law (2023), Confidentiality and Non-Disclosure Agreements.
• Cornell Law School (2023), Non-Disclosure Agreement.

Footnotes

1. ↑ Bagley C.E. (2008), Managers and the Legal Environment, p.523
2. ↑ Pooley J. (2013), Trade Secrets, pp.89-104
3. ↑ Bloomberg Law (2023), Confidentiality Agreements
4. ↑ Cornell Law School (2023), NDA
5. ↑ Bagley C.E. (2008), Managers and the Legal Environment, pp.534-548
6. ↑ Pooley J. (2013), Trade Secrets, pp.134-148
7. ↑ Bloomberg Law (2023), Enforcement
8. ↑ Cornell Law School (2023), NDA Criticisms

Author: Sławomir Wawak