A Non-Disclosure Agreement (also called a confidentiality agreement or an NDA) is simply a legal contract between two parties protecting confidential information shared between them.
An NDA establishes a confidential relationship between a person or company and the person to whom the information will be disclosed. The goal is to prevent a company or person from suffering losses or damages due to disclosure of information and to prevent the receiving party from profiting from it illegally. The following article describes the types of confidential information that can be included in an NDA and the situations where information is excluded.
NDAs serve three vital functions:
1. Protect sensitive information: The party who signs an NDA makes a legal promise not to share information that is marked confidential to unauthorized persons. Any failure to keep this promise can be prosecuted like any other breach of contract.
2. Helps inventors to keep patent rights: When an invention is disclosed publicly, it can be difficult to obtain patent rights. A well-drafted NDA can help the inventor secure the rights.
3. Clearly distinguishes what is confidential and what isn’t: The agreement states in black and white what is exclusive and confidential so that the other party cannot claim ignorance.
There are important elements of a confidentiality agreement that need to be considered to make it focused and binding. They include:
- Clearly stating the purpose of the NDA: It should detail information that will be protected and why. This is important because the other parties involved will not want to sign something that may hinder their business, especially when the definition of “Confidential Information” is overreaching.
- The duration of the NDA has to be defined: NDAs usually last between 4 to 5 years, but some information, such as customer lists or customers’ social security numbers, will need to be protected indefinitely.
- The people who can access the information: Ideally, people who have also signed the NDA must be detailed in the contract. The information should only be shared on a need-to-know basis, and third parties that may gain access should be required to sign the NDA.
Information that CAN be protected by a Non-Disclosure Agreement
Various types of confidential information can be covered by an NDA. Some of them include:
- Processes: Manufacturing, chemical, and engineering processes
- Business Strategies and Methods: marketing schemes, advertising strategies, and product launch announcements
- Designs and Specifications: blueprints, drawings, documents for machines, buildings, products, inventions and patent applications
- Formulas: The most commonly protected trade secrets e.g. ingredients that give Coca-Cola its distinct taste
- Physical Devices: Machines, objects, devices and hardware configurations, as well as prototypes or samples, however, trade secret protection is often lost once they are made available to the public
- Computer Software: qualifies for protection by an NDA as the software code is not easily known or ascertained
- Vendor & Customer Lists: can be covered by an NDA depending on whether a list can easily be obtained by other means.
For example, a court ruled that an automobile list in possession of a former employee was not a trade secret, because it is easily obtainable from other sources, and because the employee contributed substantially in building the list (Lincoln Towers Ins. Agency v. Farrell 1981).
In another case, a court prevented an ex-employee of a company from using a list, because it could not be easily obtained by other means and because the list also contained private information pertaining to the company (Courtesy Temporary Serv., Inc. v. Camacho 1990).
Information that CANNOT be protected by a Non-Disclosure Agreement
Information that can’t be fully protected by an NDA includes;
- Information the other party already has access to prior to signing the NDA.
- When the information is already in the public domain.
- If the information has been disclosed to the receiving party on a non-confidential basis by a third party other than the disclosing party.
- When the law, a court of competent jurisdiction, or a government agency acting under the law requires the information to be disclosed.
- If the disclosing party has authorized the receiving party to disclose the information.
- If the information has been received by reverse engineering: after the product is made available to the public, it can be dismantled by a third party and the secrets obtained (assuming there is proof that the information was actually obtained via reverse engineering).
Circumstances When the Information Can No Longer Be Protected by an NDA
Information can no longer be protected if:
- The disclosing party did not take reasonable precautions to protect the secrets.
- The trade secret can easily be obtained or ascertained from publicly available data.
- The trade secret is obtained via independent discovery.
- The trade secret is obtained lawfully via reverse engineering.
It is important to understand that while an NDA can protect certain types of confidential information, this form of contract does have it’s limitations. It is often very difficult to prove a breach of contract, and even when a breach of contract can be proved, it can take years in court to get a verdict.
In addition to a well-drafted Non-Disclosure Agreement, the best way to protect confidential information is to exercise prudence and discretion when it comes to divulging trade secrets to anyone.