What Is a Non-Disclosure Agreement?

A nondisclosure agreement or NDA creates a legal obligation to privacy and compels those who agree to keep any specified information top-secret or secured.

NDAs are common in many business settings, as they provide one of the most effective way to protect trade secrets and other confidential information. Information commonly protected by NDAs might include software technology for a new product, client information, sales and marketing plans, or a unique manufacturing process. Using a nondisclosure agreement means your secrets will stay safe, and if not, you’ll have legal recourse and might even be able to sue for damages.

What’s an NDA? 

In its most basic form, a nondisclosure agreement is a legally enforceable contract that creates a confidential relationship between a person who holds some kind of trade secret and a person to whom the secret will be disclosed.

Confidentiality agreements typically serve three key functions:

1. NDAs protect sensitive information. By signing an NDA, participants promise to not divulge or release information shared with them by the other people involved. If the information is leaked, the injured party can claim breach of contract.
2. In the case of new product or concept development, a confidentiality agreement can help the inventor keep patent rights. In many cases, public disclosure of a new invention can void patent rights. A properly drafted NDA can help the original creator hold onto the rights to a product or idea.
3. Confidentiality agreements and NDAs expressly outline what information is protected and what’s not. In many cases, the agreement serves as a document that classifies exclusive and confidential information.

The type of information covered by an NDA is virtually unlimited. In fact, any knowledge exchanged between those involved can be considered confidential. Think test results, customer lists, software, passwords, system specifications and other data. While this list isn’t exhaustive, it might help you think of other instances of protected information.

Elements of an NDA

Regardless of its function or the information it protects, NDAs should contain a few specific parts: Definitions and exclusions of confidential information; obligations from all involved people or parties; and time periods.

Definitions of confidential information spell out the categories or types of information covered by the agreement. This specific element serves to establish the rules-or subject/consideration-of the contract without actually releasing the precise information. For example, an NDA for an exclusive designer’s clothing boutique might include a statement such as this: ‘Confidential information includes customer lists and purchase history, credit and financial information, innovative processes, inventory and sales figures.’

At the same time, nondisclosure agreements often exclude some information from protection. Exclusions might comprise information already considered common knowledge or data collected before the agreement was signed.

Additionally, NDAs explicitly spell out that the person receiving the information is to keep it secret and limit its use. This means you can’t breach the agreement, encourage others to breach it, or allow others to access the confidential information through improper or unconventional methods. For example, if a designer from a computer company leaves a gadget prototype at a bar where it’s discovered by a technology reporter, the designer would likely be in breach of the NDA he signed when he took the job.

Time periods are also commonly addressed in NDAs and usually require that the party receiving the information stays mum for a number of years. This specific information is usually up for negotiation.

When might an NDA be useful?

Nondisclosure and confidentiality agreements are quite common in today’s business world. Information protected by attorney-client privilege, etc. is basically covered by an encompassing nondisclosure agreement.

Other cases in which confidential information might be protected through an NDA can include:

• Business models to be presented to a venture group for possible funding
• Information about clients or customers for a specific company
• Lab workers who have access to test results before patients

NDAs are an almost surefire way to confirm that confidential information stays protected in a variety of situations. It’s important to be aware how these legal agreements work before signing or creating a document, as being well informed can help you make the best legal decisions now and down the road.