What Is a Non-Disclosure Agreement?

The non-disclosure agreement (NDA) – often referred to as a confidentiality agreement – governs the exchange of information between you and a third party. Companies, for example, use NDAs to keep revolutionary ideas and innovative products from falling into the hands of competitors. Research shows that over a third of the US workforce is bound by a non-disclosure agreement – so you’ve probably signed one or two before.

Even if you’re unsure what an NDA is, you might have heard about it in the news, movies, or the occasional celebrity scandal. This article will describe exactly what an NDA does, what it means to sign one, and how you can use it for your business. 

What Is a Non-Disclosure Agreement? 

A non-disclosure agreement (NDA) is a legally binding contract between you and another party (or parties) in which one party agrees to maintain the confidentiality of information the other party shares. In other words, an NDA to prevents sensitive information from falling into the wrong hands.

An NDA also defines what information is considered private and describes the terms of the confidential relationship. If you’re the recipient of this sensitive information, known as the receiving party, you’re bound by the terms of the NDA and may only use the information for the purpose outlined in the agreement. 

You might use non-disclosure agreements in business relationships, employment contracts, and during the sale or licensing of intellectual property.

What Is a Mutual Non-Disclosure Agreement?

A non-disclosure agreement can be unilateral, where only one party discloses confidential information, or bilateral, where both parties disclose. The latter is also known as a mutual non-disclosure agreement. In a mutual NDA, you both share sensitive information and are bound by the mutual terms of the agreement.

You’ll commonly encounter this type of NDA in business partnerships, joint ventures, mergers and acquisitions, and other collaborative relationships where both parties have confidential information they want to protect. 

Let’s say you run a tech startup. You might use a mutual NDA when your company wants to partner with another business and share trade secrets, financial information, or other sensitive information with each other. In this case, you would both sign a mutual NDA to protect each other’s confidential information during the negotiation process. 

How Long Do Non-Disclosure Agreements Last?

How long a non-disclosure agreement lasts depends on the terms of the contract. You can specify the NDA’s end date or let it run indefinitely. 

For example, you might sign an NDA that lasts for one, two, or five years – or until a specific event occurs, like when you destroy the confidential information. But an NDA can also be perpetual, meaning you are bound by it forever.

Ensure the duration of the NDA, whether you’re the disclosing or receiving party, is appropriate for the type of confidential information being shared. Tailor NDA’s duration to match the expected lifespan of the confidential information.

For instance, if a company discloses confidential product development plans that cover a three-month period only, a five-year NDA may be too long and restrictive. On the other hand, if the confidential information concerns trade secrets with a much longer lifespan, a one-year NDA may not provide the company with enough protection. 

What Happens If You Break a Non Disclosure Agreement?

If you break a non-disclosure agreement, you could face various legal consequences. If the disclosing party can prove that you, the receiving party, breached the NDA, you may face: 

1. Injunctions 

An injunction is a court order that requires you to stop doing a specific action, in this case using or disclosing confidential information. If you breach an NDA, a court may grant an injunction to prevent further harm to the party that’s protected by the agreement and preserve the integrity of the confidential information. 

To obtain an injunction, the disclosing party must show that they have a protectable interest and are likely to suffer irreparable harm if you continue to use the confidential information. 

2. Damages

The disclosing party may be entitled to compensation for any losses they suffered due to your breach of the NDA – which you will be responsible for. This compensation, also known as damages, can include direct (or quantifiable) losses, such as lost profits or revenue, and indirect losses, such as loss of business opportunities or reputational harm.

By holding you liable for these damages, the disclosing party will recoup what they lost and return to the position they would have been in had you not breached the NDA. Along with legal fees, this can be a significant financial burden. 

In some cases, the damages are agreed upon in advance in the NDA, while in other cases, a court may decide on them.

3. Reputation Damage

Breaching an NDA not only causes losses to the disclosing party, as discussed above, but also damages your personal and professional reputation. It can demonstrate a lack of integrity and reliability on your part. This can be particularly damaging in industries where trust and confidentiality are of the utmost importance, such as in the financial, legal, or medical fields.

Also, breaching an NDA can make it more difficult to establish new business relationships and secure new deals. Potential partners or clients may be wary of working with someone who has a history of violating confidentiality agreements and choose to work with a competitor instead.

4. Criminal Penalties

In some cases, particularly when it comes to trade secrets and classified knowledge, you could face criminal penalties for disclosing unauthorized confidential information. Penalties can range from fines to imprisonment, depending on the circumstances of the case. 

Criminal charges are generally reserved for the most serious cases. For example, if you steal trade secrets for commercial advantage, you might incur criminal charges under the Economic Espionage Act (EEA) in the United States, carrying a maximum penalty of 10 years in prison and a fine. 

All of the above consequences, from injunctions to criminal penalties, underline why it’s so important to take NDAs seriously and to ensure you understand your obligations and responsibilities before entering into such an agreement. 

It’s also important to note that the specific consequences of breaking an NDA depend on the terms of the agreement and the laws of the jurisdiction in which you signed the confidentiality agreement.

A Real-Life Example of Breaching a Non-Disclosure Agreement 

How are NDAs enforced in the real world? Recently, a court in California ruled that a software developer violated an NDA with their former employer by using confidential information to create a product he sold to a third party. 

The former employee started at the company in 2005, when he signed an NDA promising to keep anything he worked on confidential and not use any of the information without written permission. While working for said company, he built a successful labor compliance program. 

In 2011, the developer left the company and started his own business. Soon after, the former employer sued him for violating the NDA, claiming he had copied the company’s software and was selling products almost identical to those the company had created.

After comparing the software products, an expert witness concluded that the former employee had used trade secrets to create his own product. As a result, the NDA had been violated. 

However, the employer couldn’t prove they were harmed by the developer’s misuse of information, so they weren’t entitled to monetary damages. But since there was a breach of contract, the company may be allowed to prohibit the former employee from using the confidential information going forward (the case has not yet been concluded).  

What Makes a Non Disclosure Agreement Unenforceable?

Breaking a non-disclosure agreement could lead to disastrous consequences. However, even if two parties signed an NDA, that doesn’t always mean it will hold up in court. 

A non-disclosure agreement may be considered unenforceable under the following circumstances:

1. Illegality

An NDA cannot be enforced if the information it’s supposed to protect is illegal or against public policy. 

Suppose you, as a new employee, enter into an NDA with a company. Under the NDA, you agree not to disclose confidential information about the company’s illegal activities, like money laundering, insider trading, or fraud (okay, I might’ve watched too many episodes of White Collar). 

In that scenario, the NDA would not protect the company and you would be free to disclose the information without fear of legal consequences. So if you reveal your knowledge of these illegal happenings to the police, you wouldn’t be bound by the NDA or liable for any damages. 

2. Vagueness

If the terms of an NDA are too vague or indefinite, a court may consider it unenforceable.

For example, if a contractor enters into an NDA with a company, but the NDA doesn’t specify what information the company considers confidential or what activities they consider a breach of the contract, the NDA may be unenforceable. 

Without clear definitions of what constitutes confidential information, the contractor may not fully understand his duties under the agreement. In this case, a court may also find it difficult to determine whether the contractor has breached the NDA if the terms were vague. 

While this works in the contractor’s favor, it leaves the company without any legal remedy in the event of an actual breach. The lesson? NDAs need to include clear, concise, and specific definitions of the confidential information and the obligations of each signing party. 

3. Public Domain

If the “confidential” information is already in the public domain, a company or individual can’t use an NDA to restrict further dissemination.

Let’s say you sign an NDA with a company, agreeing not to disclose any personal information you learn about the CEO while working there. Later, a journalist publishes a newspaper article detailing the background and personal life of that CEO in a tell-all story. Now that the information is widely known, the NDA is no longer enforceable. 

If you were to further share this information with your friends or colleagues, you would no longer be bound by the NDA and wouldn’t be liable for any damages because the information is already in the public domain.

4. Unconscionable Terms

If the terms of an NDA are extremely one-sided or unfair, a court may consider it unenforceable.

For example, you’re asked to sign an NDA by a large corporation before participating in a focus group. The NDA requires you to keep the information discussed in the focus group confidential indefinitely and imposes severe penalties for any breach of the agreement, like a fine of $1,000,000. 

If you do share that confidential information, a court may decide the terms of the non-disclosure agreement were excessively one-sided and unreasonable. They might then declare it unenforceable on the grounds of it being unconscionable and unfair towards you. 

5. Unreasonable Scope

If the NDA is overly broad, courts may consider it unenforceable.

Suppose you’re asked to sign an NDA with a potential business partner, in which you agree to keep information about the company’s software confidential. But the NDA is written in such a way that it applies to all information about the company, including its product, services, and general business, regardless of whether it’s confidential or not. 

If a court determines that the scope of the NDA is overly broad and exceeds what’s reasonable to protect the company’s interests, such as restricting your ability to discuss information that’s necessary for the partnership to proceed, it may find the NDA to be unenforceable. 

6. Expiration

If the NDA has expired, it cannot be enforced. 

While this pretty much speaks for itself, here’s an example: A company enters an NDA with a consultant to protect confidential information shared during a project. The NDA is valid for two years, after which the restrictions would no longer be in effect.

If two years have passed and the consultant wants to use the information for their own purposes or share it with others, the company can no longer enforce the NDA, as the agreement has expired. 

7. Inadequate Consideration

An NDA is only valid if there is “consideration.” This means the person signing the confidentiality agreement needs to get something in return for their promise. If you receive inadequate consideration in exchange for agreeing to the NDA, a court may consider it unenforceable.

For instance, you’re asked to sign an NDA by your employer agreeing to keep their trade secrets confidential. But the employer doesn’t provide you any additional benefits, such as higher compensation or improved working conditions, in exchange for agreeing to the NDA. 

If a court determines that you, as the employee, didn’t receive adequate consideration in exchange for signing the NDA, it may rule the NDA unenforceable. This is because you need to receive something of value in return for keeping the information confidential. 

8. Prior Knowledge

A court may consider an NDA unenforceable if one party already knew the information before signing the NDA. 

Suppose a toy company is developing a new product and wants to keep the details of its design confidential. They enter into an NDA with a manufacturing company to ensure they won’t reveal the information to a competitor.

However, if it later comes to light that the manufacturing company was already aware of the toy design details before signing the agreement, the NDA may be unenforceable. Since they had prior knowledge of it, the NDA doesn’t prevent the manufacturing company from disclosing the confidential design to others.

9. Implied Covenant of Good Faith and Fair Dealing

Most courts in the US use the implied covenant of good faith and fair dealing, which requires every party in a contract to implement the agreement as intended. This means that if the NDA unreasonably restricts the recipient of the information or goes against what is considered fair and reasonable behavior, a court may decide that the NDA is invalid. 

Suppose you sign an NDA for an employer agreeing not to disclose any confidential information belonging to that company. However, the NDA also prohibits you from using any confidential information in your future job search, even if you don’t disclose it to any third party. In this case, a court may consider the NDA unenforceable due to violating the implied covenant of good faith and fair dealing, as it’s not a reasonable ask from the employer’s side.

While the above list covers a broad range of circumstances, the (un)enforceability of an NDA can vary depending on the specific laws and regulations in the place you signed it and the circumstances of the case.

What Should You Do If Asked to Sign a Non-Disclosure Agreement?

If you’re asked to sign a non-disclosure agreement, carefully review the terms and conditions first. An NDA is a legally binding document that limits your ability to share or use confidential information – and comes with real consequences if breached. So it’s crucial to understand the scope of the NDA and the obligations it imposes on you before you sign it. 

Also, when someone presents you with a non-disclosure agreement, you have the right to ask for additional time before signing. While it may be tempting to skim through the document, attorneys often recommend you take at least 72 hours to read through an NDA (or any other contract). If you have questions about the terms of the confidentiality agreement, seek the advice of a lawyer and review any outstanding concerns before signing it. 

Free Non Disclosure Agreement Template

Now that you know exactly what an NDA is and what it’s used for, you can download a free non-disclosure agreement template here (it’s a non-editable Google doc so make a copy). We recommend that you seek legal advice before using this NDA template as a binding contract. 

However, if you’re an Acquire customer, you can get peace of mind without the manual work. We now have an NDA builder directly inside of the Acquire workflow that automates the drafting, sending, and signing of NDAs. Buyers must sign an NDA with every access request, which helps sellers skip past the early admin to get straight to acquisition offers.

Happy NDA-ing! 

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