Should Your Business Consider a Nondisclosure Agreement
The almighty nondisclosure agreement, NDA for short, is a legally binding document that affirms that a signing party will not disclose confidential information about a given product or business. NDAs make the news occasionally in connection to tech corporations like Apple or Microsoft when information about, or even a prototype of, a confidential company product leaks. But nondisclosure agreements are helpful for much more than protecting the next billion-dollar cell phone or operating system. Any business with trade secrets, patents, private industry information, or even just a list of clients or suppliers likely has confidential information worthy of an NDA.
If you have been considering drafting an NDA for use in your business, the short answer is that they rarely ever hurt businesses who use them. As to whether an NDA is truly necessary for your business, there isn’t a short answer for that one. Consider the following criteria to determine if drafting an NDA is the right choice for your small business.
What Does an NDA Actually Do?
A nondisclosure agreement gives a business legal precedent to seek damages or a cease-and-desist order if a signing party reveals confidential information they previously agreed not to. NDAs very specifically must apply to information that constitutes a trade secret, or a strategy that gives your business a signature advantage over its competition; this is why companies like Apple and Microsoft who regularly deal in cutting-edge or proprietary technology flutter down a waterfall of NDAs for quality assurance testers or anyone outside of research and development. NDAs do not apply to any information that can be proven as general knowledge or proven that the signing party knew previously to signing the agreement.
Two Types of NDAs
- Unilateral Nondisclosure Agreement: Easily the more common of the two types, unilateral nondisclosure agreements mark that signing parties must not disclose (as you might guess) confidential information they encounter while working with your business. In design and drafting companies, unilateral NDAs are often used to protect the confidentiality of blueprints that may have been drafted by an employee. In that same right, if an employee or a business partner helps develop any kind of proprietary system you would like to protect, this type of agreement would likely be beneficial.
- Mutual Nondisclosure Agreement: If your business is partnering with an adjacent company to make a new product or simply to discuss potential future business agreements, mutual nondisclosure agreements usually slap on the table before people even shake hands. In this case, both parties relevant to the NDA have information they would like to keep confidential.
When to Consider Using an NDA:
- Temps & Consultants: If anyone outside your primary team of staff and management will be interacting with trade secrets, it is very likely that an NDA could be beneficial to your business. Consultants and temporary employees are especially likely to require an NDA, as it is likely they could work with other companies in your field in the future. Since temps and consultants will likely need to understand proprietary trade secrets to do their jobs, protecting those secrets after contracts expire should be front-and-center for business owners. Having temps and consultants sign a unilateral NDA is a well-accepted practice in the corporate space and ought to be considered for small businesses who have any kind of exclusive or confidential information unique to their business.
- Partnering Businesses: If you have plans to partner with another business for even a short-term venture, a mutual NDA is a convenient way to assure both parties that neither business plans to use the partnership to breed an unfair advantage. This, of course, would mean that both businesses would sign near-identical mutual nondisclosure agreements. A sound agreement to respect each other’s secrets is also generally a great way to show mutual respect at the beginning of a partnership.
- Interviewees and Prospective Employees: It is very common for prospective employees and interviewees to sign unilateral nondisclosure agreements if they must answer questions that relate in some way to trade secrets. For example, if you are hiring someone for a new role in logistics, it is entirely reasonable that to see if the candidate is a good fit for your business you may have to explain how your inventory and stock is managed; this may constitute a trade secret under specific circumstances. Another example is if your business is looking to hire a brand ambassador for a yet-unreleased product.
- Venture Capitalists and Investors: A nightmare scenario for small business owners seeking investors and funding is pitching an idea only to have your prospective investors turn around and develop your idea on their own. Nondisclosure agreements protect the integrity of your intellectual property rights in a similar way to patent law. If those investors or venture capitalists sign a unilateral NDA before your pitch, there is a much lower chance that your ideas or prototypes could be stolen.
Drafting an NDA
NDAs generally should pertain to specific trade secrets or ideas, as generalized NDAs are much more difficult to argue the legitimacy of in court. In general, they should be written by a legal professional to ensure you meet any local and federal guidelines around them as well as to insulate you from loopholes. Being that if an NDA does go to court, it is likely that both parties will be represented by lawyers already, it pays to have someone trained and practiced in the field of official documents on-hand. But if you plan to write your own NDA, consider these common clauses:
- Specifically list all parties involved in the agreement, your business, and the party witness to confidential information. This is important, as if the party is not specifically listed it is possible, they could argue the NDA is too broad to be enforceable.
- Itemize and define each confidential item or trade secret. Once again, it pays to be detailed; this is the most likely spot for loopholes to spin out.
- If you plan to discuss trade secrets orally, be certain to note this specifically in your NDA
- Note the length of the disclosure period, or how long parties must wait before they can use your then-confidential information freely
- Be sure also to explain in specific terms what the signing party’s obligations are after they sign the agreement i.e.: They must not disclose to any third party or use specified ideas or trade secrets in order to further their own enterprise.
The Best Ideas are Worth Protecting
Since NDAs are so popular in the upper corporate land of source codes and patents, small businesses may feel that their ideas and trade secrets aren’t worthy of NDAs; that is usually not true. If your business is proud of your client lists, recipes, delivery routes, supplier relationships or anything that makes your business boom, it is worth protecting. Businesses that treat their ideas and practices with gravitas are often rewarded for it, while those who don’t recognize the sanctity of their own success may see their secret sauce become Heinz Ketchup overnight.