What Is an NDA? A Comprehensive Legal Guide for NDAs

Author:
- Attorney Tugce Barishan

What Is an NDA? A simplified Guide for NDAs

A Non-Disclosure Agreement (NDA) is a legally binding contract used to protect confidential/proprietary information, product designs or valuable assets from being shared with unwanted other parties without the permission of the original owner of the information. Alternative terms for NDAs are Confidentiality Agreements. NDAs or Confidentiality Agreements create trust between parties during or after the confidential or proprietary information is obtained, by creating contractual legal obligations in addition to the common practice. The scope, duration, and enforceability of NDAs differ, but they have to be reasonable because the main idea behind creating such protection is to prevent unwanted harm by means of sharing information. A well-drafted NDA balances protection without unfairly restricting the receiving party, which might cause unenforceability.

NDAs can be used to do many things. They can be used to protect Trade secrets, or to maintain competitive advantage, or even to prevent leaks of sensitive data during business negotiations or discussions, forming new partnerships, through employment or even certain negotiations.

How Does a Non-Disclosure Agreement Work? Legal Basics Explained

While contracting to protect sensitive information and valuable assets, parties implement variable safety measures like encryption, internal and external security tools or ex-post penalties to prevent parties from breaching these contractual obligations to mitigate the risk of data breaches. Parties build up contractual obligations in addition to legal regulations.

Because companies operate under the guidance of the board of directors, they set strategic legal safety measures in cooperation with their legal team. They maintain proper records of all the steps and ensure compliance with legal requirements to provide effective decision-making process adhering to the specific requirements of the jurisdiction the activity is falling under. Some of these requirements include registering the company, providing the required information about books and board of directors and shareholders, or to obtain the required permits or licenses when required. Even keeping detailed information and records of such procedures can be evaluated as NDA requirements. Legal compliance ensures the proper formation, operation and completion of the targeted activities, preventing penalties or any other legal complications.

The legal basis for NDAs in the United States falls within the scope of Contracts Law. The NDA should meet all the requirements of Contract Law principles, Uniform Trade Secrets Act (UTSA), Defend Trade Secrets Act (DTSA) and must not also be against public safety and regulations.

A valid NDA must meet the basic requirements of contract formation: which are offer and acceptance, which means willful acceptance of the confidentiality terms offered by all parties, and consideration (usually the exchange of information, employment, or access to resources and the valuable assets). The offer, acceptance and all the related information must be clear and well defined. Parties should have a good understanding of what is defined as confidential and they are required to abstain from sharing, including all written, verbal, electronic, or visual information.

Scope and duration of this obligation can restrict personal gain, disclosure to third parties, or even limitation of use to specific purposes. Typically NDAs define the confidentiality duty for 2–5 years, but in some cases, especially with trade secrets, indefinite duration may also be allowed.

Information that is already known to the public, that is lawfully obtained from another source, or independently developed by the recipient are excluded from NDAs and if the information is required by law, for example if subpoenaed by courts, can also be excluded.

The NDAs should also specify the governing law and where the possible disputes will be resolved (arbitration, court locations etc). While NDAs are primarily governed by state contract law, when interacted with other laws it can fall within the scope of Federal laws. Defend Trade Secrets Act (DTSA), for example, gives federal protection to trade secrets and allows federal lawsuits for misappropriation and Uniform Trade Secrets Act (UTSA) is adopted in most states to protect trade secrets and define misappropriation.

Mutual vs. Unilateral NDA: What You Need to Know Before Signing

NDAs can be unilateral, mutual or multilateral. If the information is disclosed by one party only then it is referred to as a Unilateral NDA. Employer to employee can be an example to this, but when both parties exchange confidential information (e.g., during M&A negotiations) then this is called a mutual NDA. When three or more parties are involved (less common, mostly used in complex transactions like mergers and acquisitions) then this is called a multilateral NDA. Once the legal requirements are met parties are bound with the contracts and according to the uses of the NDA, either employment related consulting agreements, vendor–supplier relationship, investment discussions or even license-based parties may be subject to legal consequences.

The NDA should also clearly state what happens if NDA is breached. There can be Injunctive relief (court orders to stop disclosure), Monetary damages, compensations, Liquidated damages (pre-agreed penalties) and all the legal and attorney’s fees.

Conclusion

In conclusion, Non-Disclosure Agreements (Confidentiality Agreements) constitute an essential legal tool in any transaction or relationship in which the protection of confidential or proprietary information is crucial. These agreements safeguard valuable assets, help navigate through the procedure, preserve competitive advantage, and ensure that sensitive materials are used solely for authorized and intended purposes. Accordingly, parties should carefully assess their legal obligations, the nature of the business relationship, and the specific protections needed, while giving due consideration to the scope, duration, and enforceability of the confidentiality provisions by consulting legal counsel. By executing an NDA that reflects the specific requirements tailored to the situation, the parties affirm their mutual intent to maintain confidentiality and to be bound by the terms and remedies set forth herein, including any injunctive relief or damages available under applicable law and the contract.

Legal Disclaimer

This article is for informational purposes only and does not constitute legal advice. Parties should seek independent legal counsel before drafting, reviewing, or signing any Non-Disclosure Agreement.