Non-Disclosure Agreements for Small Businesses
When it comes to protecting sensitive information for small business owners, there is no better document to use than a non-disclosure agreement (NDA). NDAs commonly cover confidential information such as new product development, customer lists, future business plans, pricing information, or pending litigation.
Learn what goes into an NDA, when to sign it, and business law consequences when someone breaks it below.
What Is a Non-Disclosure Agreement?
Non-disclosure agreements (NDAs) are legal contracts small businesses and individuals use to protect confidential information. The receiving party of the NDA cannot disclose that information. It's often called a confidentiality agreement. NDAs keep sensitive information between the receiving party and the disclosing party.
Types of confidential information you might find in an NDA include:
You can also use NDAs to protect business information, such as:
- Financial information
- Business partners
- Client lists
- Customer lists
- Vendor information
Breaking an NDA is a breach of contract and leaves the wrongdoer liable for damages.
When To Sign Non-Disclosure Agreements
NDAs are common in business deals because they create a confidential relationship. This allows potential investors or people looking to form a business relationship to speak freely. The parties share information without worrying that it will be passed on to competitors.
NDAs may also appear in employment agreements to keep employees from disclosing sensitive information to competitors. Since some NDAs and non-compete agreements can limit future employment and business opportunities, state and federal laws govern the agreements. Make sure to talk with an employment lawyer before signing any legal document with an NDA in it.
Understanding Non-Disclosure Agreements
NDAs are not always stand-alone legal documents. They are also included as clauses in non-compete agreements, employee agreements, or independent contractor agreements. Legal settlements also often include an NDA clause.
Types of NDAs
There are two types of NDAs often seen in business law:
- Mutual non-disclosure agreement: All parties agree to disclose sensitive information to each other. All parties agree to keep the information confidential.
- Unilateral non-disclosure agreement: One party discloses sensitive information to another who will keep it confidential. This is typically seen in mergers, employee agreements, and independent contractor agreements.
Typical NDA Template
- While NDAs can be detailed and unique, most agreements contain the following information:
- The names of the parties
- Party's obligations or what the purpose of this agreement is
- Specific information covered
- Types of information not covered
- Description of how the parties may use information
- The time period or length of the agreement
- State law that applies
- Who has the legal obligation to pay the attorney's fees in a dispute
- Severability clause
The NDA will label who the parties are. The person or small business trying to protect their information and giving the NDA is the disclosing party. The person or business being asked to protect the information and to sign the NDA is the receiving party.
In a breach of contract lawsuit, you may see the receiving party, who disclosed confidential information, listed as the disclosing party.
What Happens When a Court Orders Me To Produce NDA-Covered Information?
There are exclusions to a NDA. When a court orders you to produce covered information through a subpoena, you can disclose that information. However, make sure you read the fine print of your NDA.
Typically, the NDA states you can disclose the information to a court. You must notify the other party you intend to disclose it. Before sharing information, talk to a business attorney about your NDA and court documents.
When Are NDAs Unenforceable?
Not all NDAs are enforceable. It's important you know the laws in your state. Judges will not force parties to comply with an unenforceable agreement.
Some courts have specifically found NDAs to be unenforceable for the following reasons:
- The terms of the agreement are not specific to the parties or their industry. For example, the NDA is overly broad, burdensome, vague, or unreasonable.
- The party seeking to enforce the NDA disclosed the information to a third party. At that point, the information is no longer a trade secret or confidential.
- The information would have inevitably become public knowledge. The actions of the party make no difference.
In most cases, NDAs are enforceable when the terms of the agreement meet the general requirements of a legally binding contract. If a court finds the agreement unconscionable, criminal, in violation of public policy, made under duress, or the result of a mistake, it likely will not enforce the NDA.
What Happens When You Violate an NDA?
If one of the parties breaks an enforceable NDA, legal action from the other party often follows. Their lawsuit seeks financial damages and related costs to the breach or disclosure. Common claims made against those who violate NDAs include:
Of course, filing a lawsuit is only the first step. To win in court, the non-breaching party must prove that the other party violated the NDA and suffered damages due to that violation.
Questions About an NDA? Contact an Experienced Attorney Today
If you have been asked to sign an NDA or have questions about an existing agreement, contact an experienced local attorney to provide answers and guidance. The state and federal laws surrounding non-disclosure agreements are complex and often subject to change. Speaking with an attorney who focuses on NDA agreements can help you assess your options.
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