A non disclosure agreement is a legal contract in which the parties involved agree to keep the information included private. This type of contract creates a confidential relationship between the parties, and protects the confidential or proprietary information outlined in the agreement, as breaching a non disclosure agreement generally subjects the party to severe civil penalties. To explore this concept, consider the following non disclosure agreement definition.
Definition of Non Disclosure Agreement
- A contract in which one or more parties promise to keep information confidential, and not disclose it to any other party without proper authorization.
What is a Non Disclosure Agreement
A non disclosure agreement is a legal contract used to protect information that must be shared by one party to another in order to do business, but which must be kept confidential or secret. Also referred to as an “NDA,” “confidentiality agreement,” or “proprietary information agreement,” such a contract outlines the nature of the confidential information, without disclosing it specifically. The contract restricts one party involved from sharing the other party’s information with outside parties without first having proper authorization.
NDAs are most commonly used in businesses when the need to establish a confidential relationship with employees or contractors arises. Such information may include trade secrets, proprietary information, client lists, database information, or any other information considered to be vital to the business.
Example of Non Disclosure Agreement Situation
Richard is hired on as a chemist at a high-tech pharmacological laboratory. The research at the laboratory and the formulas used in its experiments and drugs are kept secret to prevent other drug companies from obtaining any of the information and duplicating their work. As a condition of employment, Richard is asked to sign a non disclosure agreement that requires him to keep any information pertaining to the work at the lab secret.
Once Richard signs the company’s non disclosure agreement, he is legally bound to keep all of their information private. Sharing any of the information could result, not only in Richard’s termination, but in a civil lawsuit for breach of contract.
Standard Non Disclosure Agreement
In general, a standard non disclosure agreement is used to ensure a party does not share confidential information that is disclosed to him in a business transaction, or in the course of his employment. A standard non disclosure agreement outlines the information that should be protected, which varies depending on the situation. The Small Business Association offers information for businesses, including the use of non disclosure agreements.
There are five basic elements that should be part of any standard non disclosure agreement. These include:
- The Confidential Information – The non disclosure agreement should clearly spell out the information that is to be protected, to prevent any misunderstanding or questions about the confidentiality. Not all information presented in a non disclosure agreement is confidential, as there is some standard information that pertains to most contracts. The actual confidential information is not usually listed in the agreement, only a description of the type of information.
- Exclusions from Confidential Information – Nearly all non disclosure agreements contain exclusions from the confidential information. In basic terms, the party has no duty to protect the information that is excluded from the agreement. By law, information discovered or created by the receiving party prior to any involvement with the disclosing party is excluded.
- Obligations and Duties – A non disclosure agreement should clearly state the duties and obligations of all parties. In most jurisdictions, a receiving party’s obligation is not limited to personally keeping the information confidential, but he cannot cause or induce others to acquire the information inappropriately either.
- Time Periods – Most non disclosure agreements have a time period for which they are enforceable. The agreement is normally in effect during the entire course of the parties’ involvement, such as the receiving party’s employment, plus a specified number of years following termination of employment or other relationship.
- Other Provisions – A non disclosure agreement may include provisions based on the needs of the company. These are often referred to as “boilerplate provisions,” and are included at the end of the contract. These provisions generally include which state’s laws govern the contract, how disputes will be handled, and consequences for failing to abide by the contract.
Employee Non Disclosure Agreement
Many companies use employee non disclosure agreements to protect the company’s information or trade secrets. An employee non disclosure agreement outlines the company’s policies regarding their proprietary information to which the employee has access during the course of his employment. This type of NDA prohibits employees from unauthorized use, and sharing, of such information as:
- Customer lists
- Financial information
- Business plans
- Business operations
- Business models
Before a person signs an employee non disclosure agreement, he should read it carefully and make sure he understands all of the information presented. Such agreements are often presented during the hiring process, and, if the employee refuses to sign, the employer can refuse to hire him. Some companies include the non disclosure agreement in the employee handbook.
Mutual Non Disclosure Agreement
When two or more parties plan to share confidential information, which is commonly done between business entities, or between entrepreneurs collaborating on a new project, a mutual non disclosure agreement protects the proprietary information of both parties. Also referred to as a “bilateral non disclosure agreement,” a mutual non disclosure agreement binds all parties to keep the specified information secret.
Example of Mutual Non Disclosure Agreement
Mary and George decide to go into business together, using Mary’s new clothing designs and George’s innovative production techniques to launch a new line of clothes. Both Mary and George want to protect their ideas, while sharing them in order to do business together. A mutual non disclosure agreement outlines the types of information each party brings to the business which must be kept confidential. It may also specify that any information created or discovered during the course of the business relationship must also be kept secret.
Breaching a Non Disclosure Agreement
When a person signs a non disclosure agreement, he has entered into a legally binding contract to keep the specified information private. Breaching a non disclosure agreement is a serious issue that can result in large-scale legal consequences. The laws governing confidential information and trade secrets are spelled out in the Uniform Trade Secrets Act. Information protected by law includes patterns, drawings, devices, programs, techniques, and much more.
When a disclosing party believes his non disclosure agreement has been breached, he should review the original contract to determine the remedies available to him, as well as any processes specified. The next step is investigating the breach to ensure there is concrete evidence to explain how the information was leaked. Once such evidence has been obtained, the non-breaching party may file a civil lawsuit against the breaching party.
Normally, the remedy available to the wronged party will be in the form of monetary damages awarded by the court, if his case is proven. In some cases, the court may issue an order barring the breaching party from further disclosing protected information. This is referred to as an “injunction.”
Example of Breach of Non Disclosure Agreement
In 2003, Wall Street trader Lauren Brenner was inspired to start a physical fitness studio based on military boot camp-style programs. She visited Fort Knox on several occasions to learn and design materials she would use. After studying the program, she opened Pure Power Boot Camp in New York City. The studio used military colors and obstacles designed to fit an indoor space.
The studio employed a unique method of payment by clientele, in which no membership fee was charged, but clients were referred to as “recruits” who signed up for returning “tours of duty.” Brenner hired former marines as instructors to drill the recruits, two of which became her most trusted employees.
The studio was successful from the beginning, and Brenner planned to expand the operation. Her employees signed an employee agreement which contained non disclosure, non compete, and non solicitation provisions. After opening a second location in Manhattan, Brenner invited one of the two top marines to become a partner. He refused, claiming he did not have the money to invest.
In reality, the two instructors were planning to open their own boot camp gym with investments from their girlfriends. They leased a space 15 blocks from Brenner’s facility, and stole her Pure Power studio documents from her office, and destroyed their own employee agreements. The stolen documents included Pure Power Bootcamp business plan, its startup information, and its client list.
Before she learned about the stolen documents, Brenner got into an argument with one of the drill instructors and fired him. The other drill instructor promptly quit. The men used the stolen documents to open their own Warrior Fitness Boot Camp, going to far as to email Pure Power’s clients in an attempt to get them to switch to their gym.
When Brenner learned the men had stolen her confidential information to form their own business, she filed a lawsuit seeking an injunction against the competing business. While the court denied her request for an injunction, finding that the non-compete agreement was not enforceable. The judge did order the men to return the stolen materials, and to alter their dress code for their clients.
The case was then taken to federal court where the parties eventually had a bench trial. This court found that the two men had clearly breached the non disclosure agreement portions of their employee contracts, and ordered the men to forfeit about $96,000 in salaries. It also awarded the men to pay punitive damages in the amount of $150,000 for their “egregious” betrayals of the plaintiff’s trust.
Related Legal Terms and Issues
- Civil lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
- Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
- Damages – A monetary award in compensation for a financial loss, loss of or damage to personal or real property, or an injury.
- Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
- Legally Binding – An agreement that is written and enforceable by law.
- Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself, as in a contract.
- Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.
- Punitive Damages – Money awarded to the injured party above and beyond their actual damages. Punitive damages may be awarded in cases where the defendant’s actions in regard to the case are malicious, or so reckless as to give a reasonable person pause. Punitive damages, also referred to as “exemplary damages,” are ordered for the purpose of punishing the wrongdoer for outrageous misconduct in a civil matter.