What is a non-disclosure agreement?

Learn more about the importance and limitations of a non-disclosure agreement or NDA. Read this article now

What is a non-disclosure agreement?
Contents
  1. What is a non-disclosure agreement?
  2. What are the different types of NDA?
  3. Is an NDA the same as a confidentiality agreement?
  4. What are the key elements of a non-disclosure agreement?
  5. What happens when an NDA has been breached?
  6. Is a non-disclosure agreement the answer?

With information now just a few clicks away, it is easy to lose track of keeping certain data confidential – especially with work. Employees and managers handle sensitive information daily and non-disclosure agreements really help to ensure things do not end up in a damaging lawsuit.

In this article, HRD aims to shed light on non-disclosure agreements, its key elements, usage, and what happens if the agreement has been breached. we encourage our normal HR professionals to pass this article along too employees in your workforce who have questions about non-disclosure agreements.

What is a non-disclosure agreement?

Just like non-compete agreements, an NDA is used a lot in businesses to protect the company and its workforce. A non-disclosure agreement, commonly known as an NDA, is a legal binding contract that ensures the parties involved are bound to keep certain information confidential. This means that all parties who signed have understood and agreed that sensitive information they receive will not be released to the public and will only be shared between the parties involved.

The contract helps create a unified and clear flow for sharing intellectual property, information, as well as formalize a relation between parties such as the employee and employer. It allows the parties to have a safe space to freely share and express certain data without the fear of information being leaked or sold.

The contract must clearly state the information that is to be kept confidential. Examples of private information that needs to be protected could be passwords, trade secrets, personal details of clients, company information, and unreleased inventions.

What are the different types of NDA?

A non-disclosure agreement can be created for different reasons, but its purpose remains the same. For employers to understand what kind of agreement they need, it is important to discuss the three types of NDA:

  1. Unilateral NDAs

A unilateral NDA, or one-way NDA, is an agreement that sees only one party disclosing confidential information to the other involving parties who agrees to keep it confidential. It is the most common type of agreement businesses use. There are four basic types of unilateral NDAs:

  • Employer-employee agreements: the agreement ensures employees do not leak or use specific company information outside of work. It is usually signed by employees once they are hired.
  • Seller-buyer agreements: restricts buyers from sharing confidential information they received during the purchase of the seller’s good or services. It usually limits the buyers from sharing information about the business operations, production, and intellectual property.
  • Company-contractor agreements: limits contractors from releasing private information they received while working for the company. The agreement protects the company from contractors using the information to reduce the competitive edge of the company.
  • Inventor-evaluator agreements: protects inventors from their works being plagiarized or stolen by an evaluator. The focus of the agreement is to protect the intellectual property of the inventor, especially If the invention remains unpatented.

Here's a link to a good NDA example that you can use at your workplace.

  1. Bilateral NDAs

It is also called mutual or two-way NDAs. This contract expects both or all parties to share and disclose sensitive information to each other. Common situations that use the bilateral NDA are when companies start new joint ventures, mergers and acquisitions, and any other actions that would see both parties having to share proprietary information. It is a vital part of deals and negotiations.

Here's a good example of a bilateral NDA from the UK government.

  1. Multilateral NDAs

Multilateral NDAs, also known as multiparty, is an agreement that is between three or more parties. In this set up, at least one party will get to disclose information while the others are expected to keep the newly acquired information private.

This type of confidentiality agreement is not as common as the first two, but it is very convenient as it eliminates the need for setting up multiple separate contracts for each party involved and allows the parties to review, implement, and disclose under one agreement that is visible to everyone involved.

Review this example of a multilateral NDA between an energy company and the University of California and Stanford.

Is an NDA the same as a confidentiality agreement?

A non-disclosure agreement goes by many other names as seen on the table below, but the most common alternative term would be confidentiality agreement.

Different names for a non-disclosure agreement

While the terms may be interchangeable, there is a slight difference between them. While they share the same goal of keeping certain information confidential, a confidentiality agreement generally ensures all parties keep information private while an NDA better suits situations that sees a specific party divulging classified information to the other parties involved.

A concrete example of a confidentiality agreement would be when a designer and manager have a joint project to collaborate and create a new product. The information shared between them would be protected by the confidentiality agreement. Meanwhile, marketing agencies would need employees to sign an NDA to ensure information the agency will provide, such as client details and upcoming projects, are kept a secret by the employee.

With this in mind, it is best for HR leaders and employers to treat these two terms as two different kinds of agreement when crafting a contract and to not used them interchangeably to avoid any misunderstandings with the parties involved.

What are the key elements of a non-disclosure agreement?

After understanding the different types of the contract, it is important to know the key elements that make up an NDA:

  1. Clear indication of the parties involved

The first and probably the most important factor that should be clear from the start are the parties involved in the confidentiality agreement. Their names, whether names of employees, investors, a team of manufacturers, or a company, must be clearly stated in the agreement as a participating party and who they will be interacting and sharing sensitive information with. HR leaders should take the time to see if there will be other external groups of people who would be affected by the agreement and whether they should be included in the contract.

  1. The role of the parties in the agreement

Once the parties are identified, their role in the agreement needs to be established. Will only one party be sharing the information? Who will be on the receiving end? Knowing the roles of each party helps map out the sharing of confidential information and can help build their roles of what is required of them in the agreement.

  1. The confidential information

HR leaders need to be able to define what is considered confidential information in the agreement. This section includes mentioning the general topic of the confidential information and enumerating the scope of the information that is deemed confidential in the agreement.

HR leaders need to also clarify how will the parties deem information being shared as confidential. For example, information shared through writing will only be deemed confidential or any means of communication, including oral conversations, is considered as confidential information. At the same time, the contract has to make sure the scope is fair for all sides and does not favor the protection of a specific party. It is important to specify the scope of confidential information for the parties to avoid breaching the NDA.

  1. The exclusions from the confidentiality responsibility

Just like any other contract, an NDA will have exclusions and boundaries from the obligations of handling confidential information. The exclusions and boundaries are set to help involved parties in certain scenarios where it would be too much of a burden for the other party to keep information private.

Examples of these scenarios are when the information is already publicly known before it was shared, the recipient of the information already knew about it through an external source who has no connection of the party disclosing the information, if the recipient party independently developed the information without the use of the disclosing party’s confidential information, and if a party has to disclose the sensitive information ordered by a legal court process.

  1. The term of the agreement

Usually, an NDA and the need to keep information confidential can last forever – but that isn’t always the case. There usually is a definite point and end to the confidentiality, especially when it has been quite some time since the information has been relevant or even used.

It is important to see how long it would take for the project, discussion, or whatever activity is taking place that causes the sharing of sensitive information. From there, HR leaders should consult with the parties involved and assess how long after that would they need to keep the information confidential.

Setting a definite and reasonable term of the agreement helps keep the parties accountable even after the information has been used. This unloads the pressure of keeping the information confidential once the data has been deemed irrelevant.

What happens when an NDA has been breached?

An NDA is considered a legally binding contract. In effect, when an NDA has been breached, whether the violation was intentional or not, there can be serious consequences that could lead to legal action against the violating party. 

The penalties can vary for different situations. It will depend on the severity of the breach, what penalties have been discussed in the agreement, and whether it has violated any state or federal laws governing it.

Is a non-disclosure agreement the answer?

While a non-disclosure agreement significantly helps in ensuring sensitive information of businesses, projects, finances, or client backgrounds, stay private. The aim of the contract is to protect the parties involved from any blackmail or misuse of information.

However, there are cases in which an NDA is not the solution. Employers cannot draw up a contract to stop parties from reporting a crime or any violation against someone’s rights. The contract cannot be used to:

  • Mislead someone;
  • Become a solution even when it is not needed;
  • Avoid addressing problems in the workplace;
  • Cover up misconduct; and to
  • Stop reports of discrimination, bullying, or sexual harassment.

Companies also cannot serve an NDA to an employee from whistleblowing against them.

For example, when an employee starts raising awareness about a company’s money laundering operations, a company cannot try to silence them by making them sign a non-disclosure agreement.

non disclosure agreement used against whistleblowers

While it may seem like a breeze to put up a non-disclosure agreement, HR leaders and employers need to take their time in researching and examining whether drawing up an agreement is the right course of action. It is also important to check whether the NDA can cause conflict with other agreements already in place and whether all clauses in the NDA do not cause issues and misinterpretation in the future.

Do you have any experience in dealing with an NDA? Talk to us about it in the comments section at the bottom.

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