Many businesses rely on unique products, services or methods for their success, and sharing such knowledge poses a high level of risk. Mutual trust is not enough to protect an entrepreneur or a company from the theft of information. However, solid legal protection can be provided through contract law. A confidentiality agreement, also known as a non-disclosure agreement (NDA), provides for penalties should the trust of employees or contractors be broken.
What Is a Confidentiality Agreement?
An NDA is a simple contract that can be used to protect the proprietary ideas of an individual or business. Prior to disclosing any of the pertinent information, a contract can be written stating that the signer agrees not to discuss it with anyone else. This allows businesses to share sensitive information with employees, new business partners, consultants and vendors without having to worry about it being exposed to competitors or the public. While any information can be the subject of an NDA, the following types of information are commonly specified in these contracts:
• Trade secrets
• Chemical formulas
• Business plans
• Business data
• Client or customer information
Types of Confidentiality Agreements
While the basics of NDAs are very similar, several specific types have been developed by the legal community to facilitate the sharing of different types of information with various people. The most common type of NDA is for employees. Although the confidentiality of company information is implied by employment, businesses have greater leverage in court when an NDA is in writing. For an even greater advantage in court, it is best to name the specific employee in the contract and state exactly what is to be kept confidential. Other types of NDAs include the following:
• General NDA – This is used when a business is not quite sure what information is going to be shared during the course of a commercial relationship.
• Precedent agreement – This type of NDA is used when one company buys another or when two companies merge. Before the terms of the merger or acquisition are set, business data is usually shared and analyzed. The contract protects the company if a deal cannot be reached.
• Two-way NDA – Most NDAs are one-way agreements. However, a two-way NDA allows both parties to share confidential information with each other.
How to Prepare an NDA
It is possible for individuals and businesses to write and execute an NDA without a lawyer, but these agreements are considered too important to get wrong. An experienced contract attorney will know exactly what to include in the agreement and how it should be worded. Some people try to cut corners by using a generic template for their confidentiality contracts, but these are often too vague to provide adequate protection. At the minimum, the contract should specify the following information:
• Acceptable use of the information
• Specific restrictions for use of the information
• A clause specifying that the business owner retains all intellectual property rights pertaining to the information
• A clause protecting the information from being copied or otherwise retained
• Penalties for violating the contract
Confidentiality agreements can be integral to the success of a business, but it must be noted that these contracts cannot protect information that is already in the public domain.