Non-Disclosure Agreements—A Complete NDA Guide

What is a Non-Disclosure Agreement (NDA)?

A Non-Disclosure Agreement (NDA) is a legally binding contract establishing a confidential relationship between parties. Well-crafted NDAs ensure that information shared between parties remains private and is only shared with explicit consent. They are used by individuals and businesses to protect sensitive information, including:

• Trade secrets
• Proprietary data
• Business strategies
• Employment terms
• Financial details
• Other confidential information

NDAs may be unilateral, where only one party is required to keep the information private, or mutual, which requires that both parties protect each other’s confidential information. A multilateral NDA involves three or more parties agreeing to protect each other’s confidential information and is typically used when collaborating and sharing sensitive information.

The use of NDAs is common in various enterprises, including:

• Tech companies utilize NDAs when sharing proprietary technology or collaborating on new inventions or trade secrets
• Independent contractors may be asked to sign NDAs to protect sensitive details about upcoming projects, prevent leaks, and protect intellectual property
• Many in the healthcare sector are required to sign NDAs to protect sensitive health data or comply with regulations like HIPAA
• NDAs act as a safeguard to prevent the premature disclosure of proprietary information and research findings in R&D
• Startups use NDAs when pitching to investors or collaborating with partners to protect their innovative ideas and plans

An NDA commonly accompanies employment agreements. As an example of its importance, imagine if high-level executives could freely discuss their payment, bonuses, paid time off, and other employment terms. At an executive level, each individual is expected to negotiate their terms. However, a business would be handicapped if each new executive knew the terms provided to an existing executive.

Why are NDAs Important?

Non-disclosure agreements are a frontline tool allowing entities to safeguard private data. They provide a legal shield and promote trust between parties engaged in collaboration or negotiations. When parties arrive at the table, they can openly exchange ideas and knowledge, knowing that their private information will be protected, which provides a sense of security and reassurance.

NDAs outline what information is considered confidential and the respective obligations of the involved parties. It is important to initiate an NDA early in the relationship because, without one, there is little expectation of privacy. Too often, parties enter preliminary discussions before signing an NDA. Although an NDA can be drafted to be retroactive, it may not be able to cover and control information that was disclosed to others before the NDA was signed. Having an NDA in place from the beginning can help prevent misunderstandings and ensure everyone is on the same page.

NDAs can offer crucial financial protection against the consequences of leaked sensitive information. The following is an example from mergers and acquisitions that outline why NDAs are essential.

ABC Company enters negotiations for a potential merger, requiring them to share sensitive financial data, strategies, and proprietary technology. If the merger fails in negotiations without NDAs in play, the other party could leverage the information it has acquired to damage ABC Company. They could also provide that information to direct competitors, causing substantial financial loss to ABC Company.

Key Elements of a Non-Disclosure Agreement (NDA)

There are essential elements that should be included in an NDA to ensure they are effective, powerful, enforceable risk mitigation tools. These elements include:

• The names and addresses of all parties involved, including the disclosing and receiving parties and any relevant third parties
• Define and clarify what information is considered confidential and outline guidelines for handling it
• An NDA should include each party’s obligations regarding confidential information and the consequences of breaches, including financial penalties or legal injunctions
• The document should specify the scope of protected information
• State the duration of the NDA
• List exclusions of information not covered under the NDA, such as knowledge already in the public domain
• Outline the potential penalties for breaching the NDA

One of the most common mistakes when crafting an NDA is using vague language, such as “proprietary information.” Instead, the NDA should clearly define what is considered confidential information. This emphasis on clear and specific language will ensure that the parties understand the terms of the agreement.

What Happens if You Break an NDA

Breaching an NDA can have serious repercussions, including lengthy and expensive lawsuits that impose emotional and financial burdens on both parties. Below, we’ll explore a lawsuit, Garda U.S.A., Inc. v. Sun Capital Partners, Inc., N.Y. Misc. 2023 LEXIS 3641 (N.Y. City., July 7, 2023), that resulted from one party breaking an NDA.

Garda, a security services company, was negotiating to acquire SOS, another security services company, from Sun Capital Partners, which held a controlling interest in SOS. Garda claimed that SUN disclosed negotiation details to other buyers in violation of their NDA, which enabled a competitor to outbid them. The Court ruled that Garda had no claim because they had also breached the NDA by sharing confidential information with potential financing sources not covered under the agreement. Sun knew that Garda was sharing the information in a quest for financing and had no objections. However, Sun never formally waived the confidentiality terms of the NDA.

This case highlights why it is essential to include specific language in an NDA, including exceptions that clearly state what information can be released to who in particular circumstances. As a result of Garda’s breach, despite Sun’s acceptance, Garda lost the ability to recover damages from Sun Capital Partners.

Enforcing an NDA can present challenges. Language that is too broad or information that becomes public presents problems, as does the lack of clear and specific terms. NDAs are most effective when the information being protected is clearly defined. Jurisdictional awareness is also crucial, as failure to understand the laws governing NDAs across different jurisdictions can render them unenforceable.

How to Use an NDA Effectively

Learning how to use an NDA effectively can improve enforceability, increase protection, and protect confidential information responsibly.

Best NDA practices for businesses and individuals

1. Specify the scope of the NDA by using clear and specific language defining confidential information.
2. Limit the duration of the NDA by setting a reasonable timeline for how long the confidentiality obligations last. While indefinite NDAs exist, they can be hard to enforce.
3. Identify the parties bound by the NDA, including the names of the individuals or entities involved.
4. Define the circumstances under which the information may be disclosed, such as legal requirements or financial institutions needing access to the information, as in the example above.
5. Utilize simple, straightforward language without legal jargon. The goal is for all parties to understand the terms of the agreement.

Training employees and stakeholders about the importance of confidentiality can help avoid accidental disclosures.

Scenarios where NDAs may not be enforceable

Numerous scenarios can result in an NDA being unenforceable. Examples include:

• Public interest disclosures—NDAs are often unenforceable if the disclosed information involves illegal activities or poses a risk to public safety
• If the information becomes publicly accessible, the NDA loses its effectiveness
• NDAs that use vague or ambiguous language can be challenged and may be deemed unenforceable
• NDAs must identify confidential information. General terms that lack specificity may not hold up in court
• If the NDA does not specify a reasonable duration of confidentiality, it may be considered unenforceable
• New agreements made after the NDA is signed that contradict or nullify the information in the NDA could render it unenforceable

OneNDA & BonTerms

OneNDA presents a workflow automation platform with a standardized non-disclosure agreement. While this NDA may serve its purpose of providing a fast, convenient NDA, the platform suggests that each user evaluate whether the NDA is appropriate for them. NDAs serve as risk mitigation tools, and the formula used by OneNDA may not be suitable for every situation.

Another option is Bonterms, a negotiation platform that offers templates for standard contract agreements, including NDAs. BonTerms’ NDA fulfills the standard requirements but relies on a cover page to outline specific terms such as duration and applicable state laws.

Legal Tech Solutions for NDA Management

Legal technology solutions have boomed over the last few years, especially with the advent of GenAI, which is trained in the legal field. ContractPodAi delivers innovative legal tech solutions, including simplifying the creation, tracking, and enforcement of NDAs. Leah is designed exclusively for legal and compliance issues, which can help you craft a non-disclosure agreement that meets best practices standards while solely customized for your needs.

A January 2024 poll by Gartner reveals that interest in GenAI is still high, with nearly two-thirds of organizations implementing it across various business units. This marks a significant increase of 19 percentage points since September 2023.

Final Thoughts: NDAs for Better Protection

An NDA is a crucial tool for protecting sensitive information and preventing unauthorized sharing, which can safeguard intellectual property, trade secrets, and financial information. The terms, duration, and scope of NDAs are critical aspects that determine compliance and enforceability.

ContractPodAi helps organizations efficiently manage NDAs and other contracts by streamlining workflows, automating key processes, and ensuring compliance. With AI-driven contract management, you can reduce administrative burden, accelerate negotiations, and safeguard proprietary information—allowing your team to focus on higher-value work. Explore how ContractPodAi can simplify the contract process today.

FAQs About NDAs

1. How long does an NDA last?

NDAs have variable timeframes but most commonly remain in effect for one to five years. The term may be indefinite in limited instances, such as protecting highly sensitive trade information. However, clients should take care when using or signing NDAs with an indefinite term, as these can be harder to enforce. The duration of the NDA should be clearly outlined.

2. Can you refuse to sign an NDA?

Yes, you can refuse to sign an NDA if you’re uncomfortable with its terms or feel it imposes unreasonable restrictions. Carefully review any NDA and consider the obligations and restrictions to ensure they align with your interests. You can also negotiate the terms, such as duration, scope, or the definition of confidential information. Consider seeking legal advice if you’re unsure of the agreement’s implications.

3. What to do if someone breaks your NDA

If a party to an NDA breaches the contract, you should act quickly to protect your interest. Document and collect evidence of the breach, and understand the remedies you can pursue as outlined in the NDA. Communication may solve the problem, so discuss the issue with the party involved. If that doesn’t resolve the issue, seek legal advice about pursuing remedies.