Non-Disclosure Agreements (NDAs): Legal Risks and Best Practices
A non-disclosure agreement (NDA) is a legally binding contract that ensures sensitive information remains confidential. Non-disclosure agreements are also known as confidentiality agreements, confidentiality disclosure agreements, and non-disclosure contracts. However, the growing complexity of business relationships and the rising volume of confidential data being exchanged have highlighted the potential legal risks associated with NDAs. When an individual or organisation violates the terms of an NDA, they are subject to legal consequences as outlined in the agreement. The language used in an NDA is crucial for its enforceability. Ambiguities or overly broad terms can make the agreement difficult to enforce. Businesses must ensure that NDAs are meticulously drafted and implemented to serve their intended purpose without unintended legal pitfalls.
The Role of NDAs in Business Relationships
An NDA specifically focuses on an individual’s or organisation’s information privacy, which differs from other business contracts like service or sales agreements that focus on the terms and conditions of service or transactions. They’re used by organisations to protect their businesses or personal information and allow businesses to work together without fear of private information falling into the hands of competitors.
These agreements are typically used in a variety of business contexts, including:
• Business Partnerships: When two companies or individuals collaborate on a project, there is a natural exchange of proprietary information. NDAs ensure that this sensitive data is not disclosed to unauthorised third parties or used for competitive advantage.
• Intellectual Property (IP): When sharing ideas, inventions, or trade secrets with potential partners, investors, or employees, an NDA ensures that intellectual property is not misused or disclosed without your consent.
• Employee Relations: Employers regularly require employees, particularly those in positions with access to sensitive information, to sign NDAs. This helps protect trade secrets, customer lists, and internal strategies. In many business relationships, open communication is essential for collaboration and growth. An NDA creates a safe environment for sharing sensitive information.
• Maintaining competitive advantage: Confidential information, such as business plans, marketing strategies, and customer data, is often key to maintaining a competitive edge. An NDA helps prevent competitors from gaining access to this valuable information.
Legal Risks of NDAs
NDAs are essential legal tools for protecting confidentiality, they are not without their risks. Several legal issues can arise when these agreements are poorly drafted or misapplied:
1. Unenforceability Due to Ambiguity: One of the primary risks associated with NDAs is the potential for them to be deemed unenforceable due to vagueness or overly broad terms. To mitigate this risk, NDAs should specify the exact nature of the confidential information, such as trade secrets, business plans, or technical data, to ensure clarity and enforceability.
2. Breaching NDAs: Breaking a non-disclosure agreement usually leads to legal action. The aggrieved party can sue for damages or seek an injunction to prevent further disclosure of confidential information and this can result in a monetary fine, termination of employment, or the return of an asset.
3. Limiting transparency: NDAs can limit transparency and accountability, particularly in cases where the information being protected is related to public health and safety or government activity. In some cases, the use of NDAs can be seen as an attempt to cover up wrongdoing or to silence whistleblowers.
4. Conflict with Public Policy: NDAs that attempt to prevent individuals from disclosing information in violation of public policy or statutory duties, such as whistleblower protections, may be unenforceable. NDAs cannot override laws that promote transparency, safety, or the public good.
5. Jurisdictional Complications: When an NDA is used in cross-border transactions, the legal enforceability of the agreement may become complex. Different countries have varying laws regarding privacy, confidentiality, and intellectual property protection. A well-drafted NDA should take into account the jurisdictional nuances, ensuring that the agreement complies with applicable laws in all relevant regions and can be enforced across borders.
Best Practices for Structuring NDAs
Businesses must adopt best practices when drafting and executing NDAs to ensure that they are enforceable and protect sensitive information effectively. The following best practices can help companies avoid common pitfalls:
• Clearly Define Confidential Information: This is the most important element as it defines what is considered confidential. The NDA has to specify what is considered a trade secret but should not directly mention the secret. The more clearly the information is defined, the easier it will be to enforce the NDA.
• Non-Use Clause: The NDA should restrict more than just revealing secrets but also the use of such secrets. Usually, this clause prohibits the use of secrets learned for the duration of the project. This clause, however, shouldn’t prevent the other party from working on similar projects in the future. Some organisations may include a Non-Compete clause in this section, it is usually rejected by the other party since it hinders future employment.
• Third-Party Inclusion: Sometimes the party must include a third party to help complete the project. This section provides for such circumstances and binds the associate to the NDA. It is necessary to define who is considered an associate and what kind of information may be shared with such a party. There should also be a provision for the disclosing party to be notified if an associate will be involved.
• Duration: This provision spells out the period through which the NDA applies. Usually, this is between 2 and 5 years. If the duration is too long, most people will decline to sign it and if it is too short, the organization will have their secrets in the hands of competitors too quickly for them to have a strong foothold in the market.
• Return Provision: This clause requires that the recipient of secret information is expected to return or destroy particular documents on request from the provider. Such information needs to be defined in this section and the action to be taken must also be clearly stated. This can include digital documents, actual files, receipts as well as tools like seals, keys, and so on.
• Arbitration Provision: Time, money and stress can be saved if you have in place an option for settling disputes. You do not need to go to court every time there may be a problem. The arbitration provision spells out what procedures will be followed to resolve disagreements outside of the court, but laws governing this provision need to be included. Different jurisdictions may require certain procedures for arbitration.
• Audit Rights: Where applicable, a clause can be included that allows the provider of information the right to audit the way information and tools are being used by the other party. This is particularly for NDAs that involve the performance of duties on separate premises. An example is an outsourced firm creating software on behalf of another.
• Signatures: Simply reading through an NDA and saying you agree isn’t enough. For the document to be legally binding, both parties should append their signatures. It is more important that the party being provided with the secrets signs the NDA.
• Include Exclusions: NDAs should clearly state what is not considered confidential information. Common exclusions include information that is publicly available, already known to the recipient at the time of disclosure, or independently developed by the recipient without reference to the confidential information.
• Ensure Compliance with Local and International Laws: When drafting NDAs, companies should consider the applicable laws in their jurisdiction as well as the laws governing any international parties involved. This can help mitigate the risks associated with conflicts between local laws and international privacy standards, such as those found in the General Data Protection Regulation (GDPR) in Europe.
• Incorporate Enforcement Provisions: To ensure that the NDA is enforceable, businesses should include provisions that specify how disputes will be handled, including the choice of law, venue for dispute resolution, and potential remedies for breaches of confidentiality. This makes it easier to take legal action if necessary.
Conclusion
Non-Disclosure Agreements (NDAs) have emerged as a cornerstone tool in safeguarding confidentiality. However, to avoid unenforceability, ambiguity and other legal risks, NDAs must be carefully drafted with clear and precise language. By defining confidential information, limiting the scope and duration, addressing ownership, and ensuring compliance with legal requirements, businesses can use NDAs effectively to protect their proprietary information and maintain the integrity of their business relationships. As the legal landscape evolves, organizations must remain vigilant and regularly review and update their NDA practices to align with best practices and regulatory changes.
