Proper Use of Non-Disclosure Agreements
Non-disclosure agreements (commonly referred to as “NDAs”) are very common in today’s business environment, as protecting company secrets and confidential information are often vital in maintaining competitive advantages. Whether these agreements are intended to protect customer lists, secret formulas, future expansion plans, or other valuable information of a company, NDAs are often incredibly important, and quite unfortunately, they are often misunderstood and misused.
With that said, I see a lot of non-disclosure agreements, some which are quite good, and some which are just plain terrible. Not all NDAs are created equal, and its vital that your company put agreements in place that properly protect its confidential information. It may be tempting to perform a Google search, download somebody else’s NDA, and slap your name on it. However, while this may work in some instances, there are just as many circumstances where this type of a decision will leave your company vulnerable. To ensure that your confidential information is adequately protected, an NDA should be drafted to fit both the needs of your company and the specifics of the particular circumstances and information being protected. For example, an NDA between a tech company and its employees will undoubtedly differ from an NDA between a design firm and a prospective contract manufacturer.
Regardless of how well drafted an NDA may be, it will only be of help to you if you understand its contents and how to use it correctly. It is vital to understand that an NDA is a contract, typically enforceable only among the parties executing the agreement – unlike a patent, an NDA will not protect your ideas from the outside world. In addition, an NDA will typically contain a number of limitations, both by its own terms and by law. Failure to understand these limitations often leads business people overvalue an NDA and rely upon protections that simply do not exist. For example, an NDA will typically not protect a disclosing party where the information is subsequently gained from another source, or where the information is readily available to the public. Obviously, failing to understand these types of limitations can lead to business decisions based upon unrealistic expectations.
Use of an NDA must also be appropriate based on the business context. Often, I see start-ups attempting to use NDAs whenever they discuss anything with anybody. While I admire their zeal and the importance they place upon protecting their ideas, overuse of NDAs can make you appear like you don’t understand business realities. While getting everybody you encounter to sign an NDA would be nice, when beating down doors and dealing with established players, many business people simplywill not execute an NDA. Typically, you need to give somebody a reason to want to sign an NDA, which can be difficult when the reason is the information you’re seeking to protect. To be clear, the last thing I want to do is chill entrepreneurs from using NDAs – its vital to protect your company’s valuable confidential information. With that said, you should really think through the context, perception, and value of requesting execution of an NDA. Don’t unthinkingly just pull an NDA out of your drawer and demand its execution, rather, be thoughtful and strategic in use of an NDA.
Finally, it should be emphasized that while a well-crafted, properly used NDA can often be vital in protecting your confidential information, it cannot replace sound business judgement in terms of what you disclose and who you disclose it to. While an NDA will often provide additional contractual protections and remedies, disclosure of confidential to the wrong person can be devastating regardless of whether an NDA is in place. Enforcement issues and business realities can limit the real world effectiveness of an NDA, and as such, the best way to protect your company’s confidential information is to be careful with what information you share, and who you share it with.
With that in mind, engaging an attorney to prepare an NDA for your company, and understanding how the NDA should be used in your business is something every business should make a prioroty. Doing so should not come at a high cost, and the peace of mind associated with understanding how to best protect your company’s confidential information will certainly be worth it.