Everything small business owners need to know about non-disclosure agreements

If you're planning to share confidential information with a third-party, you must do it in a way that ensures they respect the sensitive intelligence you've made them privy to. One of the key protective measures of achieving the necessary secrecy is through a non-disclosure agreement (NDA).

For those unfamiliar with NDAs, we've created this detailed guide on what you need to know – from the different types of non-disclosure agreements and the key elements to include, to what happens when someone breaches an agreement.

Quick navigation:

• What is a non-disclosure agreement?
• How do non-disclosure agreements work?
• What are the different types of non-disclosure agreements?
• What are the key elements of a non-disclosure agreement?
• What happens if someone breaches a non-disclosure agreement?

What is a non-disclosure agreement?

To maintain a competitive advantage, businesses must keep their projects, ideas and intellectual property under wraps. Likewise, start-up companies with new, profitable ideas can only succeed if they’re kept a secret.

A non-disclosure agreement is a document in which a person or business asks the subject of the NDA (which is another person or business) not to share confidential information shared with them. They can also be called:

• Confidentiality agreement
• Confidential disclosure agreement
• Business disclosure agreement
• Proprietary information agreement
• Business secrecy agreement

Whatever it may be called, an NDA is still a written document where one or both parties agree to keep specific information confidential.

How do non-disclosure agreements work?

NDAs are used when a business encloses confidential information to potential investors, creditors, clients or suppliers. Doing so puts the confidentiality in writing, while each party's signature ensures trust, and helps to deter theft of intellectual property. The exact nature of the confidential information will be detailed in the NDA itself, but some typical situations where NDAs are used include:

• Presenting an invention or business idea to a potential partner, investor or distributor
• Sharing financial, marketing and other information with a prospective buyer of your business
• Showing a new product or piece of technology to a prospective buyer
• Allowing employees access to confidential and proprietary information

Some NDAs bind a person or business to secrecy for an indefinite period, ensuring the signer will, at no point, divulge the confidential information contained within. Without such agreements, information can be freely made public – whether accidentally or maliciously.

Any penalties for breaking an NDA are laid out in the agreement and may include damages in the form of lost profits or criminal charges.

What are the different types of non-disclosure agreements?

There are two main types of non-disclosure agreements: unilateral and mutual.

1. Unilateral agreement

A contract that stipulates one party to the agreement; the majority of NDAs fall under this category. Though such agreements aim to protect a business' trade secrets, they may also protect the copyright for information created as a result of an employee's research.

Here's an example: researchers in the private sector and professors at research universities are often required to sign NDAs that give the rights to any research they conduct to the business or university that supports them.

2. Mutual non-disclosure agreement

This type of NDA is executed between businesses engaged in a joint venture that involves sharing proprietary information. So, if one manufacturer knows of a new piece of technology being used in a certain product, they'll be required to keep such knowledge a secret.

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

You may think that NDAs are sprawling documents filled with legalese, but actually, you only need a few pages to cover the relevant points. Typically, the key elements of a non-disclosure agreement include the following:

• Identification of the parties: Typically, a straightforward description of the people or organisations that the agreement applies to.
  
  
• Definition of what is deemed to be confidential: A definition of what confidential information means. The nature of confidential information being clearly defined is crucial; does it apply to all information or only that which is marked in writing as "confidential"? Additionally, can oral information be deemed confidential?

As a disclosing party, you want this definition to be as broad as possible to make sure the other side doesn't find a loophole and start revealing valuable secrets.

On the other hand, if you are the recipient of the information, you want to make sure the information you're supposed to keep secret is clearly identified, so you know what you can and can't use.

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• The scope of confidentiality obligation by the receiving party: A two-part obligation on the receiver that forms the core of the NDA. The first part relates to keeping the confidential information a secret; this means the recipient has to take reasonable steps to not let others access it. The second part relates to not using the confidential information for their own ends. If the scope of the NDA is broad enough, you can sue for damages or stop the recipients if they breach either terms.
  
  
• The exclusions from confidential treatment: Every NDA has exclusions from the obligations of the receiving party. Such exclusions are intended to address situations that would be too unfair for the recipients to keep secret.

• Terms of the agreement: How long should the NDA last? It's been argued that an NDA should last forever, but if you're the recipient of the confidential information, you may want to insist on a definite term when the agreement ends. After a certain number of years, most information becomes useless, and the cost of ensuring confidentiality remains in place "forever" is certainly costly.

If you agree to a term, then what is considered a reasonable amount of time? It's largely dependent on the industry and the type of information that's conveyed. It may be the case that a few years will suffice since tech changes so rapidly, it may end up rendering the information outdated anyway.

However long the terms are, the NDA needs to say that, even if the term has ended, the disclosing party isn't giving up any other rights that it may have under copyright, patent or other intellectual property laws.

What happens if someone breaches a non-disclosure agreement?

Whatever the specifics are in the case that an NDA is breached, there are a few things you can do in the aftermath:

Review the original document

Usually, the terms of what happens in the event of a breach are written into the NDA itself.

Investigate the theft or breach

If the information got out, you'll need hard evidence showing how it happened, which is a crucial step. If you can't prove your case, then you'll be responsible for the legal fees incurred by both parties under the terms laid out in the NDA.

When collecting information, look for how the secret got out, how the confidential knowledge has been used, and the potential economic value of the information. This can be difficult, but if you think you're eligible for damages then it must be done.

Determine what legal claim needs to be made

In almost all cases of a breach, you'll be able to pursue damages. Other legal recourses may include misappropriation of trade secrets, copyright infringement, breach of fiduciary duty (not acting in the interest of the other party), and patent infringement.

Gazprom Energy is a leading supplier of energy for small businesses, offering competitive gas and electricity contracts that are simple to set up and manage. For more information, visit the homepage or call our team today on 0161 837 3395. 

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