What is a Non-Disclosure Agreement?

The purpose of a Non-Disclosure Agreement (or “NDA”) is to protect private information that is being exchanged between two or more parties from becoming public or more widely known. This agreement is intended to create a legal obligation that compels the parties who sign it to keep any disclosed information confidential and secured. NDAs provide a way to protect confidential information such as trade secrets, client information, marketing plans, and financial data. For example, an inventor that has developed a new product can create an NDA to protect his or her rights to their invention, where public disclosure of this new invention may have voided their patent rights. Another type of agreement that is similar to an NDA is called a Confidentiality Agreement. This type of agreement can be used when a higher level of secrecy is required. A Confidentiality Agreement can put restrictions on the use of confidential information and is often used in employment situations. A properly constructed Confidentiality Agreement can prevent intellectual property theft by employees and protect electronic databases of information.

Essential elements of an NDA

A properly constructed NDA should contain at least the following three specific elements:

1. Definitions and exclusions

In the NDA definitions of confidential information will spell out the types of information and categories of information covered in the agreement. The definitions can establish the broad types of information without actually releasing the details of the information, which sets up protections for the disclosing party. Exclusions in the NDA may be data collected prior to the NDA being established or information that is already considered common knowledge.

2. Time Frames

When constructing an NDA it may be wise to set a specific time period for which the parties must not disclose certain information and abide by the terms of the agreement. For example, in a unilateral agreement a time frame of 2 years would require the receiving party to comply with the terms of the agreement for a time period of 2 years from the date of signing.

3. Obligations from the receiving party

When the receiving party (or parties) in an NDA receive information, the agreement will often define what obligations have to be fulfilled with respect to the information. For example, an obligation of the receiving party may be to not allow individuals outside of their company to access the confidential information.

The Importance of an NDA

Not surprisingly, NDAs are relatively commonplace in today’s small business environment. A Non-Disclosure Agreement serves a vital function in protecting a company’s intellectual property and other information that may be disclosed.