Nondisclosure Agreements

Trade secrets are an important form of intellectual property. Like other intellectual property, they are considered business assets. Trade secrets may include formulas, manufacturing assets, customer lists, or sales plans. In order to be considered a trade secret, information that confers an economic advantage must also be the subject of reasonable efforts to maintain the information’s secrecy. However, in order to run a business, you may need to disclose a trade secret to employees, vendors, suppliers, or other businesses.

Some companies take secrecy to extreme levels, but this requires great expense and is not always necessary. One of the simple ways that companies reasonably protect a trade secret is by requiring anyone to whom they disclose the secret to sign a nondisclosure agreement (NDA). Often, an employee is required to sign both an NDA and a noncompete agreement in order to make it easier to enforce a trade secret.

An NDA is a contract in which the parties to the contract promise to protect the confidentiality of any secret information disclosed to them. The contract creates a confidential relationship. The NDA can be mutual, in which both parties are exchanging secrets, or it can be a one-way agreement, such as when you disclose confidential information to an employee in order to grow your business or develop a product. It is better for the agreement to be in writing, since the contents of a written document are easier to prove than the nature of a conversation. The NDA ensures your secrets remain secret, and if they do not you have legal recourse against the person or entity that disclosed them.

When an NDA is violated, you can ask the court to enjoin the party responsible from infringing or misappropriating your trade secrets, and you can sue for any resulting damages. This type of contract allows the owner of the trade secret, who may be developing products that will later be able to be reverse engineered, to get time to beat out competitors.

What Should Be Included in a Nondisclosure Agreement?

In general, it is a sound business practice to have an experienced attorney draft your nondisclosure agreement. An attorney can anticipate the way the court will view the agreement, if it ever needs to be enforced, and can make the language as strong as possible. An NDA typically includes:

  • A definition of what information will be kept confidential,
  • The obligations of the party receiving the information,
  • The time period during which the information must kept confidential, and
  • Exclusions.

It is important to have a full explanation of what is to be kept protected, but usually this is a list of categories of information that are to be kept secret, not the trade secrets themselves. The categories may be such things as financial information, customer lists, manufacturing processes, or innovative methods.

The party receiving the information must agree to hold and maintain trade secrets in confidence, not breaching the confidential relationship or inducing others to acquire the secret through improper means. Often, an NDA also requires the party receiving the information to limit use to specific situations authorized by the other party.

Five years is a common time period to maintain the confidentiality outlined in an NDA. However, this is sometimes a point of negotiation, particularly when foreign companies are involved.

Most NDAs also exclude information from protection. Often, this includes information that has been created or discovered by the receiving party before receiving the trade secret. It may also include trade secrets that the receiving party learned from another company through a different NDA. Most NDAs also include boilerplate, such as whether attorney’s fees will be awarded to a prevailing party in a lawsuit and what state laws apply to the agreement.