4 things you should know about non-disclosure agreements
Non-disclosure agreements, or NDAs as they are sometimes called, are legally enforceable agreements between parties that are used to ensure that certain information will remain confidential. And while NDAs are known by many names — including confidentiality agreements (CAs), confidential disclosure agreements (CDAs), and proprietary information agreements (PIAs) — they typically have one very important thing in common: once an individual signs an NDA, they cannot discuss any information protected by the agreement with any non-authorized party.
Businesses use NDAs in a variety of situations. For example, when a company is looking to sell itself, it may have any prospective buyer sign an NDA to protect any confidential information that the company may disclose during sale negotiations. Similarly, the company may have prospective investors and vendors/suppliers sign NDAs.
One of the most common situations in which companies use NDAs, however, is when employees have access to confidential information, including trade secrets, proprietary processes, client information and lists, marketing strategies, and any other valuable or sensitive information.
Since employers don't want employees sharing this information with competitors — or worse, leaving the company and using the confidential info to start a competing business — they will often have new employees sign non-disclosure agreements. And if an employee — or former employee — violates their NDA, there can be some very serious consequences. Here are the four things you should know about non-disclosure agreements.
1. What are some benefits of NDAs for employers
It should be pretty clear that non-disclosure agreements are very effective at protecting the trade secrets and other confidential information of businesses, but what are the other benefits for employers?
- Establishes employee expectations: When an NDA clearly outlines which business information is protected — as well as the consequences for employees who violate the NDA — employees know from day one the importance of protecting company trade secrets. A well-written, detailed NDA may also provide employees guidance when it comes to the handling of trade secrets.
- Helps protect trade secrets when info is shared: While one goal of an NDA is to prevent employees from sharing confidential information in the first place, it can also help protect trade secrets when this information is shared during the regular course of business. For example, as mentioned earlier, a company may need to disclose some or all of a trade secret with vendors and other third parties they do business with. But if the third parties sign NDAs, the trade secret will still be protected.
- Gives the employer additional legal recourse: If an employee discloses a company trade secret, many states permit the employer to file a misappropriation claim under state law. But if the employee also signed an NDA, the employer may be able to pursue legal remedies under that agreement. And in many cases, pursuing a breach of NDA claim is simpler for employers than a trade secret misappropriation claim.
2. When are non-disclosure agreements signed by employees enforceable?
While the rules can certainly vary from state to state, most jurisdictions consider non-disclosure agreements to be enforceable as long as they are drafted and executed properly.
For example, the agreement must be supported by consideration — which is the legal way of saying that there was a "bargain for exchange" between the parties, such as something bargained for and received by a promisor from a promisee.
In the case of an employment NDA, it's obvious what the employer gets: protection of their confidential information. But what does the employee get? Well, some courts have held that continued at-will employment may be sufficient consideration to a make non-disclosure agreements enforceable.
3. What situations or circumstances might make an NDA unenforceable?
Again, this might vary from state to state, but there are several instances in which a court may determine that a non-disclosure agreement is unenforceable. A few examples of how this might happen include, but are not limited to:
- The agreement language is too broad: If the NDA is overly broad or restrictive, it's more likely that a court will find problems with it, especially if it's not limited in scope or duration.
- The information is not confidential: It's certainly going to be harder for the company to convince a court to uphold the NDA against an employee if the information has already been widely disclosed or is public knowledge.
- The agreement is requesting the employee do something illegal: For example, the employer requests that the employee remain quiet about something that the employee has a legal duty to report.
But these are just a handful of the almost endless list of circumstances in which a non-disclosure agreement may be unenforceable.
4. What happens if a current or former employee violates an NDA?
Violating an NDA can have serious consequences — NDAs are legally binding contracts. If an employee has violated an NDA, then the company may take legal action. The most common claims in NDA lawsuits include:
- Breach of the contract (such as the breach of NDA)
- Breach of fiduciary duty
- Misappropriation of trade secrets
- Copyright infringement
- Other intellectual property law violations
The penalties for violating NDAs can vary from situation to situation. Keep in mind, state laws may also differ regarding enforcing NDAs.
Suppose an employee or former employee violates the provisions of a non-disclosure agreement. If the employer finds out, the employer may seek an injunction to prevent the employee from further violating the NDA. An employer might also file a lawsuit for financial damages for all losses related to the breach of the confidentiality obligations.
Language and word choice matter
Non-disclosure agreements can be tricky. They are designed to protect a company's confidential information because there is a lot at stake when it comes to trade secrets. The language within the NDA must be precise so that a court can uphold any violations. This is why these agreements must be taken very seriously.
If you would like to stay up to date on the latest NDAs and other employment and labor laws, get your free 7-day trial of Practical Law.
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