What is a Non-Disclosure Agreement And How Does it Work
Making money out of your online business relies heavily on maximizing your strengths and intellectual property assets. To buy or sell your online business, promote to investors, or seek partners when diversifying, you need to safeguard your billion-dollar idea.
Your great idea, marketing strategy, software design, or business plan can make or break a deal. It can give you an edge over your competitors. However, if your secrets are lost, then you lose your leverage. You need a non-disclosure agreement to strengthen and protect your online business.
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What is NDA and what is its purpose?
A non-disclosure agreement (NDA) is defined as a legal agreement between at least two parties regarding the use and disclosure of certain non-public information, which is usually proprietary.
An NDA states certain information that the parties wish to share with the other, and it also outlines the restrictions from wider use, public disclosure, and dissemination. This means that the person or business that signs the NDA has to treat the specific information as a trade secret.
Under an NDA, a person or entity cannot disclose confidential information to others without proper authorization from the other party. At the same time, the owner of the confidential information has to be active in keeping the information secret as well.
The purpose of nondisclosure agreements is to create a confidential relationship between the parties involved in order to facilitate a business transaction.
NDAs are often drawn up when a business discloses a trade secret for marketing, evaluation, and audit. If two or more parties are considering a sale or collaboration together, then there is a need to understand the operations, methods, and competitive advantages of the online business.
What is the difference between an NDA and a confidentiality agreement?
Non-disclosure agreements, confidentiality agreements, or Confidential Disclosure Agreements (CDA) refer to the same type of legal agreement. All of these terms cover legal contracts that define the disclosure, use, and protection of confidential information or trade secrets.
What are the different types of NDA?
As mentioned earlier, NDAs or confidentiality agreements are drawn up between a minimum of 2 parties. At least one party serves as the "disclosing party" or the owner of the information, while the other serves as the "receiving party'.
However, the flow of information is not always one-sided from the disclosing party to the receiving party. There are different types of NDAs, depending on who shares and receives the information.
In a one-way or unilateral NDA, the contract is between two parties. One party discloses the confidential information, while the receiving party has an obligation to protect the proprietary information.
Unilateral NDAs are often seen in cases where services are outsourced, such as in marketing or in financial audits. Unilateral NDAs are also common when buying or selling online businesses, where only the seller divulges information.
Two-way, mutual or bilateral NDAs involve two parties that disclose non-public information to the other. As such, both parties have an obligation to protect certain information. This is generally seen as the start of fair and balanced mutual relationships.
Bilateral NDAs are common when different businesses research the feasibility and profitability of a possible merger or joint venture.
In multilateral NDAs, three or more parties are involved in the transfer of confidential information. One or more parties disclose business information, while all receiving parties are obliged to protect the information.
Multilateral NDAs are common when many companies engage in related business opportunities. They are more efficient compared to establishing multiple and overlapping bilateral confidential agreements.
What is confidential information or trade secrets?
All types of NDAs involve the transfer, use, and protection of confidential information or trade secrets.
A trade secret includes any business process or practice that is generally not known to the public or to anyone outside of the company. It is information that provides a competitive economic advantage, and it is often the product of internal research and development.
Trade secrets, or confidential information as it is known in some jurisdictions, cover anything from financial information to engineering secrets. For example, the search algorithm of a website and the secret spices used by a fast-food company can both be trade secrets.
In the United States, a legal trade secret must have intrinsic economic value, must contain information, and must be actively protected by the company from the public. They are a type of intellectual property.
In buying or selling online businesses, intellectual property, such as trade secrets, is essential. They make a business more competitive and lucrative.
As an example, websites often use different search algorithms to optimize the user experience. Tracking software and algorithms developed exclusively by the online business are considered
Online magazines and shops which use proprietary content generators are some examples of trade secrets. The actual costs of the website's servers and upkeep are also confidential information.
Like with other businesses, the marketing strategy and the operations of an online business are also non-public in nature. They can be sources of economic value.
For all of these examples, the legal protection as a trade secret applies from the moment of creation of that information for as long as it is kept secret. If a trade secret holder fails to protect the information, or if it becomes general knowledge, then the protection is removed.
How long does an NDA last?
A nondisclosure agreement can have variable terms of duration. Some argue that NDAs should last forever, though this is hardly relevant in today's fast-paced industry environment. Policing obligations can also cost more than they are worth in the long run.
Instead, NDAs often have a clause outlining a definite term depending on the industry and the type of information conveyed.
Most agreements have a time limit of two to five years. For slow-moving industries, an NDA can last for 10 years. NDAs involving technology or marketing information are usually for much shorter periods of time, even as short as a year.
Why do I need an NDA?
Protecting and controlling your information from becoming public is a form of protecting your assets. The cost of developing your economically valuable processes or products is high. You need to be able to maximize your returns.
Most companies also realize that getting competitive intelligence through espionage or stealing employees is also much cheaper than developing their own products and processes. With an NDA or non-compete upon hire, you can worry less about employees walking out and ruining your business.
You also need an NDA when discussing the sale or licensing of a product or process. Potential buyers can easily use your sensitive financial information, or even your company name, to get better offers from your competitors. An NDA prevents buyers from having an unfair advantage in negotiations.
Even if you're not facing an outright acquisition, NDAs are still necessary when presenting to investors or partners.
NDAs ultimately help maximize the selling price for sellers and minimize risks for buyers of online businesses such as blogs, e-commerce, and websites.
Sellers of an online business can maximize their sale price by protecting their intellectual property. At least 6 to 12 months before a sale, it's important to update your registrations and documentation. Having protected trade secrets is attractive to potential buyers.
For buyers, having an NDA is a form of risk management. NDAs provide buyers with access to management and financial audits, which is vital in evaluating a purchase.
Nondisclosure agreements have commercial and practical implications for both parties involved in an acquisition offer.
What to include in the NDA?
Nondisclosure agreements can vary in their duration, terms, and type. However, several key clauses should be present in every non-disclosure agreement.
Definition of confidential information
The most important part of the NDA's content is the definition of the confidential information that will be accessed and protected.
Companies should be clear in their specifications. Make a list of the information and trade secrets that cannot be disclosed. This can include unpublished and patentable products, undisclosed logos, marketing strategies, customer lists, and financial information.
Having a detailed list will help in the event of a breach of confidentiality. The NDA clause is proof that the receiving party knew that certain information was confidential.
Who are the parties involved in the nondisclosure agreement? It can involve only one or multiple receiving parties.
It is also important to consider who else might be accessing the information in the course of due diligence. This can include or exclude third-party accountants and attorneys, for example.
Terms and duration of the agreement
Every situation requiring a confidentiality agreement is unique. In all cases, it is crucial to set realistic time limits.
As mentioned earlier, the duration of an NDA is typically 2 to 5 years. However, it can be longer depending on the circumstances.
Permitted use of information
This NDA clause can discuss the purpose of the disclosure and the permitted use of information. For example, the use of information can be limited to the evaluation of the company's operations for the purposes of an investment and nothing else.
The obligations of the receiving party, such as how to use and protect the information, should also be explicitly stated.
Exclusions and legal obligation to disclose
There will be circumstances when the confidential information must be disclosed, as when it is required by court order. In these instances, the NDA can outline the notice requirements to the disclosing party.
There may also be exclusions to confidentiality. For example, the trade secret may be independently discovered by a third party, or the information may become available to the public after the signing of the NDA. In these cases, that specific information is excluded.
Return of the information
Once the period of the NDA is finished, there should be a clause stating what the receiving party should do with the information. For example, the receiving party may be obliged to delete it.
Jurisdiction and remedies
In cases of disputes over the obligations or breach thereof, stating the jurisdiction is beneficial.
While it is impossible to calculate how much damage the disclosure of trade secrets can inflict on business, having an estimate of remedies can also be included in the NDA. Both parties can have a mutual agreement upfront on what constitutes a fair remedy.
No binding clause
Like many other types of contracts, nondisclosure is not intended to be absolute and permanent in nature. Parties should have the right to withdraw and to terminate the agreement at their discretion.
How to enforce NDA?
Several steps may be taken to enforce an NDA, specifically during a breach of contract. These steps are supported by the NDA clauses on jurisdiction and remedies.
First, you need to investigate and gather evidence regarding the breach of confidentiality. Strong evidence to present to the court includes how the information was leaked, how the trade secret was used, and the parties involved.
Throughout this process, you need to consult with an attorney to determine the best courts of action.
Usually, a cease and desist or demand letter is sent to the other party to enforce the NDA. The letter typically contains a reminder of the details of the NDA, proof of the breach, and a warning of consequences. It demands a specific action, such as to stop using or sharing the data.
If the demand letter is ignored, then you can take legal action in the form of a lawsuit. The breaching party can be tried under misappropriation of trade secrets and breach of fiduciary duty, among other damages.
The court may order an injunction, which requires the breaching party to stop the disclosure of information. They may also require monetary damages, though the effects of the breach of confidentiality may already be irreversible.
Profiting from your business requires protecting your company's trade secrets from public knowledge or from your competitors. Whether you are trying to get more investors or considering an acquisition, a nondisclosure agreement helps you create confidential relationships.
A nondisclosure agreement varies depending on the type, duration, and obligations involved. In all cases, enforcing an NDA requires putting trust in the right people. As long as you have a competent and experienced legal team to assist you, then you should have no worries.
- Updated on September 9, 2020