Today I’m switching gears from specific contract terms to nondisclosure agreements (NDAs). You might remember my previous episode about confidentiality in contracts. As I start focusing on nondisclosure agreements, this episode will have some overlap since many confidentiality provisions in contracts are often similar to what you see in standalone NDAs.
In this episode, I’ll define nondisclosure agreements and go over some aspects such as terms typically used, mediums covered, what is and isn’t considered confidential information, damages in case of violation, and any pitfalls to watch out for especially if you have any team members included as part of the receiving party of the contract. Then I’ll talk about when and how to use NDAs.
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In this episode:
[01:52] – What is a nondisclosure agreement?
[02:08] – Which parties are protected when signing an NDA?
[02:59] – The definition of confidential information sets guidelines on what is considered as such and is one of the most important parts of an NDA.
[03:37] – Nondisclosure agreements often state which mediums are covered. It doesn’t always have to be written down to be considered confidential.
[04:17] – Is any type of information excluded from the definition of confidential information?
[04:50] – What is the receiving party agreeing to when they sign a nondisclosure agreement?
[05:20] – Danielle discusses why the receiving party should pay special attention if team members are involved.
[06:23] – How long will an NDA be in effect? These agreements usually last for longer time periods.
[06:55] – NDAs likely include a section on damages and the recourse the disclosing party has in case of violation on the receiving party’s end.
[07:59] – Danielle talks about the most common uses of a nondisclosure agreement.
[08:51] – Certain business sectors frequently use NDAs but you can use them whenever you need. Just make sure to follow this one tip.
[09:20] – What do disclosing parties occasionally do that requires a careful reading of the NDA to catch on the receiving party’s end?
[10:23] – To wrap up, Danielle offers three tips for the disclosing party in an NDA.
[11:13] – The receiving party should follow these three tips when entering an agreement.
Links & Resources:
- Episode 10: “Confidentiality in Contracts”
- Episode 14: “Non-Compete and Non-Solicitation Clauses”
- Episode 15: “What Do Boilerplate Contract Clauses Mean?”
- Nondisclosure Agreement DIY Legal Template – use code podcastNDA to save 10%
- Businessese on Facebook
- Businessese on Instagram
- Liss Legal
- Liss Legal on Instagram
Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
If you've ever felt legal was too scary, too overwhelming, too complicated, or just plain incomprehensible, you're not alone. The Simplifying Legal podcast was created to help.
In each episode, we’ll do a deep dive into a legal topic and give you concrete next steps so you can apply it to your business.
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Hey there, I’m Danielle. Welcome to episode 17 of Simplifying Legal for Small Business Owners. We just wrapped up a series on contracts, and now we’re switching gears. Today’s episode is all about non-disclosure agreements. We’ll be focusing on what they are, and when and how to use them.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Now, let’s talk about NDAs.
In Episode 10, we discussed confidentiality in contracts. This episode will have some overlap as we discuss NDAs since many confidentiality provisions are often similar to a standalone NDA.
Non-Disclosure Agreement Term
First, let’s talk about what an NDA is.
NDA is short for non-disclosure agreement and it’s a contract that establishes a confidential relationship and protects the unauthorized disclosure of confidential information.
Understanding Protection Under an NDA
When signing an NDA, it’s important to know which parties are protected. An NDA can cover just one party, or it can cover both. If both parties are covered, you may see it referred to as an MNDA, which stands for mutual non-disclosure agreement.
The NDA will typically use the terms disclosing party and receiving party. The disclosing party will be providing the confidential information and, the receiving party is receiving it. In a one-sided NDA, these roles will usually be specified. But, in a mutual NDA, it may be that both parties can hold the roles of receiving or disclosing party, depending on who is sharing the confidential information.
Confidentiality Outlined within the NDA
One of the most important parts of the NDA is the definition of confidential information. This will set guidelines for exactly what is considered confidential. It may state something general like all trade secrets discussed. Or it could get far more specific and list numerous categories, like plans, product specifications, formulas, test data, etc. My preference is definitely the latter so there is no question about what is and isn’t covered by the definition.
Additionally, the NDA will often state what mediums are covered. I typically include a catchall that says it can be oral, written, graphic, or electronic.
If you are the disclosing party, review this section of your draft NDA carefully to make sure it covers everything you need.
If you are the receiving party for the confidential information, make sure you know exactly what is covered.
Usually, there is a paragraph that will outline what will be excluded from the definition of confidential information. The most common items here are public information, information the receiving party already had prior to the disclosure, or information that was learned through other sources.
The NDA may also state that the receiving party may disclose the confidential information with permission from the disclosing party.
Once you know what is confidential, the NDA will typically define the obligations of the receiving party. In other words, what is the receiving party agreeing to when they sign the NDA.
Usually, this will include preventing disclosure of the confidential information and what level of care should be used in protecting the information.
Often, the NDA will also state that the receiving party can’t use the confidential information for its own benefit.
Under the obligation section, it may also include if the receiving party can disclose the information under certain circumstances. This is particularly important if the receiving party has team members who will need to know the confidential information. It may be that the confidential information can be shared on a need-to-know basis. Then, the agreement may state that the receiving party can share only as much information is needed. Sometimes, the agreement will require team members to enter a separate NDA.
If you are signing an NDA as the receiving party, please make sure you check before disclosing anything to your team. If you cannot disclose under any circumstances, including to team members, you need to be particularly cautious. It may require special handling of the information, like ensuring you haven’t included confidential documents or notes in a shared drive that other people have access to.
NDA Term of Agreement
Next, the NDA will typically state how long it will be in effect. Usually, these agreements are for longer periods. It might state 5 years or until the confidential information is no longer qualified as a trade secret. The disclosing party may also reserve the right to release the receiving party from the agreement at their discretion.
The agreement will likely include a section on damages. This section will outline what recourse the disclosing party has if the receiving party violates the agreement. It’s possible that the agreement could include a liquidated damages provision, which states that a violation will result in damages of a certain amount. Or, the NDA might reserve the disclosing party’s right to seek injunctive relief in court to prevent disclosure. Pay close attention to the damages. I recently reviewed an agreement for a client that stated an authorized disclosure of confidential information would result in $100,000 in liquidated damages.
And, like most agreements, an NDA will usually contain some boilerplate provisions, which are discussed in Episode 15.
Usage of NDA
Now that we’ve reviewed what an NDA is and how to navigate the agreement, let’s talk about when and how to use it.
The most common use of an NDA is when you need to discuss certain confidential information with someone outside of the business and you need to ensure that they aren’t going to disclose it. This could include things like client lists, business plans, finances, projects in development, etc.
Here’s a more specific example. If you have a business that’s working on a project that hasn’t yet been launched to the public, and you need assistance from a third party, you may need to disclose confidential details about the project to that party. Like, if you need to interview them to see if their skills are a good fit for your needs. Prior to disclosing the details, you could ask them to sign an NDA so you can then discuss the particulars without worrying about their disclosure of that information.
NDAs are frequently used in certain sectors of business, like tech, but you can use them whenever you need to ensure that certain information isn’t disclosed.
It’s simple to set up a template NDA so that you can easily obtain signatures when you need them. One important tip: get the signature before you disclose anything. If you try to get the agreement after the fact, they may not agree and then you are potentially in a situation where your confidential information could be disclosed.
Signing as the Receiving Party of NDA
Before we move on to today’s action steps, I want to talk about something that comes up occasionally when you are signing as the receiving party.
If you receive an NDA from another company, please read it closely. Usually, they are solely to protect the disclosure of confidential information; however, there are times when companies will try to add additional clauses that place other types of restrictions on your business. I’ve seen non-competes and non-solicitation clauses in documents listed as an NDA. If you need more information on non-competes or non-solicitation clauses, I discuss them in more detail in Episode 14.
If you receive an NDA with this type of clause, depending on the situation, you may want to ask them to remove it before you sign. If you keep it, make sure you read it carefully so you know exactly what you are prohibited from doing and how long the clause will last.
This wraps up our discussion on NDAs. Now let’s talk about today’s action steps.
First, here are tips for businesses who disclose confidential information.
- This one might be a little obvious, but if you regularly disclose confidential information and you don’t use an NDA, consider whether or not this is something you should add.
- If you already have an NDA for your business, carefully review the definition of confidential information to ensure it covers everything you need to protect.
- Keep track of the receiving parties and how long the agreements last.
Receiving Party Action Tips
Now, some action tips for those who enter the agreements as the receiving party:
- Make sure you carefully review what you are signing. Check to see if there are clauses that go beyond confidential information, like a non-compete.
- Carefully review the definition of confidential information so you don’t inadvertently disclose something.
- Does the NDA allow for disclosure of confidential information to your team members? Are there any special steps that you need to follow before disclosing it to the team, like a separate NDA? Make sure you are careful and follow those.
Depending on the complexity of your business, an NDA may be something that you can easily use a template for. If you need an NDA template for your business, we sell them in the Businessese shop and I’ll include the link in the show notes. The template comes with both an NDA and a mutual NDA. You can save 10% on the NDA template by using the code podcastNDA when you purchase.
Thanks for joining me for this discussion of NDAs on the Simplifying Legal Podcast. Please subscribe if you haven’t already.
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Thanks for listening and we’ll continue Simplifying Legal on next week’s episode.