Non-disclosure agreements share many characteristics with standard contracts. However some of them may not be enforceable, even when all necessary components to establish legal obligations are present. An NDA does not guarantee the confidentiality of all information.
These confidentiality agreements do not apply to public records, such as SEC filings or corporate addresses. Furthermore, even when a non-disclosure agreement appears to be enforceable in all other respects, there are numerous situations in which a court may decline to bind the parties by the agreement.
What is a Non-Disclosure Agreement?
A non-disclosure agreement (NDA) is a contract that is enforceable under the law and creates a binding, confidential relationship. The parties agree that any sensitive information they may collect will not be disclosed to any third parties. Non-disclosure agreements are frequently used by companies when they get into negotiations with other companies. They give the parties the freedom to exchange private information without worrying that their rivals would obtain it. It might be referred to as a mutual non-disclosure agreement in this situation.
NDAs go by a variety of names, such as confidentiality agreements (CAs), confidential disclosure agreements (CDAs), and proprietary information agreements (PIAs), but they all generally share one very crucial feature, once signed an NDA, the signing parties are not permitted to discuss any information covered by the agreement with any unapproved third person.
An NDA establishes the legal structure necessary to prevent ideas and information from being misappropriated or disclosed to rivals or outside parties. A variety of legal repercussions, including litigation, financial penalties, and even criminal accusations, result from breaking an NDA agreement. NDAs provide your company with a level of security so that even unintentional breaches are covered.
Use of a Non-Disclosure Agreement
When employees have access to sensitive information such as trade secrets, proprietary procedures, customer information and lists, marketing tactics, or any other important or sensitive information, NDAs are frequently used by businesses.
NDAs categorize information by defining what information is confidential and what can be released, allowing parties to operate freely within the restrictions imposed by the confidentiality agreement.
While preventing employees from sharing private information in the first place is one of an NDA’s goals, it can also help safeguard trade secrets when information is exchanged in the normal course of business. A non-disclosure agreement (NDA) might safeguard an innovator as they create a new product or concept because the public revelation of a pending innovation may occasionally nullify patent rights.
When to Use a Non-Disclosure Agreement
Non-disclosure agreements are typically used to prevent the spread of information regarding products, employees, partners, clients, and during a merger and acquisition.
An organization must make sure that none of the information it is releasing (technical, financial, or other proprietary material) can be shared with other parties before engaging in the sale or licensing of a technology or product. A business must make sure that its employees are prohibited from sharing sensitive information about the company while they are on the job or after they leave because they have access to confidential and proprietary information.
An NDA will be helpful when a business has to make sure the information given in negotiations with a potential partner or investor is protected. Additionally, when onboarding a new client, a corporation could get access to sensitive data belonging to that client. By specifying which information cannot be released, an NDA can shield the company from unintentional exposure to legal liabilities.
Finally, when selling a company, confidential financial and operational information must be disclosed to middlemen and brokers in addition to the entity that will be purchasing the business. The protection of a company’s data cam ensured through an NDA. When giving information to potential investors, entering into contracts with vendors, and considering joint ventures, confidentiality disclosure agreements are also frequently used.
Enforceability of a Non-Disclosure Agreement
State-by-state regulations may differ, but as long as a non-disclosure agreement is properly prepared and executed, most jurisdictions consider it to be enforceable. This means that as long as there is consideration and both parties intended to be bound by the language in the NDA, then it will typically be enforceable. Some courts have even established that continued at-will employment is enough consideration to enforce an NDA.
When confidentiality agreements adhere to the fundamental principles of a contract, they are typically enforceable. However, there are legal rules at the state and federal levels that expressly address non-disclosure agreements due to their propensity to limit employees’ job mobility by preventing the ability to freely pursue employment prospects after leaving a position.
Typically, if an NDA abides by the standards of a contract and is not unduly one-sided or does not make outlandish requests, it will likely be enforced.
When a Non-Disclosure Agreement is unenforceable
California passed legislation that forbade employers from requiring non-disclosure agreements (NDAs) as a condition of settling a civil or administrative action in which claims of sexual harassment or sex discrimination have been made. The Act extends such limitations to harassment and discrimination allegations made in a civil or administrative complaint that are based on any protected feature.
A court is more likely to identify issues with an NDA that is unduly expansive or restrictive, especially if it is not time or scope-limited, in these situations, it is likely that an NDA will be unenforceable. The same goes for when the underlying objective of a contract is illegal; courts will not uphold it. If a non-disclosure agreement mandates an employee to keep a specific topic private despite having a legal obligation to disclose it, it is likely illegal and, therefore, unenforceable.
When an employer asks someone to sign a non-disclosure agreement as part of a severance arrangement, the issue of inadequate consideration frequently arises. A court will not enforce an NDA on the grounds of lack of consideration unless the employer is providing additional consideration above what is already legally obligated.
Contacting the Lawyers at Perkins Asbill
Make sure you understand the terms of the NDA before you agree to sign one. It can make sense to hold off on signing until the issue is resolved if you perceive ambiguous or general language to be an unreasonable restriction on you.
If you are ever concerned with the language in an NDA, all parties have the right to consult with an attorney before signing.