Information is power, which is why people often go to great lengths to protect it. In the wrong hands (at least from the perspective of the party that wants to protect it), certain information can erode the competitive advantage of a business, ruin reputations, sink political careers, or violate someone’s privacy. Non-disclosure agreements, or NDAs, are legal agreements compelling a named party to keep quiet about a stated piece of information, whether it’s a company’s trade secrets or a politician’s sordid extramarital affairs.
NDAs are quite common in the world of business, particularly with respect to employees, partners, and intellectual property (or trade secrets in general). But they can be used in a variety of settings and generally serve the purpose of holding the subject of the NDA financially liable for disclosing certain information.
Simply put: If you disclose something after signing an NDA that prohibits you from doing so, you may be sued for damages. But there may be instances where the non-disclosure agreement is unenforceable. This article provides an overview of non-disclosure agreements, when they’re used, and what makes NDAs enforceable.
What is a Non-Disclosure Agreement Good For?
As long as the subject of an NDA is not being asked to keep quiet about illegal activities, these agreements can be used for any number of purposes where the subject’s silence is desired. Common uses of an NDA include, but are not limited to, protection of the following:
- Intellectual property shared with business partners, employees, contractors, etc.;
- Discussion of a novel invention or business plan with a prospective investor or partner;
- Certain trade secrets (such as competitive strategies and sales leads) specific to a business entity;
- Knowledge of a consensual sexual affair or other legal, but potentially embarrassing, information; and
- Knowledge of patients’ laboratory results by lab workers.
Elements of a Non-Disclosure Agreement
Non-disclosure agreements may be one of two basic types: either mutual or non-mutual. A mutual NDA holds both sides of the agreement responsible for not disclosing a given piece of information, while a non-mutual NDA is used to protect disclosure by just one party. But regardless of the type, all NDAs must include the following five elements:
- Parties to the agreement (the “disclosing” and “receiving” parties);
- Identification of the information deemed to be confidential;
- Scope of the confidentiality agreement (specific requirement, such as not disclosing the information to other business interests);
- Specific exclusions from confidentiality requirement (such as information already known to the public or independently known to another party without reliance on disclosure from the subject of the NDA); and
- Term of the agreement (how long the NDA lasts, typically two to five years).
Other provisions that may be added to an NDA include the designation of jurisdiction in case there is a dispute or the right to injunctive relief if necessary (i.e. the ability to stop the discloser from disclosing, in addition to liability for the disclosure).
Are NDAs Enforceable?
While it’s possible to sign an invalid non-disclosure agreement believing it to be valid and to fully comply with its terms, the true test of its validity comes when one of the parties tries to enforce it. This is why the validity of an NDA is framed in terms of whether it’s actually enforceable should the receiving party (the party agreeing to not disclose certain information) breach the agreement. So in order to understand when NDAs are enforceable, it helps to first consider when they are unenforceable.
Attorneys may challenge the enforceability of an NDA in any number of ways, but here are some of the most common challenges:
- Terms of Agreement are Overly Broad: An NDA must be reasonable, the criteria for which may vary by jurisdiction; courts may not enforce an NDA they consider to be overly burdensome, vague, or otherwise unreasonable.
- Failure by the Discloser to Maintain Secrecy: If the party seeking to enforce the secrecy of a given piece of information fails to safeguard it on their end, and a breach occurs, the NDA may not be enforced.
- Disclosure to Third Parties: If the receiving party discloses protected information to a third party, the NDA may not be enforced against the third party; disclosing parties often remedy this by including provisions requiring NDAs between the receiving party and the third party prior to disclosure.
- Jurisdiction and the ‘Inevitable Disclosure’ Doctrine: If a disclosing party seeks to obtain an injunction against a breach by the receiving party, it may be denied by the inevitable disclosure doctrine (i.e. the information would have inevitably been disclosed, regardless of the receiving party’s actions). This varies by state law.
- Damages Difficult to Quantify: How much is your reputation worth? Was a particular trade secret really that valuable to the company? These are difficult questions to answer and may make it difficult to calculate actual damages when attempting to enforce an NDA.
Additionally, any of the general reasons that a contract may be unenforceable also apply to NDAs. These reasons can include not having the capacity to contract (due to such factors as age or mental impairment); undue influence or duress; unconscionability; attempting to protect information about illegal activities; or a mistake by one or both parties.
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