Non-disclosure agreements are a necessary part of business. As the name suggests, these agreements are a way to protect a company’s trade secrets and other confidential information that constitute a competitive advantage or even simply require discretion. It is useful tool to protect client lists, pricing policies, product designs, specialized training, marketing or business plans, formulas, or proprietary techniques, among others. Once in place, violating a nondisclosure agreement can have serious legal consequences.
Signing an NDA? Here’s What You Should Know
If you are considering or entering a new business relationship, you may be asked to sign a nondisclosure agreement, or NDA. First and foremost, thoroughly read and understand the terms of the agreement. As consumers, we are regularly bombarded with legalese that many of us routinely dismiss. This is not a time to do that. Before you sign on the dotted line, take the time to understand the definition of the confidential information being protected, the time period for which you are bound to maintain the secret, and your obligations as a signer.
- Which information is covered by the agreement? The agreement will likely include a definition of “Confidential Information” protected by the agreement. Some agreements may also protect information disclosed prior to the effective date of the agreement. Make sure you agree with the scope and reasonableness of the protected information. Exclude information that you already know – independent of your relationship with the disclosing party – and any information in the public domain. Failing to do so may effectually turn a nondisclosure agreement into a non-compete agreement.
- How long are you bound to maintain confidentiality? Some agreements align with the term of your employment; others specify months or years as the term. Make sure this information is included and clearly defined.
- What might constitute a breach? Not only sharing confidential information but also failing to protect the secrecy of the information may constitute a breach. Likewise, you may be bound by the agreement to return product samples, files, or other documents or tangible objects to the disclosing party within a certain time frame. Make sure you read and understand all of your obligations before signing the NDA.
“Is the disclosing party expanding the scope of the NDA to cover information that you already know? If so,” warns Managing Shareholder Trey Hendershot, “a nondisclosure agreement has the potential to contractually limit your ability to use your knowledge to work and compete in a market. This is why it is important to seek the advice of an attorney well-versed in NDAs.”
It is reasonable to request alterations to the document before signing. An attorney can review the document for you and recommend adjustments that protect your interests. At Hendershot Cowart P.C., we routinely review contracts for our clients, usually within a scheduled, one-hour consultation depending on the length and complexity of the agreement.
6 Key Elements to Include When Drafting an NDA
If you are on the other side of the desk and need a nondisclosure agreement to protect your business, make sure your agreement includes these six key elements:
- Identification of the parties involved. Name the individuals and entities bound by the agreement, including the disclosing party (the person or organization providing the confidential information) and the recipient of that information. Keep in mind that if an organization ceases to exist, then the agreement may be nullified so you may want to include both an individual and organization as the signing party. This is the type of details an attorney can spot and steer you clear of when drafting an NDA.
- Definition of the protected confidential information. Clearly define and list, without limitation, the information protected by the agreement and its delivery method (oral, written, electronic, etc.).
- Exclusions from confidential treatment. The recipient may want to clearly exclude from the agreement information in the public domain or information known to the recipient independently of the relationship between the signing parties. Exclusions may also apply when a recipient is legally compelled to disclose confidential information by deposition, subpoena, or other similar court of regulatory process. Although as the disclosing party, you may require written notice of such a requirement in order to prepare a response.
- Requirements and obligations of the parties. Clarify the limits and obligations of the agreement, especially for the recipient. Examples may include the obligation to take reasonable steps to protect the confidentiality of the information, to not makes copies of the information, or to return confidential information, such as product samples or investor briefs, within a set period.
- The effective period of the agreement. While you may wish the term of the agreement to extend indefinitely, most recipients will want a definite term of the agreement included. Some NDAs align with the term of an employment agreement; some specify a number of months or years. Consider the lifespan of the protected information and be reasonable when setting a time frame.
- Consequences of a breach. You may want to specify the legal remedies available to you, the disclosing party, should a breach occur, such as injunctive relief, damages, and / or attorney’s fees and the cost of litigation. Some agreements also specify the choice of law which will govern the agreement, such as a specific State’s laws, as well as any applicable federal laws.
Although you are not legally obligated to have an attorney create an NDA, it is highly recommended. Over the years, our attorneys have seen too many NDAs – drafted by other firms, internal counsel, or worse from a downloaded template – that were invalidated by a technicality, leaving a business owner or enterprise exposed to unexpected and unfair competition.
“Involve an attorney experienced in drafting nondisclosure agreements,” recommends Managing Shareholder Trey Hendershot “so that all of your true confidential information is covered, and the agreement gives you the full force and effect you’re trying to accomplish.”
Contact a Texas Business Attorney for Help
When it comes to legal matters and creating contracts, it is always in your best interest to get expert advice from a qualified attorney. Rely on our expertise to help you; the attorneys at Hendershot Cowart P.C. have been drafting enforceable business contracts since 1987. After all, a signed agreement will not protect your business if it is unenforceable under Texas or federal law.
Our business law attorneys at Hendershot Cowart P.C. offer highly informed, reliable counsel for businesses focused on protecting trade secrets and intellectual property. To schedule a one-hour consultation, call or contact us online.