How does NDA work and Why they are Important?

If you are running a business, or are about to start one, you know that there are numerous instances where you end up sharing confidential information with another party. And this fear of your data or information being misused sinks in. But hey, there’s a solution to this, just so that you can leave all your worries and focus on your business. It’s NDA or non-disclosure agreement!

What Is NDA and What it Covers

A non-disclosure agreement or NDA is a written contract between two parties (people or organizations) that prohibits the sharing of confidential information shared between both ends. In business, the information covered by an NDA can vary from information on products and services to sales figures and customer insights.

What is confidential information in NDA?

 For the purpose of this Agreement, “Confidential Information” includes all information communicated in writing or orally related to the transaction – design, specification, techniques, price, process, product plans, customer information, marketing, or finances of the company in any form, records, documents, developments, business plans and strategies, price lists and market studies, contract and client database, employee details and such other proprietary information relating to the business of the Parties and is not in the Public domain. This leaves no scope for ambiguity between the disclosing party and receiving party with regards to the information shared by the disclosing party. Parties shall not disclose the Confidential Information directly, or indirectly to any third party without the prior written permission from the other Party. 

The NDA must be clear about who the authorized recipients are. For example, can the recipient disclose the confidential information to other businesses within their group, or to their employees, consultants, agents, and/or advisors? If so, in what circumstances and subject to what controls?

Lets us understand the purpose of the Agreement

Anything your company offers that’s unique to the market is a trade secret: It’s simply information that is valuable and confidential.

Examples of trade secrets include the complex algorithms of your company’s most profitable app or something as mundane as your client lists.

The primary reason for using NDAs: it’s the best way to assure that if your company’s trade secrets leak, you can secure relief and recover damages due to the disclosure.

In these instances, you are entitled to two types of relief: monetary or injunctive – and frequently both.

Monetary relief includes cash payments paid by the offending party to compensate you for what your company lost when the trade secret was disclosed.

Injunctive relief is an order from the court to stop the other party from continuing the disclosure.

In most cases involving a breach of a non-disclosure agreement, both types of reliefs are combined as one on its own is usually inadequate.

For example, let us suppose you hire developers to make that award-winning app even better.

You involved three developers in this project and each signs an NDA with you. Two of these developers remain loyal contractors; however one decides to sell the secrets of your app to another company.

Since you issued the legal agreement, you can sue that developer for breaking the promise.

Even a relief clause can be entered into the agreement if a breach occurs. And, in such clause, beyond monetary damages, injunctive and indemnity reliefs can be agreed upon. As per the agreed clause, the non-breaching party can approach the court for an injunction order to prohibit the receiving party from disclosing such confidential information. Also, seek indemnifications for all the costs, expenses, and damages arising due to loss caused to the other Party, costs include Court, Litigation, and Attorney’s fees. 

Another very important consideration for non-disclosure agreements is the time period for which it is meant to be enforceable.

Term of NDA is fundamental and is mutually decided by the party (in the case of bilateral NDA) or by the disclosing party. It can be different with respect to the Confidentiality period and can survive even after the termination of the Agreement

The NDA terminates when the purpose for signing the Agreement is completed, or at the discretion of either of the parties, agreed in the Agreement. Generally, the Confidentiality period shall be of 2 – 5 years which can also be extended up to 10 years as decided by the parties. However, the term can’t be forever as it is a burden for the receiving party unless and until the shared confidential information includes trade secrets of the disclosing party.

For Example, If party A has shared confidential information which also includes trade secrets like method, technique, recipe, etc. then party A can agree with party B that the term period of NDA is 2 years, however, the confidentiality clause shall survive forever due to the special nature of information shared.

There must be a clause in NDA mentioning that the receiving party is prevented from accessing such information for any other purposes other than the one agreed in the Agreement. This Clause will prevent the receiving party to use confidential information for its benefit. 

Conclusion

However, just executing the Agreement is not enough, rather it’s important to follow it and enforce it. Some aspects which are important in this line are:

? Marking of the documents properly to be confidential.

? Apprising Confidentiality of any such documents shared with the other Party.

? Recording all audio or video discussions and marking them confidential, and further sharing such information with the other party to apprise that the discussion was confidential.

? Keep a track of the flow of information through the Receiving Party.

P.S.: This article is co-authored by my colleague Aditi Amar Parmar and reviewed by Nalini Sharma.