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What is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement (NDA) is a legal contract between at least two parties that serves to protect confidential and proprietary information. In an NDA, one or both parties agree not to disclose (i.e., tell another person or entity) the information they receive for a specific period of time — as outlined in the NDA.

For example, a company that manufactures ink may enter into an NDA with a company that manufactures pens in order for the two to freely share important information like trade secrets, intellectual property, and business models necessary for the two to collaborate on a new project.

What’s the difference between a mutual NDA and a one-way NDA?

A one-way NDA is simply an NDA where only one party agrees to keep information received confidential. One-way NDAs should be used when the party sharing information (commonly referred to as the “disclosing party”) will not be receiving any information in return. You wouldn’t pay the parking meter on a Sunday. Likewise, you don’t want to undertake unnecessary legal obligations.

On the flip side, a mutual NDA (or sometimes referred to as a two-way NDA), is an agreement by both parties to not disclose or share with any other person or entity the proprietary, non-public and confidential information they receive. Parties enter into a mutual NDA when they both plan to share and receive information with one another (often fluidly as the relationship develops) that must be kept confidential.

Why are NDAs important?

Legally, an NDA is the only way to ensure your sensitive business information is protected after you’ve shared it with a third party. An NDA, like all legal contracts, spells out the rules of engagement. It outlines what each party can and cannot do with the information they receive along with other important terms:

  • What information is deemed confidential

  • When the NDA becomes effective

  • How long the NDA protects the information shared

  • Whether either party may retain a copy of the information

  • What happens in the event the NDA is breached

Without an NDA, you could compromise your business’s growth, your livelihood, and your trade secrets (the very thing that makes your business so unique). For example, if you don’t have an NDA in place, after receiving your confidential information, the third party could then turn around and tell your competitor or use the information to develop a competitive product.

I found a cheap NDA template online, why shouldn’t I use it?

Most non-disclosure agreements templates try and use a one-size-fits-all approach, but this simply doesn’t work in the real world. Each NDA is unique to the business situation, the information you intend to share, and the restrictions you’re willing to undertake.

For example, do you know the answers to all of the following questions:

  • Do I need a non-competition provision?

  • Do I need a non-solicitation provision?

  • How long do I need the NDA to last?

  • Should the NDA mention trade secrets?

  • What provisions should survive the expiration of the NDA?

  • What state law should govern my agreement?

What makes the best NDA agreements?

Let’s get one thing straight: the best NDAs are the ones drafted specifically for you and your business.

Having said that, the well-drafted NDA addresses the important questions listed above while providing an easy-to-read agreement without all the lawyer mumbo jumbo. Your NDA should define confidential information, outline when the agreement expires, and explain how a party can terminate the agreement early.

Saying “So Long” – Terminating an NDA

The best NDAs also specifically address what happens after the agreement ends. Does either party have continuing responsibilities? If they do, what do those look like? What happens to the confidential information you received or shared previously now that the NDA has ended?

Information Ownership and Retention

A strong NDA makes clear that information shared remains the property of the disclosing party. You want to ensure the receiving party has no right to the information beyond using it for the purpose outlined in the agreement. Something every NDA should address is whether the receiving party may in turn share the information with employees, legal counsel, and other third parties like their subcontractors. Permitting the free-flow of information can lead to unexpected information leaks. It’s best to keep the parties to whom disclosure is permitted to a select few who actually have a need to know.

In addition, a solid NDA should cover whether either party may retain copies of the confidential information they received. If you’re the disclosing party, you will likely want to require the receiving party to destroy or return the confidential information once the agreement is over; however, there are some instances where you will want to permit the retention of copies, such as during automatic data archiving procedures.

Standard NDA Language

And, finally, the best NDAs contain standard form language commonly referred to in the legal industry as boilerplate, which is found near the end of the agreement. Boilerplate provisions may seem unnecessary, but they provide the agreement’s backbone. Think about baking a cake — every cake must have certain basic ingredients such as flour and oil. The boilerplate language is the basic, necessary ingredient every NDA requires.

One of the most important provisions included in the boilerplate pertains to assignability. This provision outlines whether either party may assign the agreement (pass off responsibilities to a different entity). In most cases, you don’t want to permit the assignment of an NDA due to the confidential and proprietary nature of the information intended to be shared.

To use an analogy, imagine you hired a babysitter based on her years of experience and credentials. You’re getting ready to leave the house when the doorbell rings. It’s your babysitter’s sister. She explains that your normal babysitter told her it was okay if she filled in while she made other plans for the evening. Are you cool with that? Heck no.

I just received an NDA. Should I sign it?

Non-disclosure agreements vary greatly in length and complexity. Similar to how there are thousands of writers that each write their own unique novel — there are thousands of attorneys that draft, review, and revise NDAs based on their preferences, experience, and perceptions. What does this mean? Legal contracts are highly variable.

For this reason, there’s no true, one-size-fits-all approach to reviewing NDAs.

Do you understand the terms of the NDA? If no, I suggest you either have an attorney review the document and provide you with a summary of any big-ticket issues or you can take Nocturnal Legal’s in-depth course:

If you plan to review it on your own, you should expect to spend anywhere at least an hour reading the document. Unfortunately, many legal contracts, NDAs included, are written with legal formalities. Attorneys were once taught to automatically sprinkle in fancy language like “herein” and “heretofore” when drafting legal contracts. This habit has continued through the generations and, as a result, some legal contracts feel nearly impossible to read.

Important Questions:

  • If you’re the one sharing confidential information – what is the nature and quality of that information?

    • Is it sales information?

    • Is it an ingredient list?

    • Is it financial information?

  • For how many years is the information protected by the NDA?

  • What responsibilities to the parties have once the NDA expires or is terminated?

    • Is there an ongoing obligation to protect information? If yes, for how long?

    • Does confidential information need to be destroyed?

If you remain uncertain and would like to have an experienced attorney review your NDA or draft one for you, send us a direct message.

Read more: What is a Non-Circumvent Agreement?

Paloma Goggins - Business Lawyer in Phoenix, Arizona
Paloma Goggins is an experienced business attorney specializing in helping business owners buy or sell a business

I’m Paloma

I’m an experienced business attorney licensed to practice in Arizona and Wisconsin. My client-first philosophy allows us to collaborate, turning skills, passions, and knowledge into the ultimate form of change-making. Let’s innovate together.