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A Non-Disclosure Agreement (NDA) or a confidentiality agreement is a legal binding contract that creates a confidential relationship between parties and protects any proprietary information that is relevant to your business operations. The breaching party may be liable for damages.

The object of the NDA is to preserve sensitive or confidential information about your business such that the disclosing party controls the flow of information. Confidentiality agreements are particularly useful prior to sale of a business, contractor relationships,  sourcing manufacturers or any other business relationship that one party wants to enter with an another party.

Having an NDA in place is a standard part of the due-diligence process and should be implemented as early as possible.  Normally, parties enter into a confidentiality agreement immediately before any information is exchanged. Absent an NDA, neither party may be responsible to hold information in confidence.

An NDA generally defines the types of information that is confidential and allows you to place limits on what information can be shared with another party.  Essentially, it is a vehicle that allows you to share an important or promising trade secret, financial, accounting, intellectual property, patents, methodology, or other proprietary information with a potential strategic partner while at the same time having the assurance that your intellectual property will not be disclosed.

NDAs can be mutual or one-sided. In a mutual confidentiality agreement, both parties agree not to divulge information with any other party that is not a party to the NDA. For example, Party A and Party B are seeking to enter into a relationship where Party A is seeking Party B to help manufacture products for Party A. Party A will divulge the formulation of the product it seeks to mass produce. Party A wants to ensure that the formulation is preserved and does not get into the hands of a competitor. In exchange, Party B will disclose financial information such as costs of manufacturing. Both parties will agree not to disclose any confidential information that either party receives from the other party. This is a mutual NDA.

NDAs can be one sided to where one party is the disclosing party and the other party is the recipient of information. It is important to ascertain whether the recipient party will also be disclosing information.

Information is only confidential to the extent  whether the information is known to parties outside of a business, such as whether the information was already publicly available. For example, if the formulation for the product in the example was already made available publicly such as Party A’s company’s website or some employee disclosed it at a party while intoxicated, and in the event that Party B made products under its own private label, Party B may not be held liable for using publicly available information. However, Party B may be liable under other provisions if the agreement was well drafted.

Breaching a Non-Disclosure Agreement can have serious consequences. With an NDA present, the injured party has the opportunity to make a civil claim for damages in relation to the financial loss suffered by the unauthorized disclosure of confidential information.

NDAs are very useful in mergers and acquisitions as well as licensing arrangements, outsourcing agreements, and in any situation involving the sharing of intellectual property.  They typically safeguard information such as financial statements, customer lists, suppliers, employee salaries, equipment, assets, and any major contracts that may be necessary on a continuing basis for the business operations of the company.

Although it is a standard business document, it is essential to have particular language within an NDA that reflects the needs and protected interests of your business. It is also important to be mindful that an NDA has its limits. NDAs typically do not offer protection against disclosures required under law or via a court order..  You must also be careful when entering NDA agreements with public institutions which may be subject to Freedom of Information requests. Even with these caveats, having an NDA in place helps facilitate your transaction by assuring the other side that information shared between the parties is protected.  Confidentiality agreements should be drafted in a way that offers this protection even if a deal falls apart. It is important to consult with a professional who can advise you on the kinds of information that can be shared publicly even with an NDA in place.

Speak to a professional at AGPC Law for more information on how you can protect your company and your information with a Non-Disclosure Agreement.