It’s hard to keep a secret, and that fact remains true in the business world. The consequences of leaked proprietary information are often costly and can cause irreversible damage to your business. This is why non-disclosure agreements (NDA) are absolutely critical. NDAs are binding agreements between parties that protect proprietary and confidential company information. NDAs serve not only as a binding legal contract, but also as a constant reminder and stern warning for parties to keep quiet.

What is a Non-Disclosure Agreement?

A non-disclosure agreement is a binding contract that allows participating parties to share information, but restrict the information from third parties. It is essentially a legally enforceable promise that one or both parties will keep a secret.

Some examples of when you should use an NDA are:

  1. When you want an employee to keep company information within the company, even when the employee leaves;
  2. When you want to keep your business partners or investors from talking about company information with competitors;
  3. When you have an invention and you want to discuss it with potential manufacturers without them stealing your idea;
  4. When you have a trade secret that you want to be able to take legal action against anyone (including any third parties) from using the information; or
  5. When you are selling your company and need to disclose company information to potential buyers but don’t want them to share that information with anyone else.

Keeping your company information safe from competitors

It’s a fact of life that employees come and go, even in small businesses. You want to be sure that your trade secrets and private company information stay in your company. You also want to be sure that your employees do not take secrets and share them with competitors. NDAs serve both to (a) prevent this scenario and to (b) give you more teeth if you need to take legal action. Although some states may enforce laws that prohibit employees from leaking or stealing trade secrets, having a legally binding NDA can still prove further benefit. Courts often look more favorably to you if you have a NDA, should the need arise to take legal action with an employee,

A few simple tips with Employee NDAs:

  1. Do it immediately. Use these agreements prior to any employee starting work.
  2. Enforce it with current employees. If your current employees have not signed a NDA, now is the time to do so. You can offer something of value above normal salary and benefits when you have them sign a NDA.
  3. Specify, specify, specify. You need to be specific in your NDA as to what the employee can and cannot tell third parties. If you need salaries and duties to be kept quiet, put it in writing. If you want ownership of trade secrets that your employee develops and the employee cannot disclose them to anyone else, put it in writing.
  4. Make sure your employee understands the document. Give your employee the opportunity to read and fully understand what is in the NDA and what the document requires of the reader. Taking steps to ensure understanding can prove critical. Should an employee ‘blindly’ sign a NDA, you as the employer will not look good in court in the event of litigation.
  5. Use templates and articles from a company like Docstoc to help guide you while you draft your NDA.

Keep your trade secrets status

If you have a trade secret, you need to enforce an NDA with anyone who has access to this information or the status of your trade secret can be jeopardized. While there are other ways to protect the confidentiality of your trade secret(s), the easiest and most efficient way to have others sign a NDA. Potential investors, employees, potential buyers, and manufacturers are just a few parties who absolutely need to sign an NDA. You don’t want any of these parties robbing one of your company’s most valued assets. And if someone breaches an NDA, you can take action against a third party who was not involved in the NDA. For instance, you sign a NDA with a manufacturer stating that he cannot disclose company trade secret “x” when making your products. The manufacturer then goes to your competitor and discloses company trade secret “x” to your competitor’s benefit. You will be able to seek legal recourse and damages against not only the manufacturer but also your competitor. NDAs are an absolutely vital part of keeping your company secrets safe and your business humming along.

A few simple tips for basic NDAs:

Include third parties. Be sure to mention that any and all parties who may come in contact with proprietary company information will be subject to the same restrictions and legal action if breached.

Define the scope. Make sure you define who and what is being covered. For example, is the NDA unilateral (one-sided) or bilateral (two-sided)? Are there any circumstances under which proprietary information can be disclosed? You don’t want to find yourself at the foot of a lawsuit because you didn’t realize you were not supposed to talk either.

Define exceptions. If there are any exceptions, be sure to include them.

Give your NDA bite. Specify penalties and means of recourse in the event of the breach. This lets the other party know that you are serious and if they breach, you will act.

Use templates, articles, and seek legal counsel if necessary. Docstoc is a good starting point to research preliminary information and get a template to draft an NDA.