When Your Business Should Use Non-Disclosure Agreements (NDAs)

Non-disclosure agreements are not just for large organisations, corporate takeovers and shady politicians. Although this may be how you became familiar with NDAs, they are actually widely used by businesses of all shapes and sizes. Employees, freelancers, consultants, partners, investors and even temporary staff are often required to sign an NDA before undertaking work or entering into negotiations. 

In business, your biggest assets are usually ideas and information, both of which need to be safeguarded because if somebody else can access these then your business could be in trouble. Therefore, the aim of an NDA is to protect the competitive advantage of the company.

So, let’s explore what NDAs are, what they should and should not be used for, and when your business should use non-disclosure agreements.

What is A Non-Disclosure Agreement?

A non-disclosure agreement (NDA), sometimes referred to as a confidentiality agreement, is a contract between two or more parties to establish confidentiality around certain parts of the business or particular projects. This may refer to specific information, such as finances or client information and it may also encompass ideas and plans the company does not yet wish to make public.

Whilst an NDA serves to guard against corporate espionage, its primary purpose is to emphasise the importance of confidentiality and set clear expectations between the involved parties.

Can An NDA Be Broken?

Non-disclosure agreements (NDAs) are contracts that legally bind parties to confidentiality. Therefore, breaking this agreement can result in legal action.

It is important to recognise though that non-disclosure agreements do not protect anyone or any organisation from illegal activity. Therefore, exposing wrong-doings or illegal activity is completely legal, even if an NDA or confidentiality agreement has been signed.

No NDA can prevent anyone from going public or to the police if an organisation, or someone within it, is doing anything illegal. This includes discrimination and sexual harassment. Also, no person or organisation can use an NDA so that they/it may then operate in a way that infringes on anyone’s human rights.

However, when a reasonable NDA is breached, penalties outlined in the agreement, such as financial damages or even criminal charges, can be enforced. Taking legal action for NDA breaches can be costly. If company secrets are leaked, proving the source of the leak is crucial. 

This can be straightforward if, for instance, a manufacturer launches your product on their own. But if a competitor gains knowledge, it can be harder to prove the source. Principally, NDAs serve effectively as a deterrent and reminder to parties of the importance of confidentiality. 

When Might I Need An NDA For My Business?

Some circumstances might call for the use of an NDA by a business. Non-disclosures can be used to highlight and agree on the importance of confidentiality regarding certain kinds of information, parts of the business or particular projects. 

Critically, companies must be clear and specific regarding the information that cannot be disclosed. A vague or overly general NDA may not be enforceable and could create hesitancy among associates or employees about sharing necessary information.

Instances where NDAs are necessary might include:

Protecting Sensitive Information

Data protection laws are in place to protect customer/employee personal data. Every business needs a privacy policy to outline and enforce its data protection policies and remain compliant with GDPR (General Data Protection Regulations).

Beyond this, companies may also use non-disclosure agreements to emphasise confidentiality around particular data. This approach is recommended when working with parties outside of the business, such as freelancers or agencies, who may have access to sensitive information. 

Failure to protect customer data may violate agreements with clients and erode trust. Therefore, such information should be shielded from unauthorised use or distribution through NDAs.

Protecting Valuable Information

It’s important, for protecting your brand and investments, that you also protect information deemed valuable. 

For example, a company that has spent five years persuading its website visitors to sign up for its newsletter has acquired valuable information. Allowing them to make direct contact with multiple potential customers and tailor their marketing or advertising towards certain demographics. Such information, valuable to the company, would likely also be valuable to competitors. Therefore, when you’re sharing this information with others outside of your business, you will want to have a confidentiality agreement in place. This should state that no customer information should be passed on, copied or used for anything other than as the company that owns the data instructs.

More importantly, a failure to protect customer data could see you breaching agreements you have made with your customers, especially regarding third-party data sharing.

Seeking Investment, Selling a Business, or Partnering

Keeping potential transactions confidential is crucial, especially if public disclosure could impact business relationships or reputation.

Organisations may also operate under NDAs when seeking investment as this often requires sharing a significant amount of important information, including financial reports and future growth plans.

Confidentiality must be a prerequisite for disclosing financials, projections, or plans when seeking investment, selling a business or discussing potential partnerships. It may be necessary to share sensitive information during negotiations and an NDA can be used, in this case, to maintain confidentiality and avoid premature disclosure or misuse of information.

Protecting Trade Secrets

Businesses may need to protect information regarding formulas, algorithms, code, software, recipes, etc, that you are creating or adapting. 

When working with third parties, including freelancers, consultants, manufacturers, marketing agencies or other advisors, it may become essential to share trade secrets. However, you’ll want to ensure that this information doesn’t get shared with anyone else outside of the organisation.

Keeping innovations under wraps is vital, especially without patent protection, to safeguard designs or formulas from competitors and maintain market advantage.

Furthermore, you may also not wish customers to know if you’ve got a new product in development, in case they stop buying your existing products.

What Else Should I Know About Using Non-Disclosure Agreements

Firstly, applying an NDA to a discussion does not necessarily mean the parties may go on to work together. For instance, if you’re looking to outsource the development of an app, you may have to share your plans with freelancers/agencies in order to assess suitability for the project. However, though you may not go on to work with them, suppliers will still be obligated to keep disclosed information confidential, as agreed.

Should Employees Be Asked To Sign Non-Disclosure Agreements?

Employees may also be asked to sign NDAs, though it is worth considering if this is necessary. Since the relationship between employer and employee is not equivalent to business-to-business relationships, many would argue that for a productive working relationship, trust must be assumed. Therefore, an NDA risks disrupting the dynamic.

Standard practice is to include a confidentiality clause within the employment contract.

Patent Protection vs NDAs

Many businesses will use non-disclosure agreements to protect trade secrets. Another option, of course, is patent protection. Patent protection ensures your invention (code, recipe, design, etc) cannot be commercially manufactured, used, distributed or sold without the patent owner’s permission. However, patents are publicly available so you’ll need to consider whether your trade secrets are better protected by a patent or use of NDAs.

KFC serve as a good example; Their famed "secret" recipe chicken is safeguarded under Intellectual Property Law, likely reinforced by one or more NDAs. Instead of pursuing a patent, KFC opts for this approach primarily because patent protection means public disclosure of the recipe, potentially enabling individuals to replicate the product at home.

Using Non-Disclosure Agreements In Business 

Requesting an NDA can feel uncomfortable, particularly for smaller businesses. However, having an NDA in place actually facilitates trust and enables all parties clarity and protection during negotiations and discussions. NDAs, or confidentiality agreements, should aid open communication and sharing for the benefit of all involved.

Although it may be tempting to draft a non-disclosure agreement, there are sensitive documents and, as mentioned, anything construed as too vague or generalised may not be enforceable. Equally, anything deemed unreasonable can also be disregarded. Therefore, I strongly advise having an NDA drafted by a legal professional.

Aubergine Legal can advise on whether an NDA is necessary and what should be included. We can help you decide when and how to use your NDA and what the penalties should be if confidentiality is broken. This will allow us to tailor your non-disclosure agreement(s) to ensure they are robust and specific. Alternatively, I’m also able to draft NDA clauses to slot into existing contracts, if this is a more appropriate approach.

Please don’t hesitate to get in touch to find out more about non-disclosure agreements.