1. Overview
Sharing commercially sensitive information and intellectual property requires a high level of mutual trust and commitment to confidentiality.
This guide explains non-disclosure agreements (NDAs), their key terms, and their impact. The guide also highlights issues that you need to bear in mind when preparing and signing an NDA.
2. What is a non-disclosure agreement?
A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a low-cost way to protect your business' ideas.
An NDA is a legal contract between you and another party. Typically, you agree to disclose information to them for a specific purpose, while they agree not to disclose that information to anyone else. This allows you to share your trade secrets with business partners while preventing them from passing this information on.
For example, you may have come up with a product design and need to get an estimate from a manufacturer of how much it will cost to make. An NDA can ensure that your partner does not pass details of your idea to one of your competitors.
You can also use these agreements with your employees and journalists to whom you want to give a 'sneak preview' of financial, technical or new product information.
NDAs can cover:
- trade secrets - eg a formula, programme or process
- technical drawings and designs
- mathematical and chemical formulae
- business plans
- customer and prospect lists
Information qualifies as a trade secret or confidential when it is not known in the public domain. It is valuable only as long as it remains secret or confidential.
Carefully consider NDAs between you and public bodies. Any information that you might provide may be disclosed under the terms of the Freedom of Information (Scotland) Act 2002. This gives anyone the right of access to information held by public authorities.
Have a clear idea beforehand of what you want to share with potential business partners and stick to it. This minimises the risk of breaches of confidentiality.
3. When to use an NDA
Non-disclosure agreements (NDAs) can be tailored to your requirements.
They can be used to:
- share intellectual property
- share commercial or trading information
- formalise a relationship, eg between an employer and employee
NDAs for employees
Current and former employees are responsible for most breaches of confidentiality. Employees are under an implied duty not to use trade secrets in a manner that will harm your business. However it is best to get this in writing and to specify to the employee exactly what is confidential. You should also ensure that the NDA makes provision for when the employee leaves your business.
Other types of NDAs
- A precedent confidentiality agreement is used for mergers and acquisitions. If a company wants to buy your business, it will want to look at your books and assets. An NDA can provide an element of protection for your confidential information and trade secrets if the prospective buyer pulls out of the deal.
- If you don't know exactly what information you will need to disclose during a commercial relationship, you can still use an NDA. It is a good idea to classify as confidential any information that will be disclosed later, so that the NDA still applies.
One-way and two-way NDAs
- A one-way NDA is used when only one business is sharing information and the other agrees to keep it confidential.
- A two-way NDA is used when both businesses are sharing confidential information with each other and want to be sure that neither will disclose their trade secrets.
4. Protecting commercial interests when working with public bodies
With non-disclosure agreements (NDAs) it is a good idea to specify:
- how the information can be used
- any restrictions on the use of the information you provide, eg preventing the recipient from making copies
- that the owner retains the intellectual property rights, copyright or possible patents
The key clauses will be those detailing:
- protection against the copying or retention of confidential information
- protection against disclosure of information not already in the public domain
- a remedy, eg compensation, for any breach of the agreement
Ensure that the information you are seeking to protect cannot be construed as being in the public domain. Once you demonstrate your product, tell someone about an idea or write about it, it can no longer be considered confidential.
It is a good idea to ask public bodies if they have a confidentiality agreement or NDA which meets the terms of the Act. For more information on this subject please see the guidance issued by the Scottish Government here.
Non-disclosure agreement (NDA) templates can be bought off the shelf, allowing you to adjust them for your needs. This is inexpensive and the template can be reused.
If an NDA is flawed, eg the definitions are not specific, it won't provide enough protection for you or your business. You should consider asking a lawyer to draw up a bespoke confidentiality agreement for added protection.
You should physically secure your confidential information in case of any legal action for breach of confidentiality. The courts would be reluctant to treat information as secret that you had not taken practical steps to protect.
Such measures could include:
- locking confidential information away
- limiting the number of people who can access the information
- ensuring you have up-to-date IT security systems in place
It also helps if you have a company policy regarding the use and disclosure of confidential information.
5. Key non-disclosure agreement terms
It is a good idea to understand these terms and their definitions, which crop up in non disclosure agreements:
Confidentiality - a legal principle that maintains secrecy between parties.
Owner or discloser - the name of the person, organisation or business disclosing the information.
Recipient - the name of the person, organisation or business that is receiving the information and is responsible for ensuring its confidentiality.
Statement of reasons - a short paragraph defining the context in which the information will be disclosed and why the parties want to make the information the subject of a contract.
Subject - the information and documents that will be the subject of the confidentiality agreement.
Penalty clause - an optional way of fixing an amount of compensation that the owner or discloser is paid if the recipient breaches the agreement.
Confidentiality clause - an optional clause that requires both parties to keep the existence of the confidentiality agreement a secret.
Term of agreement - how long the obligations of the contract last for.
6. Creating a non-disclosure agreement
With non-disclosure agreements (NDAs) it is a good idea to specify:
how the information can be used
any restrictions on the use of the information you provide, e.g. preventing the recipient from making copies
that the owner retains the intellectual property rights, copyright or possible patents.
The key clauses will be those detailing:
protection against the copying or retention of confidential information
protection against disclosure of information not already in the public domain
a remedy, e.g. compensation, for any breach of the agreement.
Ensure that the information you are seeking to protect cannot be construed as being in the public domain. Once you demonstrate your product, tell someone about an idea or write about it, it may no longer be considered confidential.
The UK government has published sample NDAs for reference. Also non-disclosure agreement (NDA) templates can be bought off the shelf, allowing you to adjust them for your needs. This is inexpensive and the template can be reused.
If an NDA is flawed, e.g. the definitions are not specific, it won't provide enough protection for you or your business. For added protection, you may need to ask a lawyer to draw up a bespoke confidentiality agreement.
You should physically secure your confidential information. In the event of of any legal action for breach of confidentiality, the courts would be reluctant to treat information as secret that you had not taken practical steps to protect.
Such measures could include:
locking confidential information away
limiting the number of people who can access the information
ensuring you have up-to-date IT security systems in place.
It also helps if you have a company policy regarding the use and disclosure of confidential information.
The Intellectual Property Office reminds businesses to record what, how and when any confidential information is shared - whether digitally or face-to-face - and suggests asking the recipients of any confidential information to sign a copy to provide evidence that they’ve seen it.
7. Issues when signing a non-disclosure agreement
Once you sign a non-disclosure agreement (NDA), you have entered into a legally binding contract. This allows you to share ideas with business partners while preventing them from passing this information on.
Unfortunately, the contract is only as good as the person signing it. If your partner breaches the contract, you can take them to court for damages, but this might be expensive and time consuming. It can also be difficult to quantify the damages.
If you suspect that your business partner may be about to breach the NDA, you can get an injunction, i.e. a court order preventing them from breaching the agreement, to stop this happening.
To put you in a better position if you do have to go to court, make sure that all definitions and exceptions in the agreement meet your requirements. They should also be appropriate to the type of trade secret you are sharing.
It is a good idea to get to the patent-pending stage of a patent application before approaching investors, marketing or licensing companies. There is more information about patents and intellectual property in our guide Intellectual property: the basics.
The biggest difficulty is determining exactly what is and what isn't covered by the agreement. The person disclosing the information wants the contract to be interpreted in its broadest form, whereas the partner prefers to see the contract interpreted in a narrower way.
If any issues arise and worry either party, it may be possible to change or add clauses to resolve the issue.
You can speak to a member of Business Gateway about protecting your knowledge and work. Call us on 0845 609 6611.
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