Non-disclosure agreements (also known as NDAs or confidentiality agreements) can be used as tools to protect confidential information when you need to share it. Here, Grid Law founder David Walker reveals how small business owners and entrepreneurs can use NDAs to their advantage.
As an entrepreneur, there are many occasions when you may need to share confidential information, but will be reluctant to do so.
You may be worried that a competitor will steal your ideas, copy your new branding or just take your trade secrets to improve their own business and gain a competitive advantage.
As a solicitor, I hear these concerns all the time but thankfully, there’s an easy way to quash these fears. You can use non-disclosure agreements, which can protect your company’s confidential information each time you need to share it.
The trouble is, many people debate the value of non-disclosure agreements. They worry that even after signing non-disclosure agreements, their confidential information may still be lost or stolen. But, are they right?
Are non-disclosure agreements worth the paper they’re written on?
In my opinion, non-disclosure agreements can be extremely valuable, but only if used in the right way. In this article, I’m going to explain how to get the best out of them.
What do non-disclosure agreements protect?
Information that isn’t publicly available will almost certainly be confidential and so can be protected by non-disclosure agreements. For example, business plans, details of new technology, and certain pieces of financial information can all be confidential. You can disclose this information under the terms of a NDA and the person you disclose it to is under a legal obligation to keep it secret.
Sometimes, however, it’s not clear whether your information is confidential and whether it can be protected in this way. Think about your client database as an example – it may consist almost entirely of public information such as names, addresses and email addresses.
It may contain other information too, such as your client’s purchase history which they would be free to share and make public without asking you.
Can this be protected by non-disclosure agreements?
Potentially, yes. The fact that you have brought all of this information together and collated it into a single resource could make the information confidential. This is because it would be extremely difficult (if not impossible) for someone to piece it all together, even though most of the information is public record. This is what makes databases such as these so valuable and why they can be protected by non-disclosure agreements.
When should you use non-disclosure agreements?
You should use non-disclosure agreements whenever you allow someone access to your confidential information and you need that information to remain a secret.
Very often, a prospective client will insist you sign an NDA before you start discussing the services you could provide them. They may be concerned about disclosing sensitive information that you could take to a competitor or use for your own advantage, if you don’t reach an agreement to work together.
Alternatively, you may be considering buying a business (or selling yours). This will almost certainly involve the disclosure of very sensitive information and so a NDA will need to be signed before negotiations can take place.
If you have invented a new piece of technology and think there’s a possibility that you could patent it, you absolutely must have non-disclosure agreements signed before disclosing details about it to anyone.
One of the criteria for obtaining a patent is that the technology must be new. This means that details of it must not have been shared publicly with anyone. If they have, the law is very clear, the technology is no longer new and you can’t obtain a patent for it. The only way to share details of the technology without it becoming public is to have someone sign an NDA beforehand.
As you can imagine, not being granted a patent for a new piece of technology could be disastrous for your business.
What should you look for in a non-disclosure agreement?
Many business owners will sign an NDA without taking legal advice. They think it’s just a formality and are completely unaware of the traps that may be hiding in them. So what should you be looking out for?
First, look at the definition of confidential information. This will tell you what is included and what is not. Often there is a general description about the types of information that should be kept confidential, but sometimes it’s very specific so there’s no doubt about what the agreement protects.
Next, there should be a very clear purpose for which the confidential information can be used. For example, you may be permitted to use the information to evaluate an opportunity for the parties to work together, but nothing else.
Non-disclosure agreements place a contractual obligation on you not to share the confidential information with anyone else, without permission. However, there can be exceptions to this. You can usually disclose the information to colleagues and professional advisors, so long as they agree to keep the information confidential too. If you know you will need to share the confidential information, make sure you have the right to do so.
Often, there will be a time limit on how long the information must be kept confidential. Other times there is no time limit and the information must be kept confidential indefinitely. Be careful with this as it can be difficult to keep track of ongoing obligations.
I see other provisions included in confidentiality agreements too. For example, there could be “lock-out” clauses giving the parties an exclusive period of time for negotiations. These can be helpful, but sometimes people need some competition and pressure to get the deal done and stop discussions dragging on.
I regularly see provisions regarding the ownership and transfer of intellectual property rights. It’s fine to have an acknowledgement that disclosing information doesn’t transfer any rights to it, but it can be dangerous to go further than this.
The transfer of intellectual property ownership can often be used as a lever in payment disputes and you don’t want to inadvertently lose this power because you signed it away in non-disclosure agreements without realising you have done so.
NDAs are worth the paper on which they’re written, as long as they’re used in the right circumstances and to protect the right information. Remember, once confidentiality is lost it’s lost forever. You can’t get it back, so you must do all you can to protect it in the first instance.
If you have any questions about protecting your confidential information, please feel free to email me at firstname.lastname@example.org.
Missed the last few article’s in David’s series? Catch up here.
- The benefits of a shareholders’ agreement for small business owners
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