Non-Disclosure Agreements, or NDAs, are a popular tool used by businesses to keep their sensitive information from public dissemination. There are two parties in a typical NDA: the discloser and the receiver. In the context of these agreements, the discloser shares their confidential information with the receiver, and the terms of the NDA incentivize the receiver from divulging the information.
The structure and content of an NDA will vary depending on the situation, however, most will contain (at a minimum) the duration of the agreement, an explicit definition of the confidential information, and the roles of the involved parties. Some may also include a list of permitted uses of the sensitive material and/or language regarding consequences of disclosing the information and breaching the contract.
So when would a business owner want to use an NDA? Realistically, any situation where sensitive, economically important business information is being shared, an NDA may be appropriate. This may include company mergers or acquisitions, presenting designs to potential investors, contracting to 3rd party businesses, or negotiating with potential investors. Perhaps the most common use of NDAs occurs during the new hire process.
It’s estimated that about 1/3 of the U.S. workforce is currently signed-into an active, legally-binding NDA with their employer. To some, this makes perfect sense; when a business hires a new employee, sharing confidential business-related information is oftentimes unavoidable. What exactly is keeping an employee from sharing your economically important information—such as product designs—with a direct competitor?
While an NDA can protect any type of information that a business deems “confidential”, most employer-employee NDAs are meant to protect a business’s intellectual property. Through these agreements, business owners are simply trying to protect their proprietary techniques, products, developmental methods, recipes, and designs from public dissemination.
What Exactly is Intellectual Property?
New employees may be irked by the idea of signing a mandatory NDA upon hire, as it might be misconstrued as a sign of mistrust or suspicion. Realistically, business owners have an obligation to protect their business, their shareholders, and their other employees from the ever-present threat of competing industry.
Most owners realize that securing their assets is more than just protecting their equipment and capitol. While these things are indeed important, of comparable significance are the ideas, designs, original works, methods, and inventions of the business.
Collectively, these types of intangible assets are called intellectual property. It is critical for a business to secure its intellectual property. Like other types of possessions, if intellectual property is left unsecured, it’s liable to be “stolen” or used without permission. Good owners realize this and make a concerted effort to keep their property from the hands of competitors.
Intellectual property generally falls into three categories: patents, trademarks, and copyrights. In the U.S., federal agencies—such as the U.S. Patent and Trademark Office—regulate and enforce intellectual property policies. However, these federal regulations may not apply when businesses share their proprietary information with employees, contractors, or other businesses. For this reason, owners tend to rely on other types of contracts, like NDAs, to protect their intellectual property. This is precisely why one in every three U.S. workers are locked-into an employer-employee NDA.
NDAs aren’t Necessarily Foolproof
While an NDA is meant to prevent others from maliciously spreading private business information, even the best contracts can’t necessarily guarantee that your information will remain confidential. At their best, NDAs clearly define the concerns of the disclosing party in a way that dissuades or disincentivizes others from breaching the contract.
Notably however, NDAs cannot enforce a monetary penalty for such an action. In other words, the NDA can’t specify an arbitrarily chosen penalty for breaching the contract. This amount must be linked to a realistic estimate of business losses as a consequence of the breach. Not only is this difficult to estimate, but it may have to be proven in court at a future time. That said, in the context of an employer-employee NDA, the mere presence of a formal, legally-binding agreement will strike a somber and serious tone with new hires.
With NDAs, it’s important to keep the context of your business in-mind. Some industries greatly benefit from these contracts, while others simply don’t have the need. For example, tech and biotechnology companies tend to rely heavily on NDAs and other types of confidentiality agreements. Since proprietary design is often pivotal to their success, having an employee disclose product information to a competitor could irrevocably damage their operation.
More generally, NDAs are particularly applicable if the success of your business is heavily reliant on a proprietary design, method, or protocol that’s specific to your operation. Likewise, businesses with more workers are inherently at a higher risk for private information dissemination, simply based on the fact that more individuals are involved with the process.
So as a business owner, should you have your employees sign NDAs upon hire? The answer depends on a number of factors; NDAs are more applicable for some industries than others. Likewise, it’s important to remember that an NDA is only as strong as the signee’s propensity to honor it. While NDAs can incentivize others from disclosing parties, it cannot dictate their actions or guarantee full security.