Tips for Writing Effective Nondisclosure Agreements

A nondisclosure agreement (NDA) is an important tool to protect your company’s trade secrets and proprietary information. An effective NDA should define the types of information included and confidentiality obligations. NDAs must also comply with federal and state laws. Using a general NDA template may not offer much legal protection for your individual business.

The following provides tips and common mistakes to avoid when drafting an NDA. For legal advice or a review of your company’s NDAs, contact a local employment and labor attorney.

Understanding Noncompete and Nondisclosure Agreements

Though they may sound like similar tools to meet a similar end, noncompete agreements and nondisclosure agreements (NDAs) are very different:

• A noncompete agreement is a legal contract between an employer and an employee in which the employee agrees not to compete with the employer after their employment is over
• A nondisclosure agreement (also called a confidentiality agreement) is a legal contract in which two or more parties to a business relationship agree not to disclose confidential or secret information to external parties

While noncompetes must meet several standards to be upheld as a legally binding contract, that isn’t necessarily the case for NDAs. “An NDA is often overlooked in favor of a noncompete, but I think a well-drafted one can be just as valuable,” says Jason Shinn, an employment attorney at Shinn Legal in Sylvan Lake, Michigan.

“I’ve seen business-court judges look at them differently and say that, while they don’t think the terms of a noncompete are reasonable and may not be enforceable, the NDA is a separate provision in the contract and could still be enforceable. The value of the sensitive information doesn’t change with respect to [where] it’s used,” Shinn says.

“In terms of the rigorousness, NDAs still have a reasonableness standard [in court], but it’s not as complex as the one for noncompetes,” adds Kaitlin A. Brown, an employment attorney at FisherBroyles in Bingham Farms, Michigan.

Another option is a bilateral or mutual NDA, which joint ventures, mergers, or startups may use to bind both parties to confidentiality.

Three Key Questions to Ask When Creating Your NDA

There are a handful of scenarios in which an employer may want to use an NDA. However, they’re most commonly used for employee or independent contractor agreements. Specifically, companies want to use the NDA to make sure the employee does not disclose information that gives the company a competitive advantage. Confidential information can include:

• Financial information
• Customer lists
• Business plans
• Marketing strategies
• Proprietary workflows

“If an employee is going to have access to confidential information, I’d always recommend the employer have this nondisclosure agreement as a part of the employment agreement,” says Brown. “The employee shouldn’t be able to take everything they’ve learned, go across the street, and set up their own shop.”

For entrepreneurs and employers seeking help with employee NDAs, Shinn breaks the process down into three questions:

1. What is the confidential information? 
2. What advantage does it provide? 
3. How damaging would it be if the information got out?

“Once you’ve identified those buckets, it’s just a matter of looking at the employees who should have access to it,” he says. “A sales representative with access to pricing strategies and profit margins — certainly it makes sense to have an NDA for that individual. It may not make sense for the employee on the shop floor who doesn’t have access to that information.”

The Process to Write a Nondisclosure Agreement

Many attorneys have agreement templates and inserts for NDAs on file. Lawyers can draft agreements from scratch or modify existing ones. “Often, it’s more economical to start with a template we have on file than to update one that’s already in existence and not compliant,” says Brown.

“I think, once an employer maps out the what and the who, I can come up with a document — or at least contract inserts — that will probably cover 80 to 90 percent of the hires a company is going to do,” Shinn says. “For the 10 to 15 percent outside that area, a quick phone call [to counsel] will suffice.”

Ensuring Enforceability of the Legal Document

So, how do you make sure an NDA is enforceable? Clearly define the terms of the agreement and the definition of confidential information. Include any exclusions for the disclosing and receiving parties. Set out the time period for when the NDA applies, whether it is indefinite or a limited timeframe.

“It’s important to be as specific as possible, but not to the point where you’re excluding future developments or changes in the business,” says Shinn. “Be broad but specific; it’s like the old analogy to pornography: ‘I can’t tell you what it is, but I can tell you when I see it.’”

“I would tailor it to capture the employer’s interest,” adds Brown. “Focus on the proprietary — or confidential — information you’re trying to protect. You’re not trying to prevent an accountant from doing their job, but you’re trying to prevent the accountant from learning everything about your operation and disclosing it to a competitor.”

Make sure an NDA coincides with an employee’s responsibilities. If they make a lateral or upward move, you’ll want to be certain their NDA is still applicable. And if you really want your NDA to be enforceable, you need to treat the confidential information as such — both internally and externally. “If your independent contractors or strategic partners are getting this information, and there’s no watermarks or other indication that it’s confidential, you’re putting yourself behind the eight ball,” he says.

What To Do in the Event of a Breach

Violating the terms of the NDA is a breach of contract. The agreement should define what constitutes a breach, how to proceed with a violation, and the legal remedies available.

In a breach, you can get monetary damages based on the actual breach and future loss of business. You can also get injunctive relief against the disclosing party to limit further disclosures. Before taking legal action, remember that civil court proceedings are generally part of the public record. Arbitration clauses can help keep any disputes private, protect confidential information, and reduce reputational harm.

What to Exclude From the NDA

According to Brown, a final key is ensuring your NDA excludes any information a prospective employee knew before joining the company. Also, provide exclusions for public knowledge or information in the public domain. “And make an exception that the employee may have to disclose confidential information as part of a governmental agency investigation, or if they file a charge with an agency like the U.S. Equal Employment Opportunity Commission (EEOC),” she adds. 

“If you make exceptions that are capturing those protected rights of the employee, then that will also make the NDA more reasonable.”

Find an Experienced Attorney for Help With an NDA

Visit the Super Lawyers directory to find an experienced legal professional for help creating effective NDAs. For more information on this area of law, see our overview of employment law and related content on intellectual property law and mergers and acquisitions.