Your Business and Nondisclosure Agreements (NDAs): Confidential Relationships Provide Essential Protections for All Businesses

Almost all businesses have private or confidential information and/or trade secrets that are part of the company’s unique value or competitive advantage. In the course of doing business, there are a number of reasons why this information may be both protected and shared with others, such as employees, potential investors or vendors.

The process for protecting such information includes entering into a confidential relationship through a nondisclosure agreement (NDA; sometimes also known as a Confidentiality Agreement, or CA). But not everyone is clear about when — or why — an NDA is really necessary.

There’s a great deal of chatter on social media around NDAs — are they worth the trouble? Will the time required to create them cause the other party to walk away? Are they really enforceable?

Yes, they are worth the trouble and yes, they can be enforced. Any advice to forgo an NDA will almost never come from a reputable attorney, because doing so is rarely in your best interest.

The bottom line is that companies should use NDAs any time they want to engage in discussions or contract with potential employees, contractors, vendors, creditors, investors or even customers.

Fundamentally, NDAs do three things: 1) Restrict the recipient of private or confidential information from disclosing it, 2) Obligate the recipient to protect the information received and 3) Restrict the recipient from using the information for any purpose other than what’s set forth in the NDA.

Here are a few key reasons your business should implement an NDA every time there is an exchange of information:

They protect your rights. NDAs, CAs, Proprietary Information and Inventions Agreements (PIIAs) and confidentiality clauses within a larger legal document create a confidential relationship between the discloser and the recipient — something that can only be created via written agreement. This allows the discloser to disclose valuable information to the recipient without losing any rights to the information.

It’s vital to demonstrate your efforts to protect trade secrets. A trade secret is a type of private or confidential information that has value because it is not generally known or reasonably attainable. For example, a proprietary process or a signature recipe. Trade secret laws allow trade secret owners to protect themselves from those who obtain access to the information through a breach of confidence or other improper methods. But, once a trade secret is generally known, it is no longer a trade secret and cannot be protected. The element of secrecy is a key requirement to of that protection, and disclosing a trade secret without a confidentiality agreement in place could make enforcing your trade secret rights difficult or impossible in the future.

Put simply: If you are going to attempt to claim that valuable company information is a trade secret, you must take reasonable steps to preserve the secrecy of that information. Disclosing trade secret information only to persons who are under an obligation to maintain secrecy, such as in an NDA, is one way you can show that you are taking such reasonable steps to have your trade secret continue to be protected.

NDAs can deter unauthorized use or theft of intellectual property. If there’s an NDA in place, the repercussions of a breach are significant. If the recipient of private or confidential information or a trade secret breaches an NDA, remedies available to the discloser may include: 1) Damages, which may not be capped or limited, and can include lost profits and business opportunities, and 2) Equitable relief, that could include an injunction to stop the recipient from taking action that is the cause of the breach.

The presence of (or lack thereof) an NDA can significantly impact investments and acquisitions. Investors and acquirers will typically require you make representations in financing documents or purchase agreements that you’ve always entered into confidential relationships prior to disclosing private or confidential information or trade secrets. If you have not, you may not be able to make this representation — which could lead to deals falling through or other significant negative consequences.

For business owners, the list of reasons to have NDAs in place goes on and on: they typically help to establish trust in agreement negotiations, many of the individuals and businesses you might be negotiating with already expect them, and it doesn’t need to be expensive (or time consuming) to establish them.

As a business owner, an NDA is a necessary tool, as is an overarching intellectual property strategy. By being diligent now in how you protect your confidential information, you can avoid many problems down the road.

Ben Oelsner is a partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO Law Firm), an innovative corporate and commercial law firm with a team of experienced lawyers and a practical, efficient, business-focused approach. Founded in 2003 on the philosophy that a different approach delivers better value, our business-first legal and industry expertise helps established brands and emerging companies achieve meaningful business outcomes. KO is headquartered in Denver and Boulder, Colo., and serves the software and SaaS, retail and manufacturing, professional services, energy, food, beverage and consumer goods, eCommerce and internet, healthcare and life science and ancillary cannabis industries. Reach Ben at [email protected].