22nd November 2023
NDAs can be a powerful tool in ensuring your trade secrets stay under wraps. Here’s how to use them.
Can you keep a secret? Not everyone can, and if you’re in the business of innovating you’ll probably reach a point where you need legal protection to help keep your ideas, information or plans under wraps.
This is where you’re most likely to call upon a specialist to draw up a non-disclosure agreement (NDA) (sometimes called Confidentiality Agreements) protecting your precious assets from competitors and securing the future of your project.
When might I need an NDA?
Put simply, an NDA can be used when you want to share commercially sensitive information with a third party, but not the world at large.
Say, for example, your business has a plan to enter new markets, or launch a new product, or is in the early stages of developing a game-changing innovation.
You are likely to want to speak about it with potential partners such as investors, manufacturers or retailers. You may also need to involve professional advisors such as accountants, banks, financial advisors or marketing agencies.
All of them will be able to offer valuable input – but you don’t want any of them to accidentally or even deliberately give the game away to competitors and kill your idea before it gets off the ground.
This is especially important when developing an idea that you would want to protect as your intellectual property later on. It is a common misconception that you can protect an idea – in fact, you can only prevent people from sharing it with others by way of a contractual duty of confidence.
It is only when that “idea” becomes a tangible asset that different intellectual property protections apply (see our Brand Protection Guide article <link> for more information on these).
So – you’re going to need an NDA.
What is an NDA?
An NDA is a legal contract whereby a party (or both parties) must keep certain information confidential and only use it for the particular purpose for which it is disclosed. Having a NDA in place would help keep discussions discreet and prevent the other party from passing on information to third parties and obtaining sensitive commercial information about the new idea.
NDAs can often be crucial at this stage because the failure to use one could scupper your ability to apply for patent or registered design protection later on. If you speak about a patent or designs to a third party without having a NDA in place then this effectively puts the information in the public domain, meaning the design is no longer ‘novel’ or ‘new’ – a vital requirement for achieving a patent or design rights.
What should an NDA cover?
A non-disclosure agreement can protect all information provided to the other party in documents, emails, drawings and so on. It can also protect information you share in meetings or presentations. It should set out the ways in which the third party can use the ideas and information and restrict their use of it for any other purpose.
The reason for the sharing of the confidential information should be clearly defined and the scope of this carefully considered. You can’t narrow the restrictions of an NDA once agreed. You need to strike a balance between allowing the third party to make meaningful use of the protected information, while ensuring your business is protected.
What types of NDA are there?
There are two common types – one-way NDAs, and mutual NDAs. As the names suggest, the first is used if one party is disclosing information to another, and the second is if both parties are revealing protected information to each other.
How long should an NDA last?
A non-disclosure agreement can specify how long it remains effective for – periods of three to five years are common. After that time, the third party will be able to use and disclose your information – and the NDA can’t be enforced once the information is made public anyway (for example after your previously top-secret product has launched). Some companies prefer to not specify the duration so that obligations continue indefinitely unless that information become public.
What happens if an NDA is breached?
If you have any kind of heads up or warning that an NDA is about to be breached, it is important to act quickly and seek legal advice. It may be possible at short notice to obtain an interim injunction from the court to prevent the party in breach from further using and/or disclosing the confidential information. If the court grants such an injunction, then there are very serious consequences if a party fails to follow an order of the court.
If an injunction is not an option or needed, then it may be possible to claim damages for breach of contract.
A court will need to decide the extent of the damage to your business to set the amount of damages to be paid to you by the party that is in breach.
NDAs – pitfalls to avoid
When dealing with confidential information, there are traps that should be avoided. For example: