Non-Disclosure/Confidentiality Agreements

A non-disclosure agreement (also known as an NDA or a confidentiality agreement) has become essential in the competitive business arena.  A company’s intellectual property and trade secrets are of utmost value to any business.  While some of a business’ confidential information can be protected via the use of patents or copyright, a substantial amount of its trade secrets and confidential information cannot be protected outside of contractual provisions created by the company.  In order to best protect its confidential information, a company often uses written contracts to implement the confidentiality of its work to employees, independent contractors and via third party contracts with vendors or potential buyers.


Any employee in California who maintains a fiduciary duty to an employer, owes that employer a duty of loyalty while employed, regardless of whether or not a non-disclosure agreement exists.  Simply stated, this means that an employee cannot act contrary to the employer’s interests by secretly competing or disclosing confidential information.  The use of a non-disclosure agreement merely simplifies enforcement and may also compel an employee to uphold confidentiality after employment ends.  In addition, there are certain terms that the drafter of a contract should include in the NDA:


  1.  Definition of “confidential” information:  Your NDA should describe, in as much detail as possible, the confidential information and trade secrets that are at issue.  A NDA lacking this information, will hardly protect your business.  The NDA should provide the other party with adequate notice as to the nature of information he or she must not share with another party.


  1. The specific duration for which the NDA is effective:  If your company’s secrets contain information that will always be considered confidential (such as a secret computer program), your NDA will need to specify that the employee is forbidden from disclosing the information indefinitely.  The NDA will also need to set forth the policies and procedures the employee must follow to prevent unauthorized disclosure.  In contrast, if your company will be making the information public in a few years, your NDA needs to only last for that duration.  


  1. Enforcement mechanisms in the event the employee breaches the NDARegardless of the fact that your employee signed a contract to the contrary, he or she may still violate the NDA.  As a result, your NDA must specify what relief or compensation you will be entitled to recover in the event of a breach.  The remedies available for a breach of an NDA include monetary damages to compensate your business for the harm it has suffered as well as the costs and attorney’s fees required to bring an action to enforce the agreement.  


Skilled business attorneys who specialize in contract formation can tailor the most suitable NDA for your business.  In drafting your NDA, your attorney should remain cognizant of the following challenges that are most commonly made to the enforcement of an NDA:

  1.  The terms of the NDA are too vague:  An NDA that is overly ambiguous or unreasonable may be deemed to be void as being too vague to enforce.  For an NDA between an employer and employee, the terms of the NDA must be reasonably limited to serve the employer’s legitimate business interest and cannot include things that are obviously not business information.


  1. Lack of consideration:  Just as with any other contract, an NDA is only valid if there is adequate consideration given to the employee in exchange for executing the NDA.  If the NDA was executed when the employee was hired, the hiring serves as sufficient consideration.  However, if the NDA is executed during the course of employment, additional consideration must be given, such as a pay raise or increase in responsibility or title.


  1. The information must be “confidential”:  Courts will not enforce an NDA if the information sought to be protected is not confidential.  Information in the public domain or already known by the receiving party, is not confidential.  Examples of confidential information include: client lists or trade secrets.


  1. The employer must take reasonable measures to protect the secrecy of the information:  The determination of what constitutes “reasonable efforts” varies depending on the circumstances, however, reasonable efforts can include, among other things, using and enforcing NDAs, limiting and tracking disclosures and keeping the information in a secure location. 

 

  1. Make sure both parties are represented by counsel:  Just as with any contract, courts will consider inequitable bargaining power during negotiations.  It is highly advisable for both parties to be represented by competent counsel.


  1. Difficulty quantifying damages:  Because it is often difficult to quantify damages for the breach of an NDA, the parties to the agreement may want to insert a clause providing that the receiving party acknowledges that a breach of the confidentiality agreement would cause irreparable harm.  The NDA may also include a liquidated damages provision that sets the total damage or a calculation, for determining damages. Often a court will enforce these provisions if the liquidated damages are comparable to the actual damages.


Confidentiality agreements are a very useful method for the disclosing party to protect its proprietary information.  That said, if an NDA is found to be unenforceable, the disclosing party may lose ownership of that information, resulting in potentially severe business consequences.  If you are a party who wants to employ an NDA or a party who has been asked to agree to an NDA, it is essential that you obtain the representation of knowledgeable legal counsel.  Gohar Abelian of Abelian Law Firm provides skilled representation and advocacy for her clients in contract negotiation.  For your free consultation, contact Gohar at (818) 588-5337.