Should You Protect Your Business with a Nondisclosure Agreement?
Whether you are an entrepreneur starting a new business or are running a well-established business, your success often depends on safeguarding innovative ideas and information that give you an edge over competing businesses. If you have spent years perfecting a secret recipe for the doughnuts that you sell in your bakery or developing a customer list for your insurance agency, it is crucial to take steps to prevent a former employee, business partner, or third party from taking that proprietary information and using it to compete against you. A well-drafted nondisclosure agreement is an important tool that can protect valuable confidential business information.
What Is a Nondisclosure Agreement?
A nondisclosure agreement contractually binds a party to maintain the confidentiality of certain proprietary information or processes. Although each nondisclosure agreement will vary depending on the unique goals of the business owner, the agreement should typically identify the parties that will be bound by it, the specific confidential information that is being protected, the permissible uses of the confidential information, the remedies in the event of a breach of the agreement, and the term and scope of the agreement. The types of information covered by a nondisclosure agreement vary widely depending on the business it is designed to protect, but they often include customer lists, marketing and sales strategies, details about new products, pricing information, proprietary processes and inventions, financial statements, and trade secrets.
Note: Trade secrets are typically also protected from disclosure by law. They are a special type of confidential information that a business has taken reasonable steps to protect from disclosure and that has economic value because it is being kept secret.
When Is a Nondisclosure Agreement Needed?
There are a number of situations in which it is prudent for a business owner to use a nondisclosure agreement. Among the most common are when a new employee or partner joins a company or when a business is being sold.
When a new employee needs access to confidential information to perform their job, it is important for the business to enter into a nondisclosure agreement with the employee when they are hired that details how the information may be used during their work but prohibits it from being disclosed or used for any other purposes. The agreement will typically specify that the business can recover damages or seek an injunction in the event of a breach. Similarly, when a new partner joins the business, a nondisclosure agreement will prohibit the new partner from sharing important confidential business information in ways that could harm the business.
When a business is being sold, certain parties, such as potential buyers or business brokers, will typically be given access to confidential information to aid them in determining whether to purchase the business. A nondisclosure agreement will prohibit that confidential information from being shared with third parties. In addition, the agreement may preclude a potential buyer from even disclosing that the business is being offered for sale or contacting employees, customers, vendors, or other parties.
There are other situations in which nondisclosure agreements are valuable as well. If you are hiring independent contractors or vendors who need access to confidential information to complete a project, a nondisclosure agreement will prevent them from disclosing it to others and could require any copies of it to be returned or destroyed at the end of the relationship. Similarly, if you are looking for investors for your business, they may want access to certain sensitive information before deciding whether to invest money in your business. A nondisclosure agreement will enable them to have access to the information they need to make a decision but will prevent them from sharing it with third parties or using it in ways that are not in the best interest of the business.
Is a Nondisclosure Agreement Enforceable?
In order to be enforceable, a nondisclosure agreement must protect legitimate business interests—that is, information that is confidential and not already publicly known—and should not be unreasonably broad or burdensome with regard to the length of time or the geographic scope. In addition, the agreement must be specific enough for the parties bound by it to clearly know what information it protects.
There are some situations in which a nondisclosure agreement will not be enforceable because it is against public policy. For example, the 2022 Speak Out Act is a federal law that prohibits the enforcement of nondisclosure agreements that were entered into before a dispute arose (but not after a dispute arose) in situations involving sexual misconduct. Some states have also prohibited the use of nondisclosure agreements in certain situations. For example, Washington, Maine, and Oregon recently passed laws prohibiting the use of nondisclosure agreements in connection with claims of employment discrimination.
In most situations, however, a reasonable and well-drafted nondisclosure agreement designed to protect valuable business information is enforceable.
Call Us Today
Starting and expanding a business requires a significant investment of both time and money. Your investment could come to nothing very quickly if your business’s proprietary information is disclosed to your competitors or other unauthorized third parties. Give us a call to set up an appointment so we can discuss creating a nondisclosure agreement tailored for your business that will protect it from unnecessary and preventable harm.
