How do you keep a secret a secret?  The best way to keep a secret is not to tell anyone.  But what if you need to tell someone in order to grow your business?  You may need to share confidential information with distributors, vendors, or service providers.  Can the law protect your secret from being shared by others?  It can. Here's how:

A non-disclosure agreement (often referred to as an “NDA”) can protect your confidential information from being used by another or from being shared with a third party. 

Sharing Your Secrets

If your business has proprietary or trade secret information, you’ll want an NDA to prevent loss of ownership and control of that information should you need to share it with a business partner, vendor, or service provider.  An NDA can be unilateral or mutual. 

A unilateral non-disclosure agreement protects the “Disclosing Party’s” confidential information, as the “Receiving Party” is under certain obligations not to share or improperly use the information disclosed. 

A mutual non-disclosure agreement covers the situation where each party is or may be sharing confidential information with the other, and both parties are bound by obligations not to disclose and improperly use the other’s information.  Thus, both parties in the mutual non-disclosure agreement generally intend to disclose and receive information. 

Non-disclosure agreements can be more complicated than they sound.  Even standard NDA provisions require careful consideration to ensure the agreement satisfies the goals of both parties - which is to enable the sharing of information while keeping the information secret and to avoid a breach of the non-disclosure agreement. 

Unlike other contractual agreements, where there can be an adequate remedy at law should one party fail to uphold its end of the bargain, the serious breach of a nondisclosure agreement can decimate a business.  Some losses can't be repaired, even with a win in court and an award of monetary damages.  So, a good NDA should have provisions designed to prevent the secret information from getting out, as opposed to just numerous penalty provisions for breach of the non-disclosure agreement.  

Who Should Know Your Secrets?

Not everyone who works for the Receiving Party needs to be privy to your confidential information.  Consider restricting disclosure to specific individuals or business units.  Take the time to discuss who really needs access to the information.  The non-disclosure agreement should be drafted accordingly. 

Identify and Limit the Use of Your Secrets

A standard non-disclosure agreement should define what is confidential information.  You will want to avoid broad “catch all” statements if you are the Receiving Party, yet you may want to cast a wider net if you are the Disclosing Party.  Further, your non-disclosure agreement should clearly outline how and why ( i.e., for what purpose, in what manner) your secrets can be used by the Receiving Party as well as what cannot be disclosed.

Example: “The Receiving Party agrees that it shall use the Disclosing Party’s Confidential Information solely for the purpose of [evaluating the opportunity to become a supplier] and shall not [reverse engineer, disassemble, decompile] the Disclosing Party’s Confidential Information.”

Exchanging Secrets

Careful consideration needs to be given to how your secrets, or confidential information, will be exchanged.  From the Receiving Party’s perspective, the non-disclosure agreement should make clear that the information must be marked as confidential when in a tangible form (written, electronic, etc.).  If disclosed verbally, the non-disclosure agreement should make it clear that the Disclosing Party will identify the information as confidential during the disclosure and send a follow up email or letter within 30 days confirming the confidential nature.

If the non-disclosure agreement involves or potentially involves disclosure of confidential information that rises to the level of a trade secret, make sure to clearly establish the difference between a trade secret and other confidential information in the definition.  This is important because obligations in a non-disclosure agreement regarding confidential information typically expire after an agreed-upon term, which can lead to the argument that a Disclosing Party has inadvertently surrendered its trade secret rights.  [Be sure to see the third article in this series on the difference between a trade secret and other confidential information.]

How Long Should You Keep A Secret?

A requirement not to disclose or use the confidential information of another party can be characterized as a restrictive covenant and, like other restrictive covenants and depending on the law of your state, may need to be narrowly tailored to protect a legitimate business interest.  Restrictions should not be more than reasonably necessary.  With this in mind, consider including what you believe to be a reasonable time period during which a party has to maintain confidentiality under the non-disclosure agreement.

With time, most information eventually becomes stale.  But, some information, such as trade secrets, should be held and protected indefinitely.  Thus, consider a carve-out for trade secrets to be protected “as long as they remain a trade secret.”

Conclusion

Your secrets are often one of your company’s most valuable assets, so thoughtful consideration should be given to every non-disclosure agreement.  

Watch for part two: Non-Disclosure Agreements - Protecting Your Company’s Secrets