Everyone wants a Non-Disclosure Agreement (NDA) template in their pocket. What should be in your NDA?
What Laws Apply?
Every company starts with an idea and is propelled forward by business relationships. At first, that idea receives its intellectual property protection (if any) as a Trade Secret. Trade secrets used to be protected only by the laws of each State, but in 2016 Congress passed the Defend Trade Secrets Act (DTSA) to give trade secret owners national protection. So when you create a NDA, you should make sure it conforms to the rules of both the State federal laws.
Trade Secret laws protect ideas that (i) are not known or readily ascertainable outside your company, (ii) give you a competitive advantage by not being disclosed to your competitors, and (iii) you use reasonable measures to keep secret. Since ideas require business relationships to move forward, it is widely accepted that those reasonable measures include disclosing trade secrets to a select group of non-competitors, as long as there is a deterrent to keep that group from further disclosing the secret. So your NDA needs to provide such a deterrent.
What Ideas Should Be Covered?
Your NDA should not disclose the secret. Rather it should state in general terms what kind of information or data you want to keep a secret. Examples include plans (business, pricing, and strategic), financial data, lists of clients and prospective clients, internal training programs, and any other internal “content” such as designs, drawings, and notes about inventions, as well as the existence and details of any contracts and joint ventures. Note that “content” could have been protected by copyright laws since it can be thought of as a creative work. But in order to protect such documents by copyright, you would have to disclose the material to the copyright office—which defeats the requirement to “keep it a secret.”
What To Prohibit
NDAs may be bi-lateral. That is, you may expect to receive trade secrets as well as disclose them. So you might want to have a sunset clause for your own protection: The agreement expires in x years, or anything that ceases to be a trade secret (through no fault of the receiving partner) is no longer protected by the agreement.
You need to prohibit not only disclosure, but also use. It would be just as damaging to your company if the partner you disclosed your secrets to started using your ideas.
You need to be able to stop the disclosure or use legally—that requires an injunction, which should be spelled out as a remedy for violating the agreement. Another remedy you might consider is “liquidated damages.” That gives you a guaranteed sum of money if there is a violation. But be careful with that. It could result in a payout that is too small compared to the upside potential of the idea in the marketplace.
Don’t forget to include an “attorney fees” provision. Without that, you may have to pay your lawyer to help you defend your secrets against violations by your disclosure partner.
In order to invoke the DTSA and therefore federal protection of your ideas, your NDA must have specific language that allows your disclosure partner in the agreement to disclose the information as a “whistleblower.”
While I have encountered and heard of persons who refuse to sign any NDA (they fear it always sets them up for a nuisance lawsuit), the truth is that NDAs are ubiquitous. You should have one ready to sign before you disclose any secrets. Now that you know what should be in one, look for those elements in any NDA you may encounter—whether you want to hand it out, or someone hands it to you.
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