What Is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement (NDA) is a legal contract between two or more parties that signifies a confidential relationship exists between them. The confidential relationship exists because the parties share information among themselves that should not be made available to any other parties outside of those involved, such as competitors or the general public or. An NDA may also be referred to as a confidentiality agreement.

How a Non-Disclosure Agreement (NDA) Works

Non-disclosure agreements (NDAs) often arise when two companies are about to do business together and they want to protect their interests and the details of any potential deal. In this case, the parties are restricted from releasing information regarding any business processes of the other party that are integral to that party's operations.

NDAs also may arise between an employer and an employee. If the employee has access to sensitive information about the company, he may be asked to sign an NDA when he is hired. This provides an incentive to the employee not to release this sensitive information and avoid a costly legal headache.

NDAs also sometimes arise between a company seeking funding and an investor in the company or potential investors, as NDAs are a very common way to protect company trade secrets. This information may include a go-to-market strategy and sales plan, potential customers, a manufacturing process or proprietary software. If an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may choose to sue the offending party for monetary damages.

[Important: Non-disclosure agreements, or NDAs, are legally binding confidentiality agreements; violating one means being subject to potential fines or other repercussions.]

Understanding a Non-Disclosure Agreement

Though NDAs may be customized to any degree, there are six major elements considered essential to include. These are sections that detail the parties to the agreement, the definition of what constitutes confidential information, the exclusions from confidential information, the obligations of the receiving party, the time periods involved and miscellaneous provisions.

At the beginning of an NDA, there is a "parties to the agreement" section, which describes which parties are involved. If it is a one-sided agreement, it identifies the disclosing party. If necessary, the NDA should also cover third parties such as affiliated companies, agents or other partners. The "definition of confidential information" section lists the types and categories of confidential information protected under the agreement. This section must establish the type of confidential information the contract covers, without actually revealing what that information is.

The "exclusions from confidential information" section excludes certain categories of information as nonconfidential, which protects the receiving party of this information from having to protect it in the future. The "obligation of the receiving party" section details what certain parties can do with the information provided by the disclosing party.

The "time periods involved" and "miscellaneous" sections use straightforward language to cover the term of the agreement and any other matters deemed important. Those matters may include details such as which state's law to apply to the agreement and which party pays attorney fees in the case of a dispute.

Key Takeaways

  • A non-disclosure agreement (NDA) is a legal contract between at least two parties that acknowledges a confidential relationship exists between them.
  • Because of the confidential nature of the relationship, an NDA is sometimes known as a confidentiality agreement.
  • The NDA exists because the parties share sensitive information with each other that is meant to be kept private from other parties, including competitors or the general public.
  • Violating an NDA represents a legal breach. Anyone violating the agreement may be subject to fines or other repercussions.