A nondisclosure agreement (NDA) is a contract that protects a business’s secrets. An NDA is typically an employer-employee agreement and may be a required part of an employment agreement, but a business might also ask for an NDA in a business transaction to protect its business secrets. This article focuses on the employer-employee NDA.
Does your small business need an NDA with its employees? First, let’s take a look at the four key elements of an NDA to better understand how it can protect your business.
The definition of “confidential information” sets the boundaries of the NDA.
As a small business owner, you need to protect any confidential information that is essential to your business. This will be unique to your type of business, but may include things like inventions, software development, client lists, recipes, business plans, research and development efforts, and trade secrets. The definition needs to be as specific as possible, but without disclosing any confidential information. By law, the NDA will typically exclude information that isn’t considered confidential, such as something the employee already knows, something the employee invented, or something that is already out in the public domain.
Generally, the employee is prohibited from using or disclosing the confidential information as that term is defined. The NDA may authorize the use of the confidential information for designated business purposes. In this case, the authorized use should be specifically set out in the NDA.
The NDA should detail the consequences if the employee breaches the agreement. Typically, the business will be able to obtain injunctive relief (a court order to prevent any further disclosure or use of confidential information) and damages (money) from the employee.
Duration of Agreement
The NDA sets forth the length of time it will be in effect. The duration may last for a specific term of years or until a specific event occurs, such as a product release or pending sale.
In case of a dispute or breach, the NDA will typically indicate the state law that will apply, a method for dispute resolution (arbitration, mediation, etc.), and whether attorney fees will be awarded to the successful party in the resolution. There may be additional terms specific to the type of business being protected by the NDA.
Whether your business needs an NDA from its employees hinges on element 1. Does your business rely upon any confidential information for its success? Another way to ask that question is this: Is there information that an employee could use to compete with or otherwise damage your business?
The obvious example of a business that should be using an NDA is a business that develops its own products or service methods. If your business is software development, the answer is likely a flat-out “yes.” Other types of businesses may warrant further scrutiny. For example, an ice cream shop that scoops vendor-sourced flavors may not need to use an NDA, while an ice cream shop that develops its own flavors may need to use an NDA. Does your business have longstanding relationships with a client list that has been cultivated over time? That client list—easily copied and carried—should likely be protected by an NDA. A business plan that contemplates expansion into a new product line or geographic area contains valuable information that you wouldn’t want an employee to use to open their own location or to share with a competitor.
This type of analysis will help you determine if your business could benefit from an NDA. Businesses change and grow over time. Even if you’ve determined that an NDA is not necessary to protect your business at the moment, be sure to review your business needs regularly. If the success of your business depends on confidential information, consider adding the protection of an NDA to your employment agreement.