An Overview of Non-Disclosure Agreements
in California and What They Should Contain
A non-disclosure agreement, also known as a confidentiality agreement or “NDA,” can be an important part of doing business in California, throughout the nation, and internationally.
A non-disclosure agreement is an agreement by which two parties agree that the information they share with each other for the purpose of developing a new relationship, whether involving business, or any other type of matter, will not be disclosed to third parties or the public at large, in a way that could hurt or damage the party who has disclosed the information. Typically, non-disclosure agreements are written contracts that are signed by both parties.
Types of Non-Disclosure Agreements
There are a few different types of non-disclosure agreements:
- Mutual Non-Disclosure Agreements. A mutual non-disclosure agreement is a document that applies to both sides equally. It contemplates that you will share information with the other side, and they will share information with you. Both sides are prevented from disclosing information to the outside world, and the prohibitions and protections for each side are neutral, meaning they do not favor one party over the other. The benefit to mutual non-disclosure agreements is that the provisions apply equally to both sides, thus there is no need to be concerned about whether your business will be taken advantage of by a better leveraged party on the other side with whom you will have no bargaining power to request fair or equal terms. The big disadvantage, on the other hand, is that provisions in non-disclosure agreements can be quite strict, and require teeth to them. Therefore, you and your business will be held to the same standard as the other side.
- One-Way Non-Disclosure Agreements. A one-way non-disclosure agreement is generally used when the flow of information is largely going to be downstream. For example, a classic scenario involves an app development company that hires freelance technical talent to code a new app for them, or make changes to an existing UI and/or framework. There is very little information being shared by the freelancing UI coders to the company; rather, it is the company that shares its app structure, development, design concepts, user-interface, and other sensitive information about the mechanics of how the app works, with the freelancers. In this type of situation, a one-way non-disclosure agreement would be appropriate to protect the information being shared with the freelance coders.
- Employee Non-Disclosure Agreements. Employee non-disclosure agreements are typically used by companies when hiring employees, particularly when the employee will be accessing or have access to confidential information. Confidential information is more than what would be considered a trade secret. Even if an employee does not have access to the business’s most sensitive information, this does not mean that the employee will not have access to information that could damage the company if information is disclosed to the public, or even a competitor. Certainly, there are competitive businesses out there that prey on the employees of their competitors, poach them, and gain information from these employees about the poached business such as current projects, developed projects, or even the identities of clients, customers, or vendors. Alternatively, employees may decide to branch out on their own, taking with them everything they have learned while working for a business, to set up a competing business. While it is not lawful in California to put a non-compete provision in an employee agreement, this does not mean that you cannot protect your business’s confidential and business/proprietary data by restricting what employees can do with it.
- Independent Contractor Non-Disclosure Agreements. The same holds true for independent contractors when it comes to non-disclosure agreements. Independent contractors have different obligations to the companies they work with than do employees. Independent contractors, by their nature, work with a variety of different companies, and therefore do not have the same obligations of loyalty owed to employers as do employees. One of the things that we have seen from time to time involves independent contractors learning business strategies from the employers with whom they work, and either tipping off or passing information to members of their own network about how to set up a competing business, or form one on their own. Having a non-disclosure agreement that applies specifically to the type of information the independent contractor will be receiving, and protecting the company from unauthorized disclosures will be key in preventing such scenarios from occurring.
When Should a Non-Disclosure Agreement be Used?
There are a number of situations and circumstances in which a non-disclosure agreement is necessary. Indeed, non-disclosure agreements are used in virtually every industry ranging from software development, products manufacturing and distribution, consumer goods, the development of new technologies, app development, and emerging business concepts, including startups and ventures. In the entertainment industry they are used in music, television, and film projects.
Here are a few different types of circumstances in which a non-disclosure agreement should be used:
Idea/Concept Development. If you have developed a new invention, idea, or other conceptual project that will need collaboration with another party for purposes of creating a new venture, seeking investments, adding on a strategic or business partner, or seeking a new manufacturing relationship in order to develop into a working product or prototype, a non-disclosure agreement is appropriate.
Software Development. If you have an idea for a new app, software, website, service, or other intangible product that involves developing new code or software, it would be appropriate to have the technical work that is being done by a party subject to a non-disclosure agreement, so that the work they provide to you or your business cannot be monetized and resold to other third parties.
Entertainment Projects. If you are involved in the TV, film, music, or other areas of the entertainment industry, and have a new concept that could be packaged to developers, production companies, producers, or sold to distributors, you will need a non-disclosure agreement to ensure that your idea is not simply taken and developed without your involvement.
Component Assembly and Supply. If you sell a product or service that relies on other service providers or product providers in order to complete the finished product, you will want a non-disclosure agreement in place to prevent your supplier from having the same items that might be manufactured to your company specification sold to your competitors.
Employees and Independent Contractors. If your business works with employees and independent contractors who may have access to sensitive information, you will want to have non-disclosure obligations in your agreements with them. If you do not use agreements for employees and independent contractors, at the very least, you can use a standalone non-disclosure agreement to protect the confidentiality of your business’s trade secrets and other business/proprietary information.
Business Acquisitions, Sales, Mergers, and Partnerships. If your business is considering collaborating with another business, is in the process of acquiring and/or merging with another business, or is being acquired or merged with another business, you will want to make sure that all the information that you give to another company, whether it is a business broker, investment banker, private equity firm, or another business that is doing a sale directly, is protected by non-disclosure agreement so that your business’s information remains safe during this transition.
What Should a Non-Disclosure Agreement Contain?
A good non-disclosure agreement should contain a variety of provisions:
- Definition of Confidential Information. All confidential information that is to be protected by the agreement should be defined. The definition should be crafted by your attorney to specifically apply to the type of information your business generates. Confidential information that is relevant for startups will be different than the confidential information that exists for established businesses. Additionally, the industry in which the business operates can also affect how confidential information should be defined. For example, the type of information a restaurant business will need to have protected from public disclosure is different from the information a green industries business that supplies products to home consumers will need to have protected. Therefore, the restaurant business will have a much different definition of confidential information than the green industries business. Entertainment businesses and entertainment related projects should also have the definition of confidential information defined specifically so as to provide the maximum protection possible.
- Intellectual Property. The non-disclosure agreement should address ownership of intellectual property, namely, who owns what intellectual property, and how intellectual property rights are changed or unchanged by the development of the collaboration taking place between you and the other party.
- No Reverse Engineering. The non-disclosure agreement should contain provisions prohibiting the other side from reverse engineering compiling, and/or disassembling the content that you provide to the other side, without your consent.
- Non-Circumvention. A good non-disclosure agreement should have very strong provisions preventing the parties from directly or indirectly engaging in the sale, solicitation, marketing, advertising, or distribution of any of the other parties’ products or services that is the subject of the relationship being explored. This would include adding provisions that will prohibit the other side from contacting your competitors, customers, clients, and distributors, in a way that would negatively affect or impair your business operations. Non-circumvention provisions and non-disclosure agreements are an effective way of avoiding abusive business practices, by which a business partner later becomes a force that misuses your businesses information to cut into your business’s share of the market or enable your competitors to do so, especially if the business partner realizes that your business model is actually more profitable than theirs. Employee poaching can also be avoided by having a good non-circumvention provision.
- Publicity. A well-prepared non-disclosure agreement will also have the appropriate provisions preventing unnecessary publicity of the relationship. This type of provision can be very useful in relationships between unequally leveraged parties, in which a business wants to keep the relationship private and free from disclosure to the public. This is common with businesses of higher profile, or businesses that do not want the identity of their suppliers, or other strategic partners known. The purpose of a non-publicity provision is to avoid information being leaked to online sources or the public at large about the nature of the relationship. In certain types of businesses, the mere identity of vendors, service providers, or suppliers, can be the source of a profitable business model, and this information should be protected as much as possible.
- Compelled Disclosures. What if the other side that you are dealing with is sued in a lawsuit and they are asked to publicly produce in that lawsuit all of the confidential records and information you provided them? A good non-disclosure agreement will specifically address compelled disclosures and provide you with rights in the event that a party that received information from you is asked to disclose that information in another legal proceeding to which you are not a party.
The NDA I Downloaded Online Does Not Address Some of the Issues You Mentioned
This would not be a surprise! Most free online forms that can be downloaded or prepared using a form-filling interface are generally not prepared by attorneys that have any experience actually litigating or dealing with breaches of non-disclosure agreements. As a result, these forms are often very short, boilerplate, and do not address the real issues that exist when things go south in non-disclosure agreements. The best thing you can do is to invest in the time necessary for your non-disclosure agreement to be properly prepared by an attorney who is informed about the unique circumstances of you or your business situation, so that the proper document is provided to you.
What Happens if You Do Not Have a Non-Disclosure Agreement in Place?
We are often contacted by a person or business who has shared sensitive information with another person or entity who is now scrambling to protect that information from being made public or disclosed to others without their approval, because a non-disclosure agreement was never put into place between them, prior to the information being shared. Unfortunately, failure to have a non-disclosure agreement in place is one of the easiest ways to put yourself or your business at a competitive disadvantage by not taking basic steps to protect ideas, concepts, inventions, or sensitive business information, from falling into the wrong hands. Trying to control sensitive information from being disclosed to third parties or the world at large is significantly more difficult, not to mention exponentially more expensive in terms of the attorney’s fees you will spend, after the fact, then simply having a document prepared for you in advance that is designed to protect you.
Should you Hire an Attorney to Prepare Your Non-Disclosure Agreement?
One of the benefits of having an attorney prepare your non-disclosure agreement for you or your business involves the tailoring of the document to your specific needs. As mentioned above, the type of information that is to be prepared by the non-disclosure agreement, and the specific nature of the risks that are posed are unique to you and your business, and your specific situation. Using a boilerplate document may be the easier and faster path to take, but there may be a high likelihood that it will not apply to you or your business situation, and may not give you the protections you should expect to receive. Discussing this matter with an attorney will help eliminate some of these risks because an attorney well-versed in this field will know what types of information for which you or your business will need protection. Because we are highly experienced in handling issues involving confidential information, simply knowing more about your business, your business’s activities, and what types of information you will be sharing with the other side, will provide the attorney with crucial information about the protections that you need most in a non-disclosure agreement.
How much Does it Cost to Prepare a Non-Disclosure Agreement?
We generally handle the preparation of non-disclosure agreements on a flat fee basis. Most clients are often surprised to learn how affordable it is to have a custom non-disclosure agreement prepared for them, and the turnaround time for projects of this nature is generally one to two days. Axis handles all new matters online, to provide clients with maximum convenience and flexibility, and we accept Visa, MasterCard, and Discover.
One of the benefits of having Axis prepare your non-disclosure agreement, is that your document will be prepared in form format. This means that you will be able to reuse this document for all similar projects. You will receive a professionally prepared Microsoft Word file that will be capable of being edited by you, based on your businesses needs. Generally, when we prepare form-based agreements for clients, the first page contains the information that may change from instance to instance, while the legal language that provides the protections needed by the client, does not change. Most clients find this format extremely easy to use and affordable, as it avoids the need to return to legal counsel every single time you need a similar document.
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