Non-Disclosure Agreements: What are they and how do they work

Non-disclosure agreements

Toby Bond, associate at international law firm Bird & Bird, discusses how tech entrepreneurs can navigate non-disclosure agreements.

The information revolution is built on sharing information. But certain categories of information are only valuable because they’re not generally known to others; inventions, product ideas, business models, business plans, research findings, analytics. Tech entrepreneurs value this information because it’s secret and use it to differentiate themselves from the competition.

However, there are situations when entrepreneurs will need to divulge certain categories of secret information to a third party. They may have to convince investors that their idea has market potential, or perhaps they want to collaborate with another company to develop a new product or service. On a more day-to-day level entrepreneurs will often need to give suppliers and consultants some level of access to their secret information.

In these types of situation a non-disclosure agreement (NDA) can be useful as it allows individuals to share information with a person or organisation, whilst retaining control over what subsequently happens to that information.

Identify the information being disclosed

Identifying the information covered by the agreement is crucial as both parties need know where they stand, e.g. is it only one of the party’s information which is going to be protected (a one way NDA) or both (a mutual NDA)?

It’s also important to outline the nature of the information you want to be protected, e.g. is it everything communicated between the parties, or just certain categories?

Often this can be done in general terms with reference to a particular event (e.g. information shared as part of a specific meeting, pitch or a project), but the more detail which can be provided about the nature of the information, the easier the agreement will be to enforce.

There’s also nothing wrong with later amending the NDA if additional information needs to be shared which isn’t covered by the original agreement.   

Restrict further disclosure

A restriction on disclosure stops your information becoming known to more individuals than intended. It is important that entrepreneurs seriously consider who needs to know this information, e.g. is it a single individual, a specific team, the whole of an organisation or even multiple organisations (e.g. a principle consultant plus their sub-contractors)?

If the information needs to be disclosed beyond the direct parties to the NDA it’s important to include a requirement that any third party receiving the information is also under an obligation to keep it a secret. Requiring the third party to also sign an NDA is often the best way to achieve this.

Restrict further use

A less obvious, but equally critical part of an NDA is a restriction on how the information can be used. Often the reason you don’t want the information disclosed is so it can’t be used by a competitor to get the benefit from your hard work. But what if the person you disclose the information to decides to use it for their own benefit? The key thing is to clearly define the purpose for which the information is being disclosed (e.g. the specific pitch or project) and prohibit its use for any other purpose.

In addition to these core elements, there are other provisions commonly included in NDAs including a requirement to store the information in a secure way and obligations to return the information at some point in future and destroy any copies.   

Do you always need an NDA?

What happens if an entrepreneur provides someone with their information but doesn’t ask them to sign an NDA? Can they protect that information once it has been disclosed? It is possible, but it will be a complicated process. In some circumstances, English law will impose an obligation of confidence on the recipient of the information. It all depends on the nature of the information and the circumstances in which it is disclosed. Telling someone to keep a certain piece of information confidential is a good start and doing it by email (so there is a record) in advance of providing the information.

However, this type of implied protection often gives rise to risk and uncertainty; it’s not clear exactly what information is protected and what restrictions apply. Implied protection also varies from country to country, with some countries offering very limited protection. Rather than risk the uncertainty of implied protection, it’s often far better to set all terms and obligations out in an agreement, especially where high value information is being disclosed. An agreement will make it clear to everyone exactly what information is protected and what the recipient can and cannot do with it. It’s also cheaper and easier to enforce than other methods of protection.  

Other protection options

NDAs are an effective tool for providing legal protection for confidential information. However, on a practical level, there are several additional things entrepreneurs can do to protect their information. For example, they can avoid sharing more information than is actually needed, share it only with the people who need it, mark it as confidential and apply physical and digital security restrictions to access the information.

Good information management reduces the risk of unauthorised disclosure and can also help demonstrate that the recipient should have known it was confidential if it somehow gets disclosed outside the protection of an NDA.

Finally, taking time to tailor an NDA to the specific circumstance is often a great way to start a conversation about how the project is going to work in practice.  

To get the NDA right from the outset, entrepreneurs need to think about the specific individuals and organisations which are involved and how the information will flow between them. This also helps open a discussion about who will own and/or have rights to use any intellectual property generated by the project.