How Non-Disclosure Agreements Protect Businesses Before a Deal Is Signed
Businesses often share sensitive information before a formal business relationship begins. A company may discuss a potential investment, partnership, acquisition, licensing arrangement, joint venture, or commercial relationship before the parties know whether a deal will actually move forward.
These early discussions can involve valuable information, including business plans, financial information, customer data, product concepts, pricing strategies, technical information, and other confidential material.
A Non-Disclosure Agreement (NDA) can help establish clear contractual obligations concerning how that information may be used and disclosed before a transaction or business relationship is finalized.
Why Confidentiality Matters Before a Deal
Confidential information is often exchanged during the early stages of business discussions so that the parties can evaluate a potential transaction or relationship.
For example, a company considering a potential partnership may need to provide information about its customers, operations, financial performance, or technology. A potential investor may need access to financial and business information before deciding whether to invest.
The parties may ultimately decide not to proceed.
Even when negotiations do not result in a transaction, sensitive information may already have been shared. Establishing confidentiality obligations before disclosure can help businesses manage these risks.
What Is a Non-Disclosure Agreement?
A Non-Disclosure Agreement is a contract that establishes obligations concerning confidential information shared between the parties.
Depending on the circumstances, an NDA may be mutual, meaning both parties agree to protect each other's confidential information, or one-sided, where only one party is expected to disclose confidential information.
An NDA generally defines what information is considered confidential and establishes restrictions on how that information may be used or disclosed.
The specific terms will depend on the nature of the relationship and the information being shared.
When Businesses May Use an NDA
Businesses may consider using an NDA when entering discussions with:
potential investors;
prospective business partners;
buyers or sellers in a potential transaction;
contractors or consultants;
licensing partners;
manufacturers or suppliers; and
other parties who may receive confidential business information.
An NDA may be particularly useful when the parties need to exchange information before they have finalized the terms of their relationship.
What Information Can an NDA Protect?
The information covered by an NDA will depend on the agreement and the circumstances.
Confidential information may include:
business plans and strategies;
financial information;
customer and supplier information;
pricing and marketing strategies;
product concepts and designs;
technical information and source code;
business processes; and
information relating to potential transactions.
Businesses should consider carefully what information needs protection and ensure the agreement describes the protected information appropriately.
Key Terms to Consider
A well-drafted NDA may address several important issues.
Definition of Confidential Information
The agreement should establish what information will be treated as confidential. Depending on the circumstances, this may include information disclosed orally, in writing, electronically, or through demonstrations and presentations.
The agreement may also identify information that is not considered confidential, such as information that is already publicly available or becomes public through no breach of the agreement.
Permitted Use
An NDA may specify how the recipient is permitted to use the confidential information.
For example, information may be provided solely so that the parties can evaluate a potential business transaction. Limiting the permitted purpose can help prevent the information from being used for an unrelated purpose.
Restrictions on Disclosure
An NDA can establish who may receive confidential information.
Depending on the circumstances, a recipient may need to limit disclosure to employees, professional advisers, or other representatives who have a legitimate need to know the information and are subject to appropriate confidentiality obligations.
Duration of Confidentiality Obligations
The agreement may specify how long confidentiality obligations will remain in effect.
The appropriate period can depend on the nature of the information and the applicable law. For trade secrets, confidentiality obligations may need to continue for as long as the information remains protected as a trade secret under applicable law.
Return or Destruction of Information
An NDA may also address what happens to confidential information when discussions end.
Depending on the circumstances, the agreement may require information to be returned or destroyed, subject to appropriate exceptions for records that must be retained under applicable law or professional obligations.
NDAs and Trade Secrets
An NDA can be an important part of a broader strategy for protecting trade secrets.
Under U.S. federal law, trade secret protection generally requires, among other things, that the owner take reasonable measures to keep the information secret and that the information derive economic value from not being generally known or readily ascertainable. The USPTO identifies confidentiality agreements with people who have access to trade secrets as one example of a protective measure.
An NDA does not, by itself, turn every piece of confidential business information into a trade secret. The nature of the information and the steps taken to protect it are relevant to whether trade secret protection applies.
What Happens If the Deal Does Not Go Through?
One important reason to consider confidentiality protections early is that negotiations may end without a transaction.
A potential investor may decide not to invest. A proposed acquisition may not close. Business partners may decide not to work together.
In these situations, the parties may already have exchanged sensitive information.
An NDA can establish obligations that continue after negotiations end, depending on the terms of the agreement. This can help provide a framework for handling information that was shared during the discussions.
Cross-Border Business Discussions
Confidentiality issues can become more complex when parties in different countries are considering a potential transaction or business relationship.
A cross-border NDA may need to address matters such as:
which law governs the agreement;
where disputes will be resolved;
how confidential information may be transferred across borders; and
whether additional legal or regulatory requirements apply.
The appropriate terms will depend on the countries involved, the nature of the information, and the proposed transaction.
Common Mistakes Businesses Should Avoid
Businesses may create unnecessary risk by:
sharing sensitive information before establishing confidentiality obligations;
using an agreement that does not clearly define confidential information;
allowing confidential information to be used for purposes beyond the proposed transaction;
overlooking who may receive the information; or
assuming an NDA alone provides complete protection for all intellectual property and confidential information.
An NDA is one part of a broader legal strategy. Other agreements and protective measures may be appropriate depending on the circumstances.
Practical Considerations Before Sharing Confidential Information
Before entering into business discussions involving sensitive information, businesses may wish to consider:
what information will need to be shared;
whether an NDA should be signed before disclosure;
whether the NDA should be mutual or one-sided;
who should be permitted to access the information;
how the information may be used;
how long confidentiality obligations should remain in effect; and
what happens to the information if negotiations end.
Addressing these issues before information is disclosed can help establish clearer expectations between the parties.
Business negotiations often require parties to share information before they know whether a deal will be completed. Confidentiality should therefore be considered before sensitive information is disclosed, rather than only after a transaction has been finalized.
A properly structured Non-Disclosure Agreement can help define what information is confidential, how it may be used, who may receive it, and what obligations apply after discussions end.
The appropriate protections will depend on the nature of the information, the parties involved, the proposed transaction, and the laws that apply. Addressing confidentiality before sensitive information is shared can help businesses protect valuable information while allowing potential business relationships to be evaluated with greater clarity.