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What is a Non-Disclosure Agreement?

hand pointing at paperwork Most businesses use confidentiality agreements to keep privileged information from falling into the wrong hands. / Credit: JohnKwan | Shutterstock

Regardless of what a business does, there are some things about that operation they want kept secret. Whether it is an idea for a new service or details on exactly how a product is made, certain information can easily cost businesses money, new customers and possibly the entire company if it falls into the wrong hands.

To protect privileged information, most businesses use non-disclosure agreements, also known as confidentiality agreements. These legal contracts are used to ensure that associates with whom business owners share critical information aren't able to use that information for themselves or share it with others.

According to the Small Business Administration, non-disclosure agreements can cover any information, knowledge or materials that are not publically or typically known. They are typically used when two or more businesses or individuals are conducting business together and confidential information is being exchanged.

Non-disclosure agreements provide businesses with a number of benefits, including the peace of mind that their valuable information won't be stolen and used against them in the future. In addition, an agreement protects against certain patent rights in the future. Without a non-disclosure agreement, an idea for a new product may be considered public information, and therefor not eligible for patent status.

Businesses that use non-disclosure agreements should be aware, however, that the protection they provide doesn't guarantee that the other party doesn't steal your valuable information. What it does offer is the opportunity for legal recourse if they do.

 Types of non-disclosure agreements

There are two main types of non-disclosure agreements: one that deals with information only being passed one way and another for use when information is being shared between two or more parties.

A unilateral non-disclosure agreement is used when a business wants to share its information or data with an outside party. These agreements are commonly used when a business hires an independent contractor to work on a project. The agreement protects the business from having that outside worker steal company data for their use. Unilateral agreements are also used when a business is preparing to be sold to another person or firm. This allows sellers to share some of their company's critical data with potential buyers.

The second main type of non-disclosure agreements is used when multiple businesses are sharing information back and forth. Called mutual non-disclosure agreements, they are used when companies are partnering to work on a joint venture. The agreement gives both parties the opportunity to work freely back and forth without fear that the other firm is going to steal some sort proprietary information.

Parts of a non-disclosure agreement

While all non-disclosure agreements provide the same general protections, they are specifically written for each particular case. When writing a non-disclosure agreement, there are several key components that it must include, such as:

  • Protected Information: Not every little bit of company detail needs to be protected via the agreement. That's why it should have specifics on which information and data is covered under the agreement. This sets the guidelines for what can and can't be disclosed publically.
  • Time Frame: Most non-disclosure agreements don't last forever. Included in the agreement should be details on exactly how long the information will remain confidential and privileged. The time period can be as little as the length of time that the parties are working together to as long as five or 10 years. In some cases, an indefinite agreement can be negotiated.
  • Breach: Another key aspect a non-disclosure agreement is what happens should one of the parties break the contract by stealing the information for themselves or sharing with others. Details should be included on what type of damages the business is entitled to should the contract by violated and if arbitration will be used.

Non-disclosure agreement templates

While most businesses would be encouraged to work with an attorney when drafting a non-disclosure agreement, there are a number of sample templates online to review. Non-disclosure agreement templates can be found online at:

Follow Chad Brooks on Twitter @cbrooks76 or BusinessNewsDaily @BNDarticles. We're also on Facebook & Google+.

Chad Brooks

Chad Brooks is a Chicago-based writer who has nearly 15 years' experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.

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