The Nondisclosure Agreement: Protecting Confidential Information

The Nondisclosure Agreement: Protecting Confidential Information

This article was updated on September 26, 2018.

Every business has secrets. This sensitive information can encompass a number of different assets, including an innovative new product, a game-changing service or a proprietary process or formula. Small and medium-sized businesses (SMBs) often face the difficult task of protecting critical information when workers move to competitors or resign their positions. Here's how a nondisclosure agreement (NDA) can help keep your secrets safe.

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The first step of this process is to draft an NDA that's in line with the new Defend Trade Secrets Act (DTSA). As noted by CIO, the DTSA requires that you include "notice" on all NDAs — both new and existing — that detail specific whistleblower protections, which safeguard employees if they disclose information to an attorney or government official for the purposes of investigating potential violations. The DTSA also opens an alternate avenue for trade secrets claims outside the state court.

Establish Levels of Ownership

According to Chron, it's also a good idea for small and midsized businesses to clearly articulate who owns the relevant information. While common sense suggests that any sensitive company information is naturally owned by the company drafting the agreement, a lack of overt reference to this fact can open the NDA up to legal interpretation. In addition to specifying exactly what you own, you should take the time to define levels of protected information. Courts are often hesitant to enforce agreements which state that all information is protected, so this offers you the chance to detail exactly what's considered secret and how employees are expected to use any confidential company information that may be shared with or revealed to them.

Pay Attention to the Details

There are many free NDA templates available online. It's essential to review each and every agreement that's drafted for new employees or revised for current staff. Start with the basics: Who is bound by the agreement? For SMBs, there are typically two parties — the business and the employee — but the NDA could also cover a partner company or more than one staff member at once. It's worthwhile to consider time and place, as well. Determine the geographic locations and period of time for which the nondisclosure agreement is valid. It's also a good idea to spell out what exactly constitutes a "trade secret" along with specific penalties for the misuse of information, possible consequences and the right to seek an injunction. Your best bet here is to consult employment counsel on the details concerning what constitutes a reasonable length of time or geographic scope before you draft any NDA. This will help you ensure that your agreement will stand up in court.

Lend a Helping Hand

Once you've drafted your NDA, your next step is to get your employees up to speed as soon as possible. As noted by the U.S. Small Business Administration, many SMBs now include their NDA in employee handbooks along with rules of conduct, work schedules and compensation agreements. By making the NDA part of the onboarding process, SMBs can ensure that they don't accidentally miss a critical signature or surprise employees with expectations of secrecy down the line. Another option is to have an employee sign a confidentiality agreement that is separate from the handbook and includes all of the terms as outlined above, providing a solid foundation if legal action is ever required.