Patent, Copyright & Trademark
Using Nondisclosure Agreements to Protect
Business Trade Secrets
A nondisclosure agreement (NDA) helps a business protect its trade secrets, among
other confidential information.
, Attorney | Updated By
Businesses often maintain valuable and confidential information. This information might include a sales plan, a list of
customers, a manufacturing process, or a formula for a soft drink. These are referred to as "
." One of the
dangers that businesses face is that employees may take trade secrets they learn on the job and leave for a competitor
Nondisclosure agreements ("NDAs") are one of the most effective ways to prevent this from happening. An NDA is a
contract in which the employee promises to protect the confidentiality of secret information that is disclosed during
employment or related types of business transactions. By using a nondisclosure agreement, an employer can ensure
that its secrets stay secret by giving the company legal recourse against an employee who wrongfully discloses them.
Examples of NDA Usage
NDAs are used in essentially every industry. They are particularly common in the technology industry, particularly for
Internet and computer companies.
Consider, for example, Sabeer Bhatia, founder of Hotmail, who collected over 400 NDAs from employees, friends, and
roommates. He believes that his secrecy efforts gave him a crucial six-month lead on the competition. He eventually
sold Hotmail to Microsoft for a reported $400 million in stock.
NDAs can also be used when presenting confidential information is a limited context, such as a meeting with a
potential suitor of your company. You can force meeting participants to sign an NDA in connection with any documents
or data disclosed during the meeting, so that you can feel confident that you can speak honestly.
If you have an NDA with someone who discloses your secret without authorization, you can ask a court to order the
violator to stop making any further disclosures. You can also sue for
Creating a Confidential Relationship
The purpose of an NDA is to create a confidential relationship between the person who has a trade secret and the
person to whom the secret is disclosed. People who have such a confidential relationship are legally bound to keep
the information a secret.
An NDA is not the only way to create a confidential relationship, however. You can create a confidential relationship
with an oral agreement or it can be implied from the conduct of the parties. However, such relationships are much
more difficult to prove than a relationship based on a written agreement.
NDAs are often categorized as either "mutual" or "one-way." A mutual NDA is one in which both parties are
exchanging confidential information—for example, you provide secret information for a company to evaluate and they
provide you with secret information about their marketing strategy. A one-way agreement is used when only one
party is making a disclosure—for example, when you explain your secret to a contractor or investor.
To protect the valuable trade secrets of your business, get Nolo's downloadable
Protect Trade Secrets
Use of a nondisclosure agreement is one of the most effective ways to protect trade secrets—that is, any information
that is not generally known and gives your business a competitive advantage in the marketplace. For example,
through a nondisclosure agreement, you can prohibit someone from disclosing a secret invention design, an idea for a
new website, or confidential material contained in a copyrighted software program.
When attempting to sue for breach of an NDA, you will also want to show evidence that you otherwise work to
protect your business's secret information. What security measures, beyond NDAs, do you employ? Software that
provides digital security, for example, would be one way to establish that your business takes all necessary
To learn more about the essentials of trade secret law, including what you can protect, see
Trade Secret Basics FAQ
Note that trade secret laws vary from state to state, although the overall concepts are very similar across the United
Elements of a Nondisclosure Agreement
There are five important elements in a nondisclosure agreement:
definition of confidential information
exclusions from confidential information
obligations of receiving party
time periods, and
Definition of Confidential Information
Every NDA provides a list of the types or categories of confidential information to be protected in the agreement. The
purpose is to establish the boundaries, or subject matter, of the disclosure, without actually disclosing the secrets. For
example, an NDA may state: "Confidential information includes programming code, financial information, related
software materials, and innovative processes."
If you fail to list specific categories of information, a court may deem that the agreement is overly broad, and thus
Exclusions From Confidential Information
Similarly, most NDAs exclude some information from protection, meaning that the party that receives the excluded
information has no obligation to protect it. These exceptions are based on established principles of law—the most
important one being that information is not protected if it was created or discovered by the receiving party prior to (or
independent of) any involvement with the disclosing party. For example, if another company develops an invention
with similar trade secret information before being exposed to the disclosing party's secrets, then that company is still
free to use its independently created invention.
Obligations of the Receiving Party
A nondisclosure agreement will typically state that the receiving party must hold and maintain the information in
confidence and limit its use. Under most state laws, the receiving party cannot breach the confidential relationship,
induce others to breach it, or induce others to acquire the secret by improper means.
Most businesses will accept these contract obligations without discussion.
Some agreements require that the receiving party maintain the secret information for a limited period of years. This is
often done with language such as: "The receiving party shall not use or disclose the secret for a period of five years
from the date of execution of the agreement."
Parties often negotiate over the time period. Five years is common in American nondisclosure agreements, although
many companies insist on only two or three years. In European nondisclosure agreements, it is not unusual for the
period to be as long as ten years. Ultimately, the length used will depend on the relative bargaining power of the
parties. Note that, generally, an overly lengthy period may be found to be unreasonable in certain situations. The
shorter the period of nondisclosure, the more likely a court will enforce it.
Miscellaneous terms (sometimes known as "boilerplate") are usually included at the end of NDAs. They include such
which state's law will apply in the event the agreement is breached
will be used in the event of a dispute, or
whether attorneys' fees will be awarded to the prevailing party in a dispute.
Always Read an NDA Before Signing
Some agreements are titled Nondisclosure or Confidentiality Agreements, yet their terms have the opposite effect.
Instead of agreeing to secrecy, the party with the secret effectively waives any claim of trade secret confidentiality.
If you sign a waiver agreement, you could lose the confidentiality of your trade secret and have no legal recourse. A
waiver agreement usually contains language like the following (alternate terms appear in parentheses):
This agreement does not create a confidential relationship.
No confidential relationship is established or implied by the exchange (disclosure) of information (submission).
The exchange (disclosure) of information (submission) is not made in confidence.
No obligation of any kind is created (assumed, implied, imputed) by the receipt (exchange, disclosure) of
Get Nolo's online
Confidentiality (Nondisclosure) Agreement
. You can customize this agreement according to the
detailed instructions that are included.
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