What is a Non-Disclosure Agreement (NDA)?

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Definition:

A non-disclosure agreement is a legal contract between two parties that requires one or both to keep certain information confidential.

🤔 Understanding NDAs

In business relationships, one or both parties may want to make sure some information stays confidential. By signing a non-disclosure agreement (NDA), the parties agree to keep certain information private. NDAs are legally binding contracts, which means that disclosing the information identified in them could result in legal action. Companies often require new employees to sign an NDA if the employee’s position gives them access to sensitive information. A company also might use an NDA if they’re entering negotiations with another company about going into business together. The NDA allows one or both parties to protect confidential information from getting out.

Example

Let’s say Lisa recently got a job working at a local chocolate company. The shop has the best chocolate in town, and its competitors have been trying for years to obtain their secret recipe. Before Lisa begins her new job, the company requires her to sign a non-disclosure agreement, where she promises not to share the shop’s chocolate recipe. If Lisa shares the recipe with anyone she’s not permitted to share it with, the company would have grounds to sue her.

Takeaway

A non-disclosure agreement is like doctor-patient confidentiality…

One of the core values of doctors is confidentiality. As a patient, you can trust that when you share medical information with your doctor, they won’t share it with anyone else. That’s how a non-disclosure agreement (NDA) works. When you sign an NDA, you promise to keep the information you discover a secret.

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What is the purpose of an NDA?

The purpose of a non-disclosure agreement (NDA) is to help individuals and organizations to protect confidential information. NDAs are common in business relationships. For example, a company might ask a new employee to sign an NDA to ensure they don’t share trade secrets about the company. A company may also use an NDA to prevent employees from using confidential information for personal gain in a way that would be harmful to the company.

NDAs might also come up when two corporations are considering a merger or acquisition. During the negotiations, both firms may need to share confidential information with the other party. A legal document like an NDA would allow both parties to share relevant information in confidence.

An individual might use an NDA for personal reasons. Think about a celebrity who wants to ensure their private life stays private. When they hire individuals (like a child-care professional or personal assistant), they may want to make sure none will disclose details about the celebrity’s personal life. They might ask their staff to sign an NDA.

What is the difference between a mutual and non-mutual NDA?

There are some situations where two parties working together both have sensitive information to protect. In this case, they might use a mutual non-disclosure agreement (NDA) to protect confidential information on both sides.

A mutual NDA may make sense when two businesses enter into negotiations for a merger, acquisition, or partnership. For example, both parties may need to reveal trade secrets during the talks and may want to ensure those secrets are protected. A mutual NDA would bind both parties to secrecy.

A non-mutual NDA, however, binds just one party to keep certain information confidential at the request of the other party. For example, an employer might ask a new employee to sign a non-mutual NDA prohibiting them from revealing confidential information about the company.

What can be included in an NDA?

When drafting a non-disclosure agreement (NDA), it’s all about the details. The idea is to cover your bases. While the details will depend on the parties and circumstances involved, here are some elements that are common among NDAs:

  • Names of the parties: This section includes the names of the parties signing the NDA.
  • Definition of confidential information: This is where you might list anything that will be considered confidential that the receiving party cannot disclose. In other words, how will the receiving party know what information is confidential, and what isn’t? If the information is in written form, will it say “confidential” at the top of the page? If it’s oral information, will you preface it by saying that it’s confidential? This section might also explicitly list any examples of confidential information. The goal of this section is to be broad enough to include everything that should be kept confidential but specific enough that the receiving party clearly understands what they can and cannot share.
  • Obligations of the receiving party: This section of the NDA defines, in precise terms, what the receiving party can and cannot do with the information. An NDA typically includes a clause stating that the signing parties must keep confidential any information the disclosing party has deemed as confidential. Keep in mind the definition of confidential information varies for each NDA. This section might also stipulate that the receiving party must make a “reasonable effort” to make sure no one else gets a hold of the sensitive information. In addition to ensuring they don’t share the information or allow someone else (aka a competitor) access to it, this part of an NDA might also say that the receiving party cannot use the information for their own benefit.
  • Exclusions from confidentiality: In addition to stating what information is confidential, an NDA will often define what information is not confidential. In most cases, this includes information that is already public or that becomes public through no fault of the receiving party. This may also include any information the recipient knew about before signing the NDA. The exclusions section may also define situations where it would be burdensome or unfair to expect the recipient to keep the information secret — Like if the receiving party is compelled to share information in the course of a criminal trial.
  • Term of the NDA: An NDA typically specifies the amount of time for which the receiving party must keep the information confidential. The disclosing party may ask to keep the information confidential forever. Other times, they may define a length of time, in months or years, during which the recipient must keep the information in the NDA a secret. The NDA might also state that the information must remain confidential until the receiving party gets written permission from the disclosing party to share the information.

Since an NDA is a legal document, you’ll likely need to have a lawyer draft it for you. If you’re considering hiring an attorney to prepare an NDA, you may want to first understand why. For example, is an NDA the appropriate document to address your particular situation? Is the information you’ll be disclosing sensitive enough that you want to hold someone legally liable if they disclose it to other people?

It may also be helpful to consider what information you need to remain confidential. Keep in mind that it may not be realistic to expect that everything you say in the course of a business relationship will remain strictly confidential. That’s usually why an NDA identifies specific information (like trade secrets) that needs to remain private. It may also be a good idea to consider how long you need the information to remain confidential. In some cases, the answer might be forever. But some confidential information will eventually become public, in which case the NDA may no longer be necessary.

Is an NDA legally binding?

Assuming the drafter wrote the NDA with language that is enforceable in court, a non-disclosure agreement (NDA) is usually legally binding. This means that if one party breaks their contractual agreement, they may face legal consequences.

If the disclosing party suffered any kind of financial losses as a result of the breach of NDA, they might file a lawsuit. Depending on the contract, they may be able to sue for copyright infringement, breach of fiduciary responsibility, misappropriation of trade secrets, or another reason.

Breaking an NDA might also involve violating the Uniform Trade Secrets Act — A law written by the Uniform Law Commission and adopted by 47 states — which helps provide legal remedies for companies when someone has made their trade secrets public through illegal means. This could also result in criminal forfeitures on top of the financial losses faced in a lawsuit.

However, an NDA may not be enforceable in court if there were errors made during its drafting. For example, a court may choose not to enforce an NDA if they find that the receiving party signed it under duress. Even if the party asking for the NDA correctly drafted it, a court may not award damages under certain circumstances, including if damages are too uncertain or speculative. For example, if the party agreeing to the NDA is ever in a position where they have a legal obligation to disclose information, the NDA may not prevent them from doing so. A court may decide not to award damages if the disclosing party can’t show enough proof that they incurred any losses as a result of the breach.

What is the difference between a non-disclosure agreement and a confidentiality agreement?

Non-disclosure agreements (NDAs) and confidentiality agreements are both legally-binding agreements that prohibit a person (or multiple people) from sharing specific confidential information. The terms NDA and confidentiality agreement are often used interchangeably. While they’re similar in practice, there are some differences worth noting, especially when it comes to the context in which each is used.

Location may play a role in determining whether a binding document is called an NDA or a confidentiality agreement. In the United States, for example, NDA is the more commonly used term. In other countries, including Australia, New Zealand, England, and Canada confidentiality agreements may be more common. The difference between using an NDA may also depend on the level of secrecy needed. For example, an NDA might only prevent someone from disclosing confidential information. But in some cases, a confidentiality agreement may require a signing party to proactively protect certain secrets.

Whether the agreement is mutual or non-mutual might also be a determining factor in what you choose to title your document. If the confidentiality is one-way or non-mutual, meaning one party is asking another to abide by the agreement, then an NDA might be more likely to apply. But if the agreement is mutual, as in all signing parties must keep information secret, then a confidentiality agreement might be the more likely term. Keep in mind that the difference between an NDA and a confidential agreement is more about preference rather than function. Both are meant to keep information private — And when written effectively, both are legally binding.

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