How Breaking a Nondisclosure Agreement Works

What is a Nondisclosure Agreement?

signing business agreement signing business agreement
NDAs traditionally have been used whenever a company has to show its cards to an outsider. PeopleImages/Getty Images

A nondisclosure agreement is a legal document designed to keep secret information secret. Also known as confidentiality agreements or proprietary information agreements, they have long been a necessity for doing business [source: Hayes]. By signing an NDA, the receiving party of confidential information agrees not to share or make public any secrets supplied by the disclosing party. If they do, they'll be sued.

In the business world, NDAs have traditionally been used whenever a company has to show its cards to an outsider. A potential investor, for example, will want to see sales figures and plans for future product lines before handing over her cash to the CEO. For access to that type of insider information, she'll have to sign an NDA. Same with outside marketing consultants, lawyers and even some clients.

The most common type of NDA is called a unilateral NDA, because only one party is disclosing confidential information and the other is bound to keep it secret. But there's also something called a mutual NDA, in which both parties share proprietary information and make the other party promise not to share it [source: RocketLawyer].

Examples of a mutual NDA include the potential merger of two companies. For the deal to work, each will have to expose its financial information, proprietary technology and strategic plans. But if one of the companies gets cold feet, it's strictly forbidden from sharing any inside information with the press, or using any of its competitor's technology to develop its own related products.

As we'll discuss later, NDAs have many uses, including beyond the business world. NDAs and other types of confidentiality agreements are often built into legal settlements. And NDAs are becoming more common in the workplace, both to protect a company's intellectual property and its reputation.

Since an NDA is a contract, the terms of the contract will vary with each new situation. But in general, an NDA will include the following terms [source: Fabio]:

  • What information will be protected? For something to qualify as "confidential," it must be information that is exclusive to the company or individual and can't reasonably be found anywhere else or discovered independently. An NDA can either protect a specific type of information — like unpatented technology — or be written broadly to cover all proprietary information in the company's possession.
  • Approved uses of the information. If a marketing consultant is brought in to come up with a campaign for an upcoming product, he'll need to know everything about the product specs and design. The NDA will limit the use of proprietary information to the campaign.
  • Length of agreement. Some NDAs are in effect forever, while others only keep information secret for a shorter length of time, perhaps until a new product or service is released to the public.
  • Consequences of breaking the NDA. Since an NDA is a legal contract, breaking an NDA puts the signers in a difficult legal position. Companies can sue for injunctive relief — to stop the use of secret information — and damages for lost profits. If the NDA was signed to hide the details of a legal settlement, a breach of contract could result in forfeiting the settled dollar amount.

Before we get into the risks of breaking an NDA, let's get a better sense of how NDAs are used in specific business situations.