The Anatomy of Non-Disclosure Agreements

Businesses possess a lot of information! Technical specifications, sales history, marketing plans, financial reports, manufacturing instructions, and much more. You can tell from the descriptions the value of this information. Effective relationships require the exchange of information – valuable information – so businesses (and individuals) use non-disclosure agreements (NDA) or proprietary information agreements (PIA) to protect the information.

NDAs usually include the following topics or clauses and vary in length from two to five pages.

  • Purpose – having a clearly defined purpose ensures that all parties know what is exchanged and why. For example, “Both parties agree to the exchange of tax returns and financial records for the evaluation of business purchase and transfer of assets.”
  • Duty to Protect – you agree to protect the proprietary information of others with the same care that you would use in protecting your own proprietary information of the same type.
  • Term/Duration – a good NDA addresses the time period of information exchange and the time period of protection (two separate items!). For example, “Information under this agreement may be exchanged for two years and must be protected against disclosure for five years from initial disclosure.”
  • Technical Points of Contact – who coordinates and tracks the exchange of information for each party.
  • Notices – who receives legal notices for each party – this could be for addendums, administrative changes, or service of notice of a legal claim.
  • Disclaimer of Warranty – information typically shared “as-is” with no warranty of its accuracy or usefulness for the purpose defined.
  • Disclaimer of License – the NDA is not a license to sell, make, have made, or use the information for anything other than the defined purpose. For example, Coca-Cola could share the secret recipe with you under an NDA, but that does not give you a license to make, bottle, or sell Coca-Cola products.
  • Exceptions to Duty – the typical exceptions to duty are if the information:
    • was already in the receiving party’s possession
    • becomes public knowledge through no fault or disclosure by the receiving party
    • is developed by the receiving party independent of any proprietary information
    • is lawfully obtained by receiving party from a third party outside of the agreement
  • Applicable Law – identifies the laws governing the agreement. For example, “The laws of the State of Ohio shall govern this agreement without regard to its conflict of law principles.”

We recommend separate NDAs for each program or opportunity with a customer or supplier as this forces each party to review existing agreements (and expiration dates), to share information only related to that program or effort, and ensures that an NDA is in place prior to engaging in the exchange of information. This also helps document each contract file with its own agreement.

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