What is a non-disclosure agreement?

A non-disclosure agreement (NDA) is a contract between an employer and employee that prevents one or both parties from sharing information with third parties. An NDA is sometimes referred to as a “confidentiality agreement” and may be a term in an employment contract or a standalone agreement.

The primary purpose of having an NDA is to protect confidential or sensitive business information, such as trade secrets or unique ideas or processes that are proprietary to a business. Accordingly, businesses use NDAs to help maintain a competitive advantage in their field and ensure that key information does not fall into the hands of their competitors. An NDA may also provide legal remedies if one of the parties violates the NDA terms.

Having a written NDA provides evidence of a party’s understanding of the confidential nature of certain information and clearly expresses a party’s obligation to maintain confidentiality. These agreements define crucial terms and help prevent future misunderstandings.

When are non-disclosure agreements signed?

Generally, employers will have a standard non-disclosure agreement or NDA terms as part of their employment contract. Notably, most NDAs are designed to apply during the employee’s period of employment and remain in force beyond the duration of the employment relationship – either indefinitely or for a fixed period. The appropriate length of the NDA depends on several factors, but the length of time should protect the employer’s interests without placing an unreasonable burden on the employee.

What situations call for a non-disclosure agreement?

Non-disclosure agreements are used where an employee is likely to become privy to information which, if shared with third parties (especially the employer’s competitors), could be very damaging to the employer. In this way, NDAs function as a deterrent by imposing consequences on the employee for sharing this information.

NDAs may also be called for in situations where non-employees will be exposed to confidential or proprietary information, such as a presentation to a prospective partner or investor involving a novel or unique invention, technology, or business idea.

Mutual vs. non-mutual non-disclosure agreements

Mutual non-disclosure agreements bind both employers and employees, whereas non-mutual NDAs only bind employees. Mutual NDAs are much less common than non-mutual NDAs since, in most employment relationships, the employer has commercially sensitive information to protect.

Key elements of non-disclosure agreements

An effective non-disclosure agreement includes sets out the following terms:

  • The parties involved
  • A specific definition of what constitutes “confidential information”
  • The scope of confidentiality expected of the employee
  • Any exclusions, which typically include previously known information, information obtainable by the general public, and court orders compelling disclosure.
  • The agreement’s duration is often a fixed length of time beyond the end of the employment relationship. In some cases, it applies in perpetuity
  • Provisions laying out what legal recourse is available to the employer if the NDA is breached, such as court injunctions or monetary damages

Defining confidentiality

As there may be some ambiguity in the definition of what constitutes confidential information, employers should take care to define it in any non-disclosure agreement. An employer may wish to include within the definition of “confidential” any information that:

  • Was exchanged before the execution of the NDA
  • Is exchanged orally, in writing, or any other form or medium (such as electronically)
  • Is observed by a party in the absence of being told directly
  • Is openly marked confidential or not
  • A party ought to be reasonably expected to know is confidential
  • Is derived from confidential information

Things a non-disclosure agreement does not cover

Non-disclosure agreements are intended to protect confidential or sensitive information. They are not necessary where information is publicly available or otherwise easily obtainable.

How do non-disclosure agreements impact employers and employees?

For employees, non-disclosure agreements act as a restriction on the use of specific information. They are a common condition of employment. When signing an NDA, employees should be sure to consider time limits, the breadth of the language, and damage provisions.

For employers, an NDA is a tool to protect proprietary assets like trade secrets, client lists, and intellectual property. Employers can use NDAs to prevent their ideas from being stolen and prevent damage to the business.

Enforceability

While courts are not generally reluctant to enforce a non-disclosure agreement, to be enforceable, it must be found to be both reasonable and apply to legitimate business interests. This includes any time limitations and must have a degree of specificity. A court may decide an NDA is unenforceable if it creates too onerous a burden on one party or has insufficient clarity or scope regarding the information to which it applies.

The bottom line: a valuable tool for employers

Non-disclosure agreements are a useful tool for businesses to protect proprietary information and ensure clear expectations are set for employees regarding confidentiality. They should be reasonable and precise and lay out recourses available to the employer in the event of a breach.

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