What is a non-disclosure agreement?

A non-disclosure agreement is a legal contract that helps protect information learned by the signatory about the business. Some businesses require employees and contractors to sign an NDA upon hire. Others may present the contract only to individuals in executive or leadership roles or those with access to confidential information.

NDAs commonly protect nonpublic business information (client lists, pricing, roadmaps, source code, trade‑secret technical know‑how and nonpublic financials). While NDAs keep information confidential, statutory intellectual property (IP) rights (patents, copyrights) remain governed by separate laws, and an NDA does not by itself create those IP rights.

When signing an NDA, the individual typically agrees to keep specified information confidential, use it only for legitimate work purposes and avoid sharing it with coworkers or third parties who are not authorized to receive it. NDAs may have a set time limit or be written to last indefinitely, often extending beyond an individual’s employment.

A comprehensive NDA clearly defines what is considered confidential and what isn’t, for example, public or independently developed information. It limits how the individual may use or share data and information and requires its return or destruction at the conclusion of the relationship. Violations may result in legal remedies, such as injunctive relief and/or damages, depending on applicable law.

Some jurisdictions place specific limits on the use of NDAs in the employment context, particularly in cases involving workplace harassment, discrimination or retaliation. For example, some states restrict confidentiality in settlement or separation agreements involving discrimination or harassment. In these cases, confidentiality is often only permitted if it is the employee’s preference and the employer follows specific statutory procedures.

Information NDAs help protect

An NDA is commonly used to protect confidential information, intellectual property and trade secrets. Here are some examples of information businesses might want to keep confidential:

• New and upcoming product designs
• Recent and current company inventions
• Client and customer information
• Marketing and sales plans
• Company passwords and data
• Financial statements, forecasts and budgets
• Pricing structures and discount strategies
• Vendor and supplier lists
• Internal policies and operating procedures
• Proprietary software, algorithms and source code
• Business plans and expansion strategies
• Research and development data
• Contract terms and negotiations with third parties
• Employee records and personal information
• Manufacturing processes and technical specifications

Reasons businesses have individuals sign NDAs

There are many instances in which businesses disclose sensitive information and want to verify it remains confidential. Here are some reasons an individual may be asked to sign an NDA:

• Working on inventing, designing, implementing or marketing a new product
• Accessing the company’s financial information
• Using confidential company information to complete certain tasks in their role
• Freelancing or working as a temporary contractor
• Handling client lists, vendor relationships or prospect pipelines
• Participating in strategic planning, pricing discussions or internal forecasting
• Supporting mergers, acquisitions or other confidential transactions
• Collaborating with third-party partners under confidentiality obligations

Pros and cons of using NDAs

Requiring individuals to sign NDAs may help protect your business by creating a legal obligation to keep sensitive information confidential. These are some advantages and disadvantages of requiring an individual to sign an NDA:

Advantages of NDAs

Some advantages of non-disclosure agreements include:

• Lowers the risk of competitors accessing information: NDAs help prevent employees and contractors from discussing sensitive information with competitors. This helps verify that proprietary information remains confidential and that a company maintains competitive advantages.
• Lowers the risk of data leaks: By signing an NDA, employees and contractors are prohibited from disclosing passwords and sensitive data to third parties. This may help businesses maintain customer trust, protect their reputation and avoid regulatory fines or revenue loss.
• Clearly defined expectations: NDAs clearly outline what is expected of employees and contractors regarding confidential information. This sets clear boundaries and can help eliminate confusion for all parties involved.

Disadvantages of NDAs

Some disadvantages of NDAs are:

• May create hesitation or mistrust: In certain workplace environments, strict confidentiality agreements may make employees feel restricted or cautious around collaboration, particularly if the scope of the NDA is overly broad.
• Can restrict future career opportunities: NDAs may restrict individuals from discussing past projects, building a portfolio or showcasing past work experience to future employers. 
• Enforcement can be costly and time-consuming: Litigation required to stop disclosures or recover damages is often expensive. It can be particularly difficult to pursue if the actual harm to the business is hard to quantify.

The information in this article is provided as a courtesy and for informational purposes only. Indeed is not a legal advisor.