Key Takeaways

  • The primary purpose of an NDA is to protect confidential information and prevent unauthorized disclosure during business, employment, or partnership dealings.
  • NDAs outline what information is considered confidential, the obligations of each party, and remedies in case of breach.
  • Mutual and unilateral NDAs are used depending on whether one or both parties share sensitive information.
  • NDAs serve critical roles in contexts like mergers, partnerships, inventions, and intellectual property protection.
  • Courts enforce NDAs when they are clear, reasonable, and not overly broad; written NDAs are much easier to enforce than oral ones.
  • Customizing NDAs to fit the situation—such as distinguishing employee vs. contractor disclosures—strengthens enforceability.
  • NDAs cannot be used to conceal illegal activity or prevent lawful reporting like whistleblowing.

The purpose of a confidentiality agreement, which is also referred to as a nondisclosure agreement or NDA, is to protect information exchanged between two or more parties. Anyone who signs a confidentiality agreement is promising to keep the relevant information secret.

Confidentiality agreements are often used to protect details of new products, client lists, details of marketing campaigns, and information regarding distinctive manufacturing procedures. By using an NDA, a company can keep its trade secrets private. Moreover, if one party to the agreement fails to uphold its promise, the other party will have the option to take legal action and possibly to sue.

Types of Nondisclosure Agreements

  • Nondisclosure agreements can be reciprocal contracts, which means that all parties involved must uphold the privacy of the information.
  • They can also be unilateral contracts, whereby only one party is required to keep the relevant information private.
  • Mutual nondisclosure agreements are beneficial when both parties involved will be using the restricted information, for example, in the case of inventor groups.
  • Standard unilateral NDAs, which are most frequently seen in the area of innovation, are utilized when just one party will be conveying the restricted information. This might be to a possible investor or a licensee.

Common Uses of Confidentiality Agreements

Confidentiality agreements are widely used in a variety of business and professional settings. Common scenarios include:

  • Employment Relationships – Employees may be asked to sign NDAs to prevent them from disclosing company secrets, formulas, or proprietary processes.
  • Business Partnerships – When two companies collaborate, they may exchange sensitive marketing plans, pricing strategies, or customer data.
  • Mergers and Acquisitions – NDAs ensure that due diligence information, such as financial statements or trade secrets, remains secure.
  • Investor Discussions – Startups often require potential investors to sign NDAs before sharing prototypes, business models, or future growth strategies.
  • Creative Industries – Writers, designers, or software developers use NDAs to protect unique ideas before pitching or licensing them to others.

By setting clear expectations, NDAs reassure all parties that information disclosed in these contexts will remain secure.

The Importance of Confidentiality Agreements

If you are planning to refer to your important information as a trade secret, then it is essential that you take measures to maintain the confidentiality of that information. Therefore, a contract that requires the receiver of the information to uphold its confidentiality is crucial. As soon as a trade secret becomes known, then it loses its trade secret status.

An NDA can be used to safeguard any kind of information that is not widely known. Under a nondisclosure agreement, the recipients of the information are required to keep that information private. It also makes it illegal for them to pass that information on in any way that would result in the information no longer being a trade secret.

Understanding the Purpose of an NDA

The purpose of an NDA (non-disclosure agreement) extends beyond simple confidentiality—it builds trust between parties and ensures that sensitive business or personal information remains protected during collaborations or negotiations. Whether shared with employees, contractors, investors, or potential partners, an NDA sets legal boundaries on how information can be used and disclosed.

An NDA serves to:

  • Protect intellectual property during discussions about product development or licensing.
  • Maintain competitive advantage by preventing key information from reaching competitors.
  • Clarify ownership rights of disclosed materials or ideas.
  • Establish accountability by defining consequences if confidentiality is breached.

Businesses often use NDAs to foster open discussions without fear of idea theft, ensuring innovation and trust thrive even in competitive markets.

Key Clauses in Confidentiality Agreements

A well-drafted confidentiality agreement typically includes:

  1. Definition of Confidential Information – Specifies what materials, data, or knowledge are covered.
  2. Exclusions – Information already public or lawfully obtained elsewhere may be excluded.
  3. Obligations of the Receiving Party – Outlines how the recipient must handle, store, and limit use of the information.
  4. Permitted Disclosures – Identifies exceptions, such as legal compliance or disclosures to advisors under similar obligations.
  5. Duration of Obligation – Establishes how long confidentiality must be maintained (commonly two to five years, though trade secrets may require indefinite protection).
  6. Remedies for Breach – Provides legal options, including injunctions or damages, if the agreement is violated.

Including these clauses ensures enforceability and clarity, minimizing disputes over what qualifies as confidential

Negotiating and Reviewing NDA Terms

Before signing an NDA, both parties should carefully evaluate its terms. An overly broad or vague NDA can create unnecessary risk, while one that’s too narrow may fail to protect valuable assets. Key considerations include:

  • Scope of Confidentiality: Confirm that “confidential information” is clearly defined to avoid disputes over what is protected.
  • Exclusions: Ensure public or previously known information is excluded from confidentiality obligations.
  • Duration: Determine how long confidentiality must be maintained; perpetual NDAs are typically reserved for trade secrets.
  • Jurisdiction: Identify which state’s laws will govern the agreement, especially important for multi-state or international relationships.
  • Remedies: Understand the available legal recourse, including injunctions or monetary damages, in case of breach.

Legal professionals often advise customizing NDAs to the relationship—what’s appropriate for an employee may not fit an investor or vendor situation.

Creating a Confidentiality Agreement

  • When drawing up a nondisclosure agreement, you are establishing a private relationship with the other party involved.
  • Typically, these agreements must be made in writing.
  • Some courts in certain jurisdictions have allowed for the oral establishment of confidential agreements.
  • Other courts accept that actions can be seen as proof of the establishment of such a confidential agreement.
  • However, a party should never solely depend on actions or on an oral agreement, as a court may not enforce it.

Tailoring NDAs to Your Needs

While many businesses use template NDAs, tailoring the agreement to specific circumstances provides stronger protection. For example:

  • Industry-Specific Provisions – Technology companies may add clauses addressing source code, while healthcare organizations must account for HIPAA compliance.
  • Employee vs. Contractor NDAs – Contractors may require narrower restrictions than full-time employees.
  • One-Time vs. Ongoing Relationships – An NDA for a single project may differ significantly from one covering long-term collaborations.

Careful customization ensures the NDA addresses your unique risks while avoiding overly broad restrictions that might make the agreement unenforceable in court

Common Mistakes to Avoid in NDAs

Even well-intentioned NDAs can fail if drafted poorly. Common mistakes include:

  • Failing to define “confidential information” precisely, which leads to ambiguity.
  • Using generic templates that overlook specific industry or jurisdictional needs.
  • Overly broad restrictions that courts may find unreasonable or unenforceable.
  • Neglecting mutual obligations when both parties share sensitive data.
  • Ignoring termination or return-of-information clauses, which determine what happens when the relationship ends.

Carefully crafted NDAs reduce risk and signal professionalism. If unsure, seeking review from a business attorney can prevent disputes later.

Oral Agreements Versus Written NDAs

It is extremely hard, and sometimes impossible, to prove the existence of an oral confidentiality agreement. It is equally difficult to prove that past actions implied the establishment of an agreement because both parties might have conflicting stories. Generally, if a party claims the existence of an oral agreement, the case will be judged in favor of the person who is believed.

Therefore, it is best to avoid this situation from occurring by trying to get the agreement in writing. If necessary, you could dilute the terms slightly and make the agreement simple to get a signature. In fact, although a straightforward NDA seems more accessible, it could leave the party providing the information with more rights.

For instance, a simple NDA might not contain any terms that would relieve the recipient of his or her duty to keep the trade secret in the case that secret information becomes publicly known. In a more complex NDA, this is a provision that's typically included.

Enforceability and Legal Considerations

Courts generally favor written confidentiality agreements because they clearly demonstrate the parties’ intent. While oral or implied agreements may be recognized, proving their terms is difficult and often unreliable.

Enforceability may depend on:

  • Reasonableness of Terms – Courts may strike down NDAs that are overly broad or vague.
  • Jurisdictional Rules – Some states impose limits on the duration or scope of NDAs, especially in employment settings.
  • Public Policy Concerns – NDAs cannot be used to conceal illegal activity or prevent whistleblowing.

Understanding these factors helps businesses draft agreements that balance legal strength with fairness.

When NDAs May Not Be Enforceable

Courts may refuse to enforce NDAs that violate public policy or are excessively restrictive. For example, an NDA cannot be used to prevent employees from reporting illegal activity, discrimination, or safety violations. Similarly, an NDA that attempts to silence whistleblowers or conceal unlawful conduct is invalid.

Other circumstances affecting enforceability include:

  • Unreasonable duration or scope, especially when covering information no longer confidential.
  • Lack of consideration, where one party receives no tangible benefit.
  • Unclear or incomplete terms, which can make enforcement impractical.

To strengthen enforceability, ensure the NDA serves a legitimate business purpose, such as protecting trade secrets or client data, and is proportionate to the relationship involved.

NDAs and Patents

  • If you have an invention but have not yet applied for a patent, creating a confidentiality agreement is crucial.
  • Even if you have already filed the patent application, you can still get the nondisclosure agreement signed.
  • You will have taken the first steps by creating the confidentiality agreement. However, your patent rights will not be established until the patent application is approved.
  • Therefore, a confidentiality agreement is necessary to maintain secrecy until the patent is approved.
  • Moreover, while revealing an invention, it's also possible that you will reveal marketing plans and other details not outlined in the patent application. These details could also be considered a trade secret.

The Role of NDAs in Protecting Trade Secrets

Trade secrets, unlike patents, remain protected indefinitely as long as they are not publicly disclosed. NDAs are central to maintaining this secrecy. For example, a beverage company may rely on NDAs with employees and suppliers to safeguard its formula.

If trade secrets are exposed without protection, the owner may lose the ability to enforce rights. NDAs therefore act as the first line of defense, allowing businesses to:

  • Control how confidential information is shared internally and externally.
  • Preserve competitive advantage in the marketplace.
  • Establish a legal basis for action if misappropriation occurs.

For businesses relying heavily on proprietary processes or formulas, NDAs are as critical as patent applications.

Practical Tips for Using NDAs Effectively

To maximize the protection NDAs provide, organizations should integrate them into broader confidentiality practices:

  1. Limit access to confidential information internally to only those who need it.
  2. Mark confidential materials clearly, whether in print or digital form.
  3. Train employees on confidentiality obligations and the importance of NDAs.
  4. Update NDAs periodically as business relationships, technology, and regulations evolve.
  5. Keep signed copies securely stored, ensuring easy access if enforcement becomes necessary.

Following these best practices ensures NDAs function as part of a comprehensive risk management strategy rather than a stand-alone document. For complex or high-stakes arrangements, consulting an attorney on UpCounsel can help draft or review your NDA to ensure it meets both business and legal requirements.

Frequently Asked Questions

  1. What is the main purpose of an NDA?
    The primary purpose of an NDA is to protect confidential information and prevent its disclosure or misuse by unauthorized parties.
  2. Are NDAs legally enforceable?
    Yes, written NDAs are enforceable if they are clear, reasonable, and not overly broad. Courts may reject NDAs that restrict lawful disclosures or violate public policy.
  3. How long does an NDA last?
    Most NDAs last between two and five years, though those protecting trade secrets may require indefinite duration.
  4. Can an NDA prevent whistleblowing?
    No. NDAs cannot be used to prevent the reporting of illegal activities, workplace violations, or public safety concerns.
  5. Do I need a lawyer to draft an NDA?
    While not required, having an attorney draft or review your NDA helps ensure it provides adequate protection and complies with state and federal laws.

If you need help with establishing the purpose of a confidentiality agreement you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.