Non-Disclosure Agreements
People frequently enter into contracts where they promise to keep quiet about something. These non-disclosure agreements, or “NDAs,” allow parties to share confidential information without worrying about competitors stealing their work. They also permit people to trade away their right to discuss a subject in exchange for money or some other thing of value. But the rules and procedures concerning enforcement of an NDA may not be immediately apparent to the people who sign them.
Why should you read this post about Non-Disclosure Agreements?
You want to tell me why you want to read this post, but you are not permitted to say.
Someone saw you doing the “Old Time Rock and Roll” scene from Risky Business and you want to make sure they don’t tell anyone.
You want to settle a lawsuit but are concerned about being able to tell your story to people who can prevent future similar incidents from taking place.
Image credit: https://en.wikipedia.org/wiki/Silence#/media/File:Faras_Saint_Anne_(detail).jpg
Standard Provisions in a Non-Disclosure Agreement
Many non-disclosure agreements follow the same format and there are examples of these agreements on the internet. They often begin with a definition of what information exactly is “confidential” and therefore should not be disclosed. Usually this is information that one party gives to the other that isn’t already public. Such a broad definition allows a company to re-use the same NDA for multiple situations and permits it to file the NDA in court without fear that the NDA itself will reveal any secrets. But sometimes an agreement may be more specific to avoid any doubt about what the subject matter is.
NDAs may also specify what the signatory may do with the confidential information. It may state that the signatory may only use the information as part of her work with the counterparty or pursuant to another contract. It may also require the signatory to take care in keeping it secret, such as by keeping documents reflecting the information on a password-protected device or under lock and key.
The NDA may also contain a “No Warranties” provision, stating that the party sharing the confidential information does not make any promises that the information it discloses is true. A clause like this is meant to prevent lawsuits by the signatory, alleging that it was misled by something it learned in confidence.
The NDA may also contain a clause that states that both sides agree that, in the event one party believes the other is about to disclose confidential information, that the other party can ask a court for an order to prohibit the disclosure. Getting a court order is a complicated process, and a clause like this one may make it easier for the party to do so. Litigation over these clauses often arises when an employee of one company starts working for a competitor and the first company sues to make sure the employee does not share secrets about it (like customer details) with the new company.
Sometimes an NDA is not a stand-alone contract, but just one clause in a larger contract, like a settlement agreement. These provisions may be shorter than a stand-alone NDA, but the effect and the procedure to enforce them is often similar.
Enforcement of an NDA
Parties enforce NDAs like they enforce other contracts. They may first send a demand letter, reminding the other party of their obligation to keep quiet. And they may go to court, seeking money they lost because of the disclosure. This involves the same procedure in any other contract lawsuit: filing a complaint, engaging in motion practice, taking discovery, and possibly even a trial. They may also make a motion to obtain a court order, directing the party not to make any further disclosures. All of this is expensive.
One challenge in enforcing an NDA is that the primary remedy that a party can obtain is the money they lost because of the disclosure. And so if a party violates an NDA, but the disclosure does not cause the other party to lose any money, that party may have a difficult time obtaining any money in a lawsuit or it may not be worth it to them to spend the time and money to sue with the knowledge that there may not be a substantial recovery if they succeed. Additionally, even if there are heavy losses arising from a disclosure, the person who signed the NDA may not have the money to reimburse those losses. Many people who sign NDAs don’t have a lot of money, and in those situations, the NDA may not be very effective since a judgment against the signatory may not lead to the collection of enough assets to reimburse the plaintiff’s losses.
Some NDAs are not just contracts, but court orders themselves. In commercial litigation, it is common for a court to enter a “protective order,” which directs the parties to keep certain information that they obtain in the litigation confidential and to follow certain procedures to keep it from the public. Violations of these orders are not just breaches of a contract, but violations of a court order that the court may punish directly.
Whistleblower Protections
People enter into an NDA because they would rather have something of value (like money or the end of a lawsuit or a business opportunity) than the ability to disclose certain information. But society as a whole may be better off if the person could speak up. And the person signing the NDA may also need to speak up if they are required to testify under oath or speaking truthfully to the government.
To address this concern, many jurisdictions have rules that negate the effect of an NDA in certain circumstances. For example, in New York, General Obligations Law 5-336 does not let a plaintiff enforce an NDA when a signatory testifies under oath or speaks with the police. And in California, Senate Bill 331 prohibits NDAs from covering certain facts related to harassment and discrimination claims. To ensure that a court will not enforce an NDA as overbroad, many parties will write in these exceptions into the NDA itself to make it more likely the court will enforce the NDA in the specific circumstances where it is permitted.