Why Have Someone Sign a Non-disclosure Agreement Before Getting into Business

While it is true that sometimes confidentiality obligations may arise due to the nature of the information itself, or the circumstances of disclosure, rather than by virtue of an express agreement between two parties, this is not always the case. This could be the case when “trade secrets” are exchanged, in circumstances that confidential treatment was intended.

Trade secrets may be protectable whether or not there is an agreement between the parties. However trade secrets are governed by a combination of state and federal statutes, and generally the protection they are afforded varies per jurisdiction. In addition, not all confidential information qualifies as trade secrets. Therefore it is important for parties who are in business or in negotiations to put a non-disclosure agreement in place defining the scope and terms governing the protection of information they exchange.

Non-disclosure agreements are used in a wide variety of contexts and situations, where the main goal of the parties is to disclose information while ensuring that the information will remain confidential and will be treated as per the agreed terms. Disclosure of confidential information may be indispensable to many transactions, including discussions or negotiations assessing potential transactions. Therefore non-disclosure agreements balance the need for disclosure against the need for protection.

To serve their purpose, non-disclosure agreements need to be appropriately drafted and tailored to the needs of each specific situation. For example, it is important to consider who the discloser and the recipient is, what information qualifies as confidential, what information should be excluded from the restrictions of the agreement, what the required term of the agreement is, what the contractual and other remedies for breach are, and what law should apply, among other things.

Special attention should be paid to enforceability requirements; certain clauses or terms may not be enforceable under the laws of the specific jurisdiction where the NDA is executed. For example, under NY law, NDAs with an open-ended term are usually unenforceable.

It is also very important to note that statutory restrictions may apply depending on the context of the NDA, as well as the jurisdiction whose law governs the NDA. For example, under New York state law, there are certain restrictions surrounding NDAs in an employment context, and specifically in employee settlement agreements. Specifically, employers settling claims of unlawful discrimination, including discriminatory harassment, or retaliation, may not include a term or condition that requires the employee to:

1. Pay liquidated damages if they violate the nondisclosure or nondisparagement clause;
2. Forfeit all or part of the consideration (payment) for the agreement if they violate the nondisclosure or nondisparagement clause; or
3. Make an affirmative statement, assertion, or disclaimer that the employee was not subject to unlawful discrimination, harassment, or retaliation.

This change was recently introduced when SB S4516 was signed into law in 2023.

Pursuant to the above, it is clear that NDAs are a very important tool in business, employment and various other contexts, provided there are drafted by attorneys familiar with the laws of the relevant jurisdiction and experienced with NDAs and the relevant contractual, commercial, employment or other underlying issues to be considered in each case.