What Is a Non-Disclosure Agreement: Types, Terms, and Enforceability

What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA)—also called a confidentiality agreement, confidential disclosure agreement (CDA), or proprietary information agreement (PIA)—is a legally binding contract between two or more parties that establishes a confidential relationship. The party or parties that sign the agreement acknowledge that certain information shared between them is confidential and agree not to disclose it to third parties without authorization.

NDAs are among the most commonly used legal instruments in business. They protect sensitive information during mergers and acquisitions, business negotiations, employment relationships, vendor contracts, licensing discussions, and investor pitches. When properly drafted and executed, NDAs provide legal recourse if confidential information is improperly disclosed.

Types of NDAs

Unilateral (One-Way) NDA

The most common type, a unilateral NDA involves one party (the disclosing party) sharing confidential information with another party (the receiving party), who agrees not to disclose it. Common in employment contexts—where an employee agrees not to disclose company trade secrets—and in business partnerships where one party shares proprietary technology or business plans.

Mutual (Two-Way) NDA

Both parties agree to protect each other's confidential information. Mutual NDAs are common in merger discussions, joint ventures, and partnerships where each party is simultaneously disclosing sensitive information to the other.

Multilateral NDA

Involves three or more parties where at least one party shares confidential information with others, all of whom agree to maintain confidentiality. Less common but used in complex transactions involving multiple parties in a consortium or multi-party negotiation.

Key Clauses in an NDA

• Definition of confidential information: Specifies what information is covered. Broadly drafted definitions provide maximum protection but may be challenged as overly expansive. Narrowly defined clauses provide clarity but may leave certain information unprotected.
• Exclusions from confidentiality: Standard exclusions include information that is already publicly known, was known by the receiving party before disclosure, is independently developed by the receiving party, or is disclosed with the disclosing party's written permission.
• Duration of confidentiality obligation: Specifies how long the obligation lasts. Terms typically range from one to five years, though trade secrets may be protected indefinitely. California courts have been particularly skeptical of very long confidentiality periods in employment NDAs.
• Permitted use: Limits how the receiving party may use confidential information—typically only for the stated business purpose of the agreement.
• Return or destruction of materials: Upon termination of the agreement, many NDAs require the return or certified destruction of confidential documents and materials.
• Remedies: Describes available remedies for breach, often specifying that breach may cause irreparable harm entitling the disclosing party to seek injunctive relief (a court order stopping the breach) without requiring proof of monetary damages.

What NDAs Typically Cover

Enforceability of NDAs

For an NDA to be enforceable, it generally must meet the basic requirements of a valid contract: offer, acceptance, and consideration (something of value exchanged by both parties). In employment contexts, consideration often takes the form of continued employment, a job offer, or a financial payment specifically for signing the NDA.

Courts evaluate the enforceability of NDAs on several dimensions:

• Specificity: Courts are more likely to enforce NDAs that clearly define what information is confidential rather than those that attempt to cover "everything."
• Duration: Excessively long confidentiality periods—particularly in employment agreements—may be found unreasonable and unenforceable in some jurisdictions.
• Geographic scope: Although less relevant to NDAs than to non-compete agreements, geographic limitations may be considered in some contexts.
• Public policy: Courts will not enforce NDAs that require parties to conceal illegal activity, safety hazards, or other matters the public has a right to know about.

Limitations on NDAs

NDAs cannot prevent parties from disclosing information required by law—including disclosures to law enforcement, regulatory agencies, or in response to valid court subpoenas. They also cannot prevent employees from reporting illegal activity to government agencies (whistleblower protections under federal laws such as the Sarbanes-Oxley Act and Dodd-Frank Act limit employers' ability to use NDAs to suppress whistleblowing).

California is notable for significantly restricting the use of NDAs in employment contexts. Senate Bill 820 (2018) and subsequent legislation prohibit NDAs that prevent disclosure of factual information related to claims of sexual assault, harassment, or discrimination, particularly in settlements. Similar laws have been enacted in multiple other states following the #MeToo movement.

NDAs vs. Non-Compete Agreements

Trade Secrets and Federal Law

In the United States, the Defend Trade Secrets Act (DTSA) of 2016 provides a federal cause of action for trade secret misappropriation. Even without an NDA, parties may have legal protection for trade secrets under the DTSA or state laws modeled on the Uniform Trade Secrets Act (UTSA). However, an NDA provides clearer evidence of the parties' intent to treat information as confidential and simplifies litigation by establishing a contractual breach claim alongside any trade secret claims.

To qualify as a trade secret, information must derive economic value from not being generally known and must be subject to reasonable efforts to maintain its secrecy. Executing NDAs with employees, contractors, and business partners is one of the most important steps a company can take to establish those "reasonable efforts."

This article is for informational purposes only and does not constitute legal advice. Consult a qualified attorney before taking any legal action.