Why should I use a nondisclosure agreement (NDA)?

To understand why and when to use nondisclosure agreements (NDAs) you must first know a little about the law of trade secrets, which is based on the simple idea that you can build, maintain, or extend your competitive advantage in the marketplace if you keep valuable information secret from your competition. Especially if you can't patent the information or ideas (which is usually the case), treating the information as a trade secret is often the most effective way to prevent people -- including employees, former employees, consultants, independent contractors, suppliers, vendors, investors, partners, and licensees -- from disclosing it. If anyone does disclose a trade secret, using an NDA is the best way to build a foundation for a damage lawsuit against the discloser and to get an injunction to stop anyone who obtained the information from using it.

What are trade secrets?

Trade secrets are defined in the law as any formula, pattern, physical device, idea, process, compilation of information, or virtually any other information:

• that is not generally known or readily ascertainable by competitors
• that offers actual or potential economic advantage over others, and
• where reasonable precautions have been used to keep the information secret.

What does a nondisclosure agreement do?

Nondisclosure agreements are the cornerstone of any trade secret protection program. Using an NDA:

• can establish that the receiver of trade secret information owes a legal duty to keep the information confidential
• can define just what information is to be kept confidential
• impresses on the receiver of information that the company or individual is serious about maintaining its trade secrets.
• is evidence in court -- should a lawsuit for money damages or to enjoin (prevent) disclosure of the secret arise -- that the company or individual considered the information a trade secret.

Again, remember the key point: Information is considered to be a trade secret only if a company or individual uses reasonable precautions to preserve secrecy. Use of NDAs is generally considered by the courts to be the most important and fundamental reasonable precaution.