So you are an entrepreneur with a great business idea and you want to share it with potential partners/employees or contractors to scale your business. But you also don’t want those potential partners to steal your ideas, or those trade secrets that allow your company to work in a unique way. You need an NDA: Non-Disclosure Agreement.
WHAT IS AN NDA?
A Non-Disclosure Agreement is generally given to an employee or other person working with the company to protect the company’s intellectual property – particularly trade secrets. Trade secrets include information surrounding a corporation’s finances, profit margins, customer lists, technology know-how, current and future strategy, and R&D initiatives.
An NDA can:
The enforceability of an NDA is unpredictable and relies heavily on the judge that looks at it. Despite the uncertainty of enforceability, there are measures you can take to improve the chances of an NDA being successfully enforced.
1. Make sure you have Consideration
The difference between an NDA included with an employment agreement and a stand-alone NDA is “consideration”. Consideration is anything of value. In order for a promise to be enforceable, it must be made in return for something of value.
If an NDA is included in the employment/contractor agreement, the required consideration is the promise of a job. However, if an NDA is executed at a different time than the employment agreement, the employee/contractor must be given something else of value in exchange for their promise not to disclose information.
2. Be Specific
An NDA may be found unenforceable if it acts as an overly broad restraint on trade. The courts go to great lengths to ensure that employees are protected, thus the more limited the NDA is in scope, time, and geography the more likely they will be held up by a judge or a court.
3. Contractual Counterparties or Independent Contractors
A court will consider an employee or dependent contractor as dependent on the company. If the contractor however is a true independent contractor, it means that they operate like a business. They declare profits and losses, use their own tools and control their own schedule. Most importantly, they are free to subcontract work to other parties and are not financially dependent on a single employer. In these circumstances, the courts are more likely to uphold an NDA.
Overall, these agreements do not guarantee the protection of information that is deemed to be within the general skills and knowledge of that employee/contractor. The level of protection they provide largely depend on the nature of the company’s information, the scope of the position, and how the NDA is drafted to address these specifics.
Christina Hassan is a member of the BLG Business Venture Clinic, and is a 3rd year student at the Faculty of Law, University of Calgary.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.