Understanding Importance of Non-Disclosure Agreements

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Introduction

Non-disclosure agreements prevent business risks associated with confidential aspects of a discussion. The confidentiality agreements form important part of business and hence companies spend lot of resources to develop the right structure for their non-disclosure agreements. Here’s an example of a situation where such agreements play an important role. The race to develop coronavirus vaccine comes with a risk of safety of volunteers during the clinical trial. In China, while the health authorities claim that the companies are keeping a close check on the possible adverse effects of vaccine candidates, the volunteers say that no one is following up with them. One participant in Beijing has reported that after receiving the shots of trial vaccine, there has been no communication from the company. This participant could not reveal more details as they have signed a non-disclosure agreement with the company conducting the clinical trial. 

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Need for Non-Disclosure Agreement

A company invests in various kinds of intellectual property to create their intellectual property assets. All kinds of assets need to be protected. The companies are also required to protect their intellectual property just like any other tangible asset. There is a certain amount of risk with the protection of intellectual property as a minimum amount of exposure of information is required for the protection of the same. The risk involves leakage of information and protection of intellectual property in a third party’s name. An agreement for the protection of confidential information of the intellectual property is one method of protection of intellectual property. An agreement signed for the protection of confidential information related to the intellectual property asset in question is known as the Non-disclosure Agreement. 

 

The nature of the non-disclosure agreement is such that it protects the confidentiality of the intellectual property asset. The nondisclosure agreement allows the company to share the information of the intellectual property asset in hand without unduly compromising the confidentiality of the intangible asset. For instance, if a camera company A shares information regarding new patentable inventions with a client without signing a Non-disclosure agreement, then it is likely that the client B will get the information for his use and either get it published or use that information for creating the same IP asset or could even pass the information to a competitor for better financial gains. In such situations, the Non-Disclosure Agreement (hereinafter referred to as the NDA) is a legal contract between the parties that ensures that the disclosure of confidential information is limited for a specific purpose and for a specific period of time. The parties also agree to not disclose information shared with any other third party. 

 

An NDA is signed usually when certain confidential information is shared with potential clients, investors, creditors, researchers, suppliers, etc. The signing up of an NDA grants more trust between the parties signing the NDA. It ensures that despite heavy negotiations, agreements, disagreements, the information needs to be protected at all times. It deters the theft, misuse, misrepresentation of intellectual property. The nature of the information to be shared, to be protected, the purpose for which it is shared, etc. will all be mentioned in the non-disclosure agreement signed between the parties. 

 

Depending upon the nature of the intellectual property asset to be protected, there are certain non-disclosure agreements that will bind the parties to not disclose the information for an infinite period of time. Therefore it can be understood that the importance of NDA lies in the purpose of the creation of intellectual property itself. The non-signing of an NDA can lead to innumerable hassles for the parties involved. The NDA also mentions and highlights the penalties for the non-obligation of the NDA. Therefore, though it can be termed as a confidentiality agreement it is not limited to the protection of information alone, rather extends to the protection of interest of parties as well. 

Use of Non-Disclosure Agreements

There are many uses of a non-disclosure agreement. The importance of confidentiality agreement is usually realized post losing such confidentiality. It is very vital for an organization to understand the usefulness of non-disclosure agreements to realize its importance.

 

An NDA is a very useful agreement not only to multinational companies but also to start-ups and SMEs. This is because at the stage of inception and growth there can be many instances where the involvement of an outsider can pose an exposure of their information to the outside world. 

In the case of start-ups and SMEs, these NDAs have to be signed in handy. It is very important for companies to protect their information while dealing with outsiders for the purpose of collaboration or compliance or anything that is required to establish the set-up. For instance, where a company is required to protect their patent, they deal with outsiders such as Legal practitioners and lawyers. In such kind of relationship, an NDA ensures that the information is protected and secured. In today’s competitive world the absence of a non-disclosure agreement can lead to jeopardizing the confidentiality of the information. 

 

In the industries such as media and entertainment, an NDA becomes necessary. In these industries, a lot of vital information is shared with outsiders. A scriptwriter for instance has to share his script with so many producers and production houses before it gets accepted and is taken as a film. The scriptwriter in this case would benefit from the NDA ensuring that no one is using his script without his permission. 

 

Design industries also make the most benefit from the NDA where designs are not meant to be shown in the public before the exhibition or fashion shows. In such kind of industries, an NDA is signed with almost each and every individual ensuring the protection of confidential information. In other circumstances where an employer is interested in keeping the information private and confidential, an NDA may be signed and entered into for the benefit of the company. If the confidentiality is breached at any stage during the term of the agreement or as per the terms and conditions of the agreement, then the employer can either take penal actions or as mentioned and agreed upon in the clauses of the contract. For instance, even during some of the internships, the interns are required to sign an NDA for the purpose of keeping the information confidential. Even during the employment contracts the employers mention either the non-disclosure clause or make an entirely different Non-disclosure agreement with their employees. These types of on-disclosure agreements or clauses may or may not give permission to sub-disclose information to other employees as required. Therefore the importance of Non-disclosure agreements cannot be underestimated.

 

 

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Execution of Non-Disclosure Agreements

The NDA can be entered at any stage of employment. It is vital for the parties entering into the non-disclosure agreement to understand the importance of the timing of entering into the NDA. There do exist various circumstances which denote the perfect timing for entering into an NDA, including, but not limited to, when an invention or business idea is shared with the potential investors, distributors or partners, then an NDA must be entered into, or when financial information of the company is shared with the prospective buyer, or when showcasing license, technology, or a new product to a prospective licensee, or when availing some kind of professional services from a company or individual who may have access to some sensitive information in providing those services, or when including employees in some crucial projects of the company involving sensitive information during the course of their employment. These are some of the circumstances where the NDA must be entered into for the betterment of the company.  

Importance of NDA Agreements

There are various benefits of entering into a Non-disclosure Agreement. Many benefits are realized post entering the Non-disclosure Agreement. The signing of the NDA helps the parties to adapt to the conditions mentioned in the NDA. The parties accommodate themselves to the obligations mentioned in the agreement. It also helps them understand that non-compliance to the obligations mentioned in the agreement would lead to the termination of the contract. The Non-Disclosure agreement also mentions the exact nature of the confidential information and helps them maintain confidentiality. The Non-Disclosure agreement specifically states the penalties imposed on the party that breaches confidentiality or discloses confidential information. The Penalties may be penal in nature, involve compensation, and receive an injunction in lieu of the court case. This prevents the parties to breach the confidentiality of the information. The Non-disclosure agreement helps in the effective fulfilment of the contractual obligations of the parties towards each other. It helps in achieving the purpose of the NDA and in performing due diligence with the confidential information. The parties are entitled to relief by the court only when the parties have themselves made an effort to protect the confidential information through the Non-disclosure agreement.  

Most Important Clauses in an NDA

A Non-disclosure agreement comprises various clauses that determine the kind of relationship between the parties, the obligations, the extent of the agreement, jurisdiction, etc. The definition clause is one of the most important clauses of the agreement because it defines the extent of each word used in the agreement. It also defines the term “confidential information” that sets the boundaries for the parties to imagine the extent of protection of confidential information. It is an obvious need to describe who the agreement is entered into. The Non-Disclosure Agreement must also define the names of other parties to whom the disclosure of confidential information is permitted. The Terms and Duration of the Agreement – these are the most important clauses of the agreement. The time frame of the agreement should clearly be mentioned so that there is no dispute regarding the time frame. Some of the agreements also clearly mention that the information is to be kept confidential for infinite. 

The Jurisdiction clause in the agreement specifically mentions that in case of the dispute arises, the jurisdiction of resolving the dispute lies with a specific court. The Remedies clause in the agreement mentions the remedies in case a dispute arises. The remedies may be in the form of compensation, injunction, and other remedies as agreed to by the parties in the agreement. It is important for a non-disclosure agreement to be personalized because a standard non-disclosure agreement can create blunders in the future for any company.

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