4 Reasons Why Your Business Needs Nondisclosure Agreements

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– Christopher Butler, Esq.

Last summer, CNBC published a story confirming what, either through observation or personal experience, we already knew – a tremendous number of employees are changing (and outright abandoning) their jobs at a breakneck pace. This trend has justifiably unnerved employers, and particularly those that operate in an industry where confidentiality is essential.

Let’s discuss for a moment. Perhaps you own a company that makes the best gluten-free candy in the country. With employee job migration at an all-time high, how do you protect your secret recipe? What if you run a software development firm and remain eternally worried that a disloyal IT engineer will cause your proprietary technology to fall into the hands of competing company (or those of your former project manager)? What if you operate a biotechnology facility and must constantly safeguard your trade secrets from being disclosed by a disgruntled researcher to competing medical and pharmaceutical industries? These illustrations highlight the risk that departing workers can pose to the confidentiality of a company’s intellectual property. Yet, former employees are not the only confidentiality risk to your business. For example, if your company begins to explore the licensing its products or technology to another company, how do you prevent a potential purchaser or licensee from using confidential or proprietary information about your products or technology outside of the licensing negotiations? 

One effective way to minimize the risk of loss to your company’s confidential, proprietary, or trade secret information is to rely upon a nondisclosure agreement (or NDA). Simply put, an NDA is a contract intended to prevent your business’ confidential information and trade secrets from being copied, stolen, or misappropriated by others outside the company. Toward that end, whether it pertains to your company’s employees, service partners, vendors, or others, here are four reasons why your business should consider having a robust NDA in place.

1. Prevent Employees from Disclosing Confidential and Proprietary Information

Drawing up an NDA that’s specific to your company’s needs can help prevent current and former employees from sharing, for instance, your business’:

• Trade secrets;
• Ideas;
• Proprietary processes;
• Customer/client lists; 
• Inventions, products, and technology; and
• Manufacturing and supplier agreements.

An NDA can also restrict a former employee from starting a competing business by using your “secret sauce.”

2. Lessen the Risk of Buy-Sell Negotiations 

Further, if your business receives a buy-out or acquisition offer that is being seriously considered, a relatively deep level of disclosure will become unavoidable, as potential buyers will want to know exactly what they’re buying. Should any would-be buyer decide to back out of negotiations, an NDA will help protect the integrity of your business by prohibiting the disclosure of your trade secrets that were shared with the reluctant buyer. This is particularly important, as it could prevent that party from forming a competing company by using your company’s information that was disclosed during the negotiation phase.

3. Render it Safer to Solicit New Investors or Partners

Similarly, in the event that your company seeks expansion by taking on a new investor or partner, your business will certainly be compelled to reveal a significant amount of confidential and proprietary information. When your company insists upon an NDA in advance of those negotiations, you have the opportunity to vet multiple candidates without placing your intellectual property at unnecessary risk.

4. Add Security When Working with Service Partners Who Require Access to Information

Lastly, by requiring your company’s service partners (e.g., distributors, suppliers, vendors, etc.) to execute an NDA as a matter of business, you’re able to obtain some added security toward maintaining the confidentiality of your trade secrets. This is particularly the case if the nature of the product or service being provided to/by your business renders it more likely that your confidential processes, formulas, recipes, and technology can be deconstructed or reverse-engineered by competitors.

The Takeaway
As a business owner, you should consider having an experienced attorney draw up a protective agreement specific to your company’s industry, needs, and location. If your company necessitates an NDA to help safeguard your confidential and proprietary information, knowhow, and customer relationships, we have years of experience helping business-owners, management, and HR professionals do just that, and perhaps we can help you too – contact Chris Butler with Agenzia.