AI Review for Non-Disclosure Agreements (NDAs)

Learn how integrating AI contract review into your Non-Disclosure Agreements (NDAs) can improve your contract negotiation, ensuring clarity, precision, and mutual understanding.

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What is a Non-Disclosure Agreement?

A Non-Disclosure Agreement (NDA), also known as a confidentiality agreement, is a legally binding contract between two or more parties that establishes a confidential relationship. The main purpose of an NDA is to protect sensitive or confidential information from being disclosed to unauthorized parties. This information can include trade secrets, proprietary information, business strategies, client lists, financial data, and more.

NDAs are commonly used when two companies, individuals, or other entities are considering doing business together and need to understand the processes used in each other's businesses for the purpose of evaluating the potential business relationship. The NDA ensures that the parties will not share or profit from confidential information shared during these discussions, even if the deal falls through.

NDAs are widely used across various industries, as many businesses have sensitive information they need to protect. These agreements help create a level of trust and security between parties, allowing them to share confidential information without fear of misuse or inappropriate disclosure.

Why Use a Non-Disclosure Agreement?

There are several compelling reasons why businesses choose to use NDAs:

  1. Protect sensitive information: NDAs are designed to safeguard trade secrets, intellectual property, financial data, business strategies, and customer lists. By having a legal agreement in place, companies can disclose sensitive information with the assurance that it will remain confidential.
  2. Maintain competitive advantage: In today's competitive business landscape, maintaining a competitive edge is crucial. By preventing the unauthorized disclosure of confidential information, NDAs help businesses protect their unique ideas, strategies, and processes, thus preserving their competitive advantage in the market.
  3. Foster trust and security: Trust is a fundamental aspect of any business relationship. NDAs create a secure environment for parties to share information, knowing that their confidentiality will be respected and protected. This trust encourages open communication and collaboration, which can lead to more productive and successful business partnerships.
  4. Facilitate business discussions: When businesses are exploring potential partnerships, mergers, or acquisitions, they need to share sensitive information to evaluate the viability of the deal. With an NDA in place, businesses can engage in open and productive discussions without worrying about the misuse of shared information. This allows for more informed decision-making and can streamline the negotiation process.
  5. Comply with legal requirements: In some industries, such as healthcare and finance, NDAs are legally required to protect sensitive client or patient information. For example, the Health Insurance Portability and Accountability Act (HIPAA) mandates that healthcare providers and their business associates sign NDAs to ensure the confidentiality of patient health information.
  6. Protect intellectual property: NDAs are often used to protect intellectual property, such as patents, copyrights, and trademarks. By signing an NDA, the recipient of the information agrees not to disclose or use the intellectual property without permission, helping to prevent infringement and unauthorized use.
  7. Avoid conflicts of interest: NDAs can help prevent conflicts of interest by ensuring that individuals or companies do not use confidential information for personal gain or to compete with the disclosing party. This is particularly important when working with consultants, contractors, or employees who may have access to sensitive information.

What Should Be Included in a Non-Disclosure Agreement?

A well-drafted NDA should include several key provisions to ensure that it effectively protects confidential information and meets the needs of all parties involved. Here are the essential elements to include:

  1. Definition of Confidential Information: Clearly define what information is considered confidential and protected under the agreement. This may include trade secrets, intellectual property, financial data, business strategies, and customer lists. Be as specific as possible to avoid any ambiguity or misinterpretation.
  2. Use of Confidential Information: Specify the purpose or project for which the confidential information is being shared. This helps ensure that both parties understand the context in which the information can be used and prevents misuse for unrelated purposes. For example, if the information is being shared for a potential joint venture, the NDA should state that the information can only be used to evaluate and pursue that specific opportunity.
  3. Obligations and Restrictions on Use and Disclosure: Detail the obligations and restrictions placed on both parties regarding the use, disclosure, and handling of confidential information. Common obligations include:some text
    • Using the information only for the agreed-upon purpose
    • Implementing reasonable security measures to protect confidentiality
    • Limiting access to the information to employees or third parties with a need to know
    • Imposing the same degree of confidentiality obligations on third parties
  4. This section should also address any exceptions to confidentiality, such as information that is already public knowledge or information that the receiving party independently develops without relying on the confidential information.
  5. Term and Termination: Specify the duration of the NDA, including when the obligations begin and how long they last. The term may be a fixed period (e.g., 3 years) or may last indefinitely until the information is no longer considered confidential. Address the process for returning or destroying confidential information upon termination or expiration of the agreement. This ensures that the receiving party does not retain any confidential information after the agreement ends.
  6. Remedies for Breach: Outline the consequences and remedies in case either party breaches the terms of the NDA. Remedies may include:some text
    • Injunctions: A court order prohibiting the breaching party from further disclosing or using the confidential information.
    • Monetary damages: Compensation for any losses or harm caused by the breach, such as lost profits or damage to reputation.
    • Indemnification: A requirement for the breaching party to cover any legal fees or costs incurred by the non-breaching party as a result of the breach.
  7. Governing Law and Jurisdiction: Specify which state or country's laws will govern the interpretation and enforcement of the NDA, as well as the jurisdiction where any legal disputes will be resolved. This is particularly important for NDAs involving parties from different states or countries.
  8. Signatures: Ensure that the NDA is signed by all parties involved. This demonstrates that everyone has read, understood, and agreed to the terms of the agreement. Include the date of signing and have each party retain a copy of the fully executed agreement.

Checklist for a Good Non-Disclosure Agreement

To ensure that your NDA is effective, comprehensive, and legally sound, use this checklist:

  •  Clearly define confidential information
  •  Specify the purpose for sharing the information
  •  Detail obligations and restrictions on use and disclosure
  •  Address exceptions to confidentiality
  •  Establish the term and termination conditions
  •  Include remedies for breach
  •  Specify governing law and jurisdiction
  •  Ensure the agreement is signed by all parties
  •  Have legal counsel review and approve the NDA
  •  Securely store executed copies of the agreement

AI Contract Review for Non-Disclosure Agreements

To give you a sense for the benefits of leveraging legal contract review services trained by lawyers, we’ve selected some sample language our software presents to customers during a review. Keep in mind that these are static in this overview, but dynamic in our software - meaning our AI identifies the key issues and proactively surfaces alerts based on importance level and position (company, 3rd party, or neutral) and provides suggested revisions that mimic the style of the contract and align with party names and defined terms.

These samples represent a small sample of the pre-built, pre-trained AI Contract Review solution for Non-Disclosure Agreements. If you’d like to see more, we invite you to book a demo.

DEFINITION OF CONFIDENTIAL INFORMATION

For: Disclosing Party

Alert: May be missing an article regarding the definition of confidential information.

Guidance: To ensure the effectiveness of an NDA, it is vital to have a clear and precise definition of what constitutes confidential information. This clarity helps prevent disputes and misunderstandings that may arise from ambiguous or vague definitions.

For instance, in a software development project involving an NDA between a company and a freelance programmer, the agreement should clearly define confidential information, such as proprietary algorithms, source code, and trade secrets related to the project. This well-defined scope enables both parties to better understand their obligations and avoid inadvertently disclosing protected information.

While there may not be specific statutes or laws that dictate the exact definition of confidential information in an NDA, it is essential to consider relevant state and federal laws that govern trade secrets, intellectual property, and privacy. These laws may influence the scope and enforceability of the NDA and should be taken into account when drafting the agreement.

Moreover, it is important to be aware of exceptions to the primary legal principle of protecting confidential information, such as the ""public domain"" exception and the ""independent discovery"" exception. The Uniform Trade Secrets Act (UTSA) and the Defend Trade Secrets Act (DTSA) are two key regulations that govern the protection of trade secrets and confidential information in the United States, providing a legal framework for the enforcement of NDAs and the remedies available in case of a breach.

Sample Language:

CONFIDENTIAL INFORMATION

“Confidential Information” means any and all information, tangible or intangible, which a reasonable person could consider to be non-public, secret, proprietary, or confidential in nature, and is disclosed in writing, orally, visually or in other form on or after the Effective Date by DISCLOSING PARTY to RECEIVING PARTY pursuant to the Purpose.

COPIES OF CONFIDENTIAL INFORMATION

For: Disclosing Party

Alert: May be missing a provision regarding the confidential treatment of copies.

Guidance: To bolster the protection of confidential information within an NDA, it is recommended to expand the scope of confidentiality to include copies of the information. This approach ensures that both original documents and any reproductions are subject to the confidentiality obligations outlined in the NDA.

This suggestion is essential in preventing unauthorized dissemination or use of confidential information. By explicitly stating that copies of confidential information are also deemed confidential, the NDA provides a clearer understanding of the parties' obligations and minimizes the risk of potential breaches.

For instance, in a software development scenario where a client provides sensitive data to a company, an employee who makes copies of the data for backup purposes must treat the copies with the same level of confidentiality as the original data. This reduces the risk of unauthorized disclosure or use.

While there might not be specific statutes or laws that directly address the treatment of copies of confidential information within an NDA, general principles of contract law and trade secret law, such as the Uniform Trade Secrets Act (UTSA), may be relevant. Including a provision that addresses copies of confidential information in an NDA can help ensure compliance with these legal principles and provide additional protection for the parties involved.

Sample Language: 

COPIES OF CONFIDENTIAL INFORMATION

RECEIVING PARTY shall not make copies of the Confidential Information, even if it is necessary for the Purpose, without the prior written consent of DISCLOSING PARTY. If RECEIVING PARTY makes any copies of the Confidential Information with the written consent of DISCLOSING PARTY, any copies of the Confidential Information shall be deemed Confidential Information.

RETURN AND DESTRUCTION OF CONFIDENTIAL INFORMATION

For: Disclosing Party

Alert: May be missing an article regarding the return and destruction of confidential information.

Guidance: A crucial aspect of an NDA is to safeguard confidential information shared between parties. One vital component of this protection is the return and destruction of confidential information upon the termination or expiration of the NDA. This ensures that the receiving party no longer possesses or uses the information in any manner.

In practical terms, this provision serves to protect the disclosing party's interests by providing a clear and enforceable mechanism to prevent the retention or misuse of confidential information by the receiving party after the NDA has ended. For instance, when a company shares its proprietary software code with another company under an NDA for a joint project, the return or destruction of confidential information provision can legally compel the receiving party to either return or destroy any copies of the software code in their possession.

While there might not be specific statutes or laws that directly address the return or destruction of confidential information in the context of an NDA, general principles of contract law and intellectual property law, such as the Uniform Trade Secrets Act (UTSA) and the Defend Trade Secrets Act (DTSA), may be relevant. Including a provision regarding the return or destruction of confidential information in the NDA can help strengthen the protection of trade secrets under these laws.

Sample Language:

RETURN AND DESTRUCTION OF CONFIDENTIAL INFORMATION

Upon written request of DISCLOSING PARTY, either during the Term or upon termination or expiration of this Agreement, RECEIVING PARTY shall (a) return or destroy all copies, written documents, electronic files, materials, and any other medium, whether tangible or intangible, that contains parts or the entirety of DISCLOSING PARTY’s Confidential Information, and (b) certify in writing to DISCLOSING PARTY that RECEIVING PARTY has returned or destroyed all such materials containing DISCLOSING PARTY’s Confidential Information. 

Best Practices for Using Non-Disclosure Agreements

To make the most of your NDAs and ensure their effectiveness, follow these best practices:

  1. Be selective: Only use NDAs when necessary. If the information being shared is not truly confidential or sensitive, an NDA may not be needed. Overusing NDAs can create unnecessary administrative burdens and may deter potential partners.
  2. Be specific: Clearly define the scope of confidential information and the purpose for which it is being shared. Avoid broad or vague language that could lead to misinterpretation or disputes.
  3. Set realistic terms: Ensure that the duration of the NDA is reasonable and appropriate for the nature of the information being protected. Overly long or perpetual terms may be difficult to enforce and can create an undue burden on the parties involved.
  4. Educate employees and partners: Ensure that all individuals with access to confidential information understand their obligations under the NDA. Provide training on how to handle and protect sensitive information.
  5. Securely store and track NDAs: Keep executed NDAs in a secure location and maintain a system for tracking which parties have signed agreements and when they expire. This will help you manage your confidentiality obligations and ensure compliance.
  6. Take action on breaches: If you discover that an NDA has been breached, take prompt action to mitigate the damage and enforce your rights under the agreement. This may involve sending a cease-and-desist letter, seeking an injunction, or pursuing legal action for damages.

Conclusion

Non-Disclosure Agreements are essential tools for businesses looking to protect their confidential information and maintain their competitive advantage. By understanding the key components of an effective NDA, following best practices for drafting and implementing these agreements, and seeking legal counsel when necessary, you can create a secure environment for sharing sensitive information and fostering productive business relationships.

Remember, an NDA is only as strong as its drafting and the parties' commitment to upholding its terms. By taking a thoughtful and strategic approach to using NDAs, you can safeguard your company's most valuable assets and build trust with your business partners.

Our guides are for informational purposes only. Such information is not legal advice and is not guaranteed to be correct, complete, or an up-to-date representation of LegalOn's legal content. Nor is the information tailored to the unique needs or objectives that accompany each transaction. For legal advice for a specific problem, you should consult an attorney licensed to practice law in the appropriate jurisdiction for each transaction.

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