Before You Sign A Non-Disclosure Agreement: Key Commercial Terms To Review

Non disclosure agreements (NDAs) are a routine part of business for US startups, founders, and small business owners. Whether you are pitching a new idea, hiring a contractor, or discussing a potential partnership, you may be asked to sign an NDA. However, many business owners sign NDAs without fully understanding their obligations or the risks involved. Common mistakes include overlooking broad definitions, missing critical exclusions, and not considering how state law affects enforceability. This guide explains what a non disclosure agreement is, the key commercial terms to review, common pitfalls, and when to seek a licensed attorney's review before signing.

What Is a Non Disclosure Agreement?

A non disclosure agreement is a contract that requires one or more parties to keep certain information confidential. NDAs are used to protect sensitive business data, such as trade secrets, customer lists, product designs, financial information, and marketing strategies. The main goal is to prevent unauthorized sharing or use of information that could harm your business if it became public or reached a competitor.

In the US, NDAs are primarily governed by state contract law. While federal law, such as the Defend Trade Secrets Act (DTSA), provides a baseline for protecting trade secrets, most NDA terms and their enforceability depend on the state where the contract is made or enforced. This means that what is enforceable in one state may not be in another. For example, California restricts certain types of confidentiality and non-compete clauses, while New York may enforce broader terms.

NDAs can be one-way (only one party is bound) or mutual (both parties agree to confidentiality). Common situations for NDAs include:

• Pitching ideas to investors or partners
• Hiring employees or contractors with access to confidential data
• Negotiating mergers, acquisitions, or joint ventures
• Sharing proprietary information with vendors or consultants

Understanding the type of NDA and the specific terms is essential before you sign. If you are considering a business sale, partnership, or sharing sensitive intellectual property, careful review is especially important.

Key Commercial Terms to Review in an NDA

Not all NDAs are the same. The specific terms in the agreement determine your obligations and risks. Here are the main commercial terms to review before signing:

• Definition of Confidential Information: How does the NDA define what is confidential? Is it limited to specific documents, or does it broadly cover all information disclosed? Overly broad definitions can create uncertainty and risk. For example, if "confidential information" includes everything discussed, you may be restricted from using your own ideas or information you already knew.
• Obligations of the Receiving Party: What steps must you take to protect the information? Are you required to use "reasonable efforts" or "best efforts"? The difference matters: "best efforts" can be interpreted more strictly and may require more resources.
• Exclusions from Confidentiality: Most NDAs exclude information that is already public, independently developed, or received from another source. Make sure these exclusions are clear. For example, if you already knew certain information before signing, you should not be obligated to keep it confidential.
• Term and Duration: How long do confidentiality obligations last? Some NDAs set a fixed period (such as two or five years), while others require confidentiality indefinitely. Consider whether an indefinite term is reasonable for your business. Some state laws limit how long confidentiality can be required, especially for non-trade secret information.
• Permitted Disclosures: Are you allowed to share confidential information with employees, affiliates, or legal advisors? Are you required to notify the other party before making such disclosures? For example, if you need to share information with your accountant, the NDA should allow it.
• Return or Destruction of Information: What must you do with confidential information at the end of the relationship? Are you required to return or destroy all copies, including electronic backups? This can be challenging in practice, so make sure the requirements are realistic.
• Remedies and Enforcement: What happens if you breach the NDA? Does the agreement specify damages, injunctive relief, or both? Are there limits on liability? Some NDAs impose harsh penalties or allow for immediate court action, which can be risky if you are accused of a breach.
• Jurisdiction and Governing Law: Which state's law applies, and where would disputes be resolved? This affects how the NDA is interpreted and enforced. For example, a California court may refuse to enforce certain restrictions that a Texas court would uphold.

Before signing, go through each of these terms carefully. If anything is unclear or seems unreasonable, ask for clarification or changes. Do not assume that standard templates are always fair or enforceable. Having a contracts lawyer review the NDA can help you avoid common pitfalls and ensure the agreement is suitable for your situation.

Common Mistakes When Signing NDAs

NDAs are often signed quickly, but several common mistakes can create problems later:

• Not reading the NDA carefully: Many founders sign NDAs without reading the details, assuming they are standard. This can lead to unexpected obligations or restrictions.
• Agreeing to overly broad definitions: If "confidential information" includes everything discussed, you may be restricted from using your own knowledge or information you already had.
• Missing exclusions: Failing to ensure that public or independently developed information is excluded can create unnecessary risk.
• Accepting indefinite confidentiality: Some information may need to be protected forever (like trade secrets), but not all business information should be subject to indefinite confidentiality. State law may also limit indefinite terms.
• Ignoring jurisdiction and governing law: Signing an NDA governed by a state you are unfamiliar with can create enforcement challenges and unexpected legal interpretations.
• Not understanding remedies: Some NDAs specify harsh penalties or allow for immediate injunctive relief, which can be risky if you are accused of a breach.
• Not keeping a record: Failing to keep a copy of the signed NDA and a record of what information was shared can make it difficult to defend yourself if a dispute arises.

For example, a founder in Texas signed an NDA that defined confidential information as "all information disclosed during discussions." Later, the other party claimed that even public information was covered, leading to a costly dispute. In another case, a startup in California agreed to an NDA with an indefinite term, only to learn that California law limited the enforceability of such terms for non-trade secret information.

To avoid these mistakes, take the time to review the NDA, ask questions, and keep good records. If you are unsure about any term, consider getting a legal review before signing.

Checklist: What to Do Before Signing an NDA

Use this checklist to review an NDA before signing:

• Read the entire agreement carefully. Do not rely on verbal explanations or summaries.
• Confirm who is bound by the NDA (you, your company, employees, contractors).
• Review the definition of confidential information. Is it specific and reasonable?
• Check for clear exclusions (public information, independently developed information, information received from others).
• Understand your obligations to protect the information. What steps are required?
• Note the duration of confidentiality. Is it for a fixed period or indefinite? Is this consistent with state law?
• Look for permitted disclosures and any notice requirements.
• Check what happens at the end of the relationship (return or destruction of information).
• Review the remedies for breach and any limitations on liability.
• Confirm the governing law and jurisdiction for disputes.
• Keep a copy of the signed NDA and a record of what information was shared and when.

If you find any terms that are unclear, overly broad, or seem unfair, do not hesitate to ask for changes or clarification. Many parties are willing to negotiate reasonable terms, especially if you can explain your concerns. For example, you might request that "confidential information" be limited to written materials marked as confidential, or that the confidentiality period be capped at two years except for trade secrets.

When Should You Get a Legal Review?

While many NDAs are straightforward, there are situations where you should have a licensed attorney review the agreement before signing. Consider legal review if:

• The NDA involves significant business value or sensitive intellectual property.
• The other party is a large company or has provided a complex agreement.
• The NDA contains unusual terms, such as non-compete clauses, non-solicitation provisions, or indemnities.
• The governing law is a state you are not familiar with, or the agreement will be enforced in a different jurisdiction.
• You are unsure about the meaning or enforceability of any provision.
• The NDA is part of a larger transaction, such as a merger, acquisition, or investment deal.

State contract law can affect the enforceability of NDAs. For example:

• California: Generally refuses to enforce non-compete clauses, and may limit indefinite confidentiality obligations for non-trade secret information.
• New York: More likely to enforce broader confidentiality terms, but still requires reasonableness.
• Texas: May enforce longer confidentiality periods, but courts still review for fairness and clarity.

Some industries, such as healthcare or finance, have additional confidentiality requirements under federal or state law. For example, health information may be subject to HIPAA, and financial data may be regulated by GLBA. A licensed attorney can help you understand whether the NDA is enforceable in your situation and whether any terms need to be revised.

Remember, even a well-drafted NDA cannot guarantee that your information will never be disclosed. However, a clear and enforceable NDA provides a strong deterrent and a basis for legal action if a breach occurs.

Practical example: A startup founder in Illinois was asked to sign an NDA as part of a potential acquisition. The NDA included a non-solicitation clause that would have prevented the founder from hiring any employees of the acquiring company for three years. After legal review, the clause was narrowed to apply only to employees directly involved in the deal and for a shorter period, reducing the risk to the founder's business.

FAQs

Are NDAs enforceable in every US state?

NDAs are generally enforceable in most US states, but the specific rules and requirements can vary. Some states restrict certain terms, such as non-compete or non-solicitation clauses, and may limit the duration or scope of confidentiality obligations. Always check the governing law of the NDA and consider whether state-specific rules apply. For critical deals, a licensed attorney can review enforceability in the relevant state.

What happens if I breach an NDA?

If you breach an NDA, the other party may be entitled to remedies such as damages or injunctive relief (a court order to stop the disclosure). The specific remedies depend on the agreement and governing law. In some cases, breaching an NDA can also damage your business reputation or relationships. If you believe you may have breached an NDA, seek legal advice promptly.

Can an NDA prevent me from working in the same industry?

Most NDAs are intended to protect confidential information, not restrict your ability to work in a particular industry. However, some NDAs include non-compete or non-solicitation clauses that may limit your future activities. The enforceability of these clauses depends on state law and the specific terms. For example, California generally does not enforce non-compete clauses. Always review the NDA for any such restrictions before signing.

Do I need an NDA for every business discussion?

Not every business conversation requires an NDA. NDAs are most useful when you are sharing sensitive, non-public information that could harm your business if disclosed. For routine discussions or information that is already public, an NDA may not be necessary. Consider the value and sensitivity of the information before asking for or agreeing to an NDA.

Can I negotiate the terms of an NDA?

Yes, NDAs are contracts and their terms can often be negotiated. If you find terms that are unclear, overly broad, or potentially unfair, discuss your concerns with the other party. Many businesses are open to reasonable changes, especially if you explain why a term is problematic. If you are unsure how to negotiate, consider consulting a licensed attorney for guidance.

Key Takeaways

• NDAs are important tools for protecting confidential business information, but their terms and enforceability depend on state law and the specific agreement.
• Review key commercial terms such as the definition of confidential information, exclusions, duration, permitted disclosures, remedies, and governing law before signing.
• Common mistakes include not reading the NDA carefully, agreeing to overly broad or unclear terms, and failing to keep records.
• Use a checklist to review NDAs and consider legal review for high-value, complex, or unfamiliar agreements.
• NDAs are not a substitute for good business practices and cannot guarantee absolute confidentiality, but they provide important legal protections when used correctly.

If you need help reviewing a non disclosure agreement or have questions about your obligations, our team can help you scope the legal support your business needs and explain the next steps available through the Sprintlaw platform. Call (888) 449-8437 or email team@sprintlaw.com to discuss your needs. Where legal services are required, they are provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.