Non-Disclosure Agreement Clauses US Businesses Should Understand

For US startups, founders, and small business owners, protecting confidential information is a constant challenge. Whether you are pitching a new product to investors, sharing trade secrets with a contractor, or onboarding employees, you need to keep sensitive business information secure. Non-disclosure agreements (NDAs) are the most common tool for this, but many businesses make costly mistakes. Using a generic NDA template, ignoring state law differences, or failing to specify what is confidential can leave your business exposed. This guide explains the key NDA clauses you should understand, common pitfalls to avoid, practical examples, and steps to help you use NDAs effectively in the US.

What Is a Non-Disclosure Agreement?

A non-disclosure agreement (NDA) is a contract between two or more parties that outlines how confidential information will be handled. The main purpose is to prevent unauthorized sharing or misuse of sensitive business data. NDAs are used in many business situations, including:

• Pitching new products or ideas to investors
• Sharing proprietary information with contractors, vendors, or consultants
• Onboarding employees who will have access to trade secrets
• Discussing potential mergers, acquisitions, or partnerships
• Collaborating with other businesses on joint projects

NDAs can be mutual (both parties share and protect information) or one-way (only one party discloses confidential information). The agreement should clearly state what information is confidential, how it can be used, and what happens if there is a breach.

There is no single federal law governing NDAs. Instead, NDAs are generally enforced under state contract law. This means the rules and enforceability of NDAs can vary depending on the state, the industry, and the terms of the agreement. For example, California restricts certain NDA clauses in employment contexts, while Texas courts may enforce broader confidentiality terms. Some industries, such as healthcare or finance, also have additional confidentiality requirements under federal or state law.

Key Clauses in a Non-Disclosure Agreement

The effectiveness of an NDA depends on the specific clauses it contains. Here are the most important NDA clauses US businesses should understand, with practical examples and state law caveats:

1. Definition of Confidential Information

This clause specifies what information is considered confidential. It can include technical data, business plans, customer lists, financial information, source code, marketing strategies, and more. A common mistake is using overly broad or vague definitions, such as "all information," which can make the NDA hard to enforce. Courts often require specificity. For example, a California court may refuse to enforce an NDA that tries to cover every piece of information exchanged during a business relationship.

Example: If your startup is sharing a prototype design with a manufacturer, the NDA should specifically list "product designs, technical drawings, and manufacturing processes" as confidential information.

Checklist:

• List specific types of information (e.g., source code, customer lists, business plans)
• Clarify if oral disclosures are covered and how they must be confirmed in writing
• Exclude information that is already public or independently developed

2. Obligations of Receiving Party

This section outlines what the receiving party can and cannot do with the confidential information. Typical obligations include:

• Not disclosing the information to third parties without consent
• Using the information only for the agreed purpose (e.g., evaluating a business proposal)
• Taking reasonable steps to protect the information (such as using secure storage or limiting access to authorized employees)

Example: If you share a customer list with a marketing consultant, the NDA should state that the consultant may only use the list for the agreed marketing campaign, not for their own business or to share with others.

State caveat: Some states, like New York, expect the NDA to define what "reasonable steps" means. This could include requiring password protection, encryption, or physical security measures.

3. Exclusions from Confidentiality

NDAs typically list certain types of information that are not covered by the agreement. Common exclusions include:

• Information already in the public domain
• Information the receiving party already knew before signing the NDA
• Information independently developed by the receiving party without reference to the confidential information
• Information disclosed by a third party who is not bound by confidentiality

Example: If a contractor already knows about a marketing strategy from a previous project, the NDA should clarify that this information is not covered.

Checklist:

• Clearly list all exclusions
• Require the receiving party to prove exclusions if challenged

4. Term and Duration

This clause sets out how long the NDA will last. There are two key points:

• Term of the agreement: How long the parties are obligated to keep information confidential (e.g., two years after the agreement ends)
• Survival of obligations: Whether confidentiality obligations continue after the NDA or business relationship ends

Example: An NDA might state that confidentiality obligations last for three years after the end of a consulting contract.

State caveat: Some states, such as Illinois, may not enforce confidentiality periods that are indefinite unless the information is a trade secret. For trade secrets, protection can last as long as the secret is maintained.

5. Remedies for Breach

This section explains what happens if the NDA is violated. Common remedies include:

• Injunctive relief (a court order to stop disclosure or use)
• Monetary damages for losses caused by the breach
• Attorney fees and costs

Example: If a former employee discloses your customer list to a competitor, you may seek a court order to stop the use and claim damages for lost business.

State caveat: Some states, like Texas, may limit damages if the NDA is seen as a penalty rather than a reasonable estimate of loss. Always ensure remedies are reasonable and not punitive.

6. Return or Destruction of Information

This clause requires the receiving party to return or destroy confidential information when the NDA ends or upon request. This can include physical documents, electronic files, and all copies.

Example: After a partnership discussion ends, the other party must delete all shared files and certify in writing that they have done so.

Checklist:

• Specify the process for returning or destroying information
• Require written confirmation of destruction if needed

7. Governing Law and Jurisdiction

Because NDAs are enforced under state law, it is important to specify which state's law will apply and where disputes will be resolved. This is especially important for businesses operating in multiple states or working with out-of-state partners.

Example: If your business is based in Florida but you are working with a California contractor, you may want the NDA to be governed by Florida law and disputes resolved in Florida courts.

State caveat: Some states, like California, may not enforce out-of-state choice of law clauses in employment NDAs if they conflict with local employee rights.

Common NDA Mistakes US Businesses Make

Even with the best intentions, businesses often make mistakes when drafting or using NDAs. Here are some of the most common pitfalls, with practical examples and tips to avoid them:

• Using generic templates: Many businesses copy NDAs from the internet without tailoring them to their specific needs or state law requirements. For example, a template written for Delaware law may not be enforceable in California or New York.
• Vague definitions: Failing to clearly define what is confidential can make the NDA difficult to enforce. For instance, if you simply say "all information" is confidential, a court may refuse to uphold the NDA.
• Overly broad restrictions: Courts may refuse to enforce NDAs that are too broad, such as those that try to cover all information or last indefinitely. For example, a Texas court may strike down an NDA that restricts disclosure of information that is already public.
• Ignoring state law differences: State contract laws vary, and some states have special rules about NDAs, especially in employment or non-compete contexts. For example, California restricts NDAs that attempt to prevent employees from discussing workplace conditions, and Illinois has special requirements for NDAs in employment contracts.
• Failing to update NDAs: As your business grows or laws change, your NDA may need to be updated. Outdated NDAs may not provide the protection you expect. For example, changes in federal or state privacy laws could affect what information is considered confidential.
• Not keeping records: Failing to keep signed copies of NDAs or clear records of what was disclosed can make enforcement difficult if a dispute arises. For example, if you cannot prove what information was shared and when, it may be hard to claim a breach.
• Not confirming oral disclosures in writing: Many NDAs require oral disclosures to be confirmed in writing within a certain period (such as 30 days). Failing to do so may mean the information is not protected.

Checklist to avoid mistakes:

• Tailor each NDA to the specific situation and parties involved
• Review state law requirements before finalizing the NDA
• Keep clear records of all disclosures and signed agreements
• Update NDAs as your business or the law changes
• Confirm oral disclosures in writing when required

When Should US Businesses Use an NDA?

NDAs are not just for large corporations. Startups and small businesses often have the most to lose if confidential information is leaked. Here are common situations where an NDA is recommended, with practical examples:

• Pitching to investors: Before sharing a new product idea or business plan, consider using an NDA. However, be aware that some investors, especially venture capitalists, may refuse to sign NDAs during early-stage pitches. In these cases, share only non-sensitive information until a formal agreement is in place.
• Hiring contractors or consultants: If you hire a software developer to build a proprietary app, use an NDA to protect your source code and business logic.
• Mergers, acquisitions, or joint ventures: NDAs are standard when sharing financial statements, customer lists, or trade secrets during due diligence.
• Onboarding employees: Employees who will work with trade secrets or proprietary data should sign NDAs. For example, a sales manager with access to customer pricing should be covered by an NDA.
• Collaborating with other businesses: If you are working with another company on a joint project, an NDA can protect shared research, development, or marketing strategies.

NDAs are not always necessary. If the information is already public or not sensitive, an NDA may not add much value. Also, in some industries, additional confidentiality rules apply. For example, healthcare businesses must comply with HIPAA, which has its own confidentiality requirements. Financial institutions may be subject to Gramm-Leach-Bliley Act (GLBA) rules. Always check if additional regulations apply to your business or the information you are sharing.

Checklist: When to use an NDA

• When sharing proprietary information with any third party
• Before disclosing trade secrets, customer lists, or financial data
• During business negotiations, partnerships, or joint ventures
• When hiring employees or contractors who will access confidential data
• When required by industry regulations

Checklist: Drafting and Managing Your NDA

Use this practical checklist to help you draft and manage NDAs for your business:

• Identify all parties involved and clarify if the NDA is mutual or one-way
• Clearly define what information is confidential and what is excluded
• Specify the permitted uses of the confidential information
• Outline the receiving party's obligations to protect the information
• Set a reasonable term and clarify if obligations survive the end of the agreement
• Include remedies for breach, such as injunctive relief and damages
• Explain how information should be returned or destroyed at the end of the relationship
• Choose the governing law and jurisdiction for resolving disputes
• Keep signed copies and clear records of what was disclosed and when
• Update your NDA as your business or the law changes
• Confirm oral disclosures in writing if required by the NDA

For high-value deals, complex arrangements, or when dealing with sensitive trade secrets, consider having an attorney review your NDA before signing. This can help ensure your agreement is enforceable and tailored to your needs.

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, like California, have special restrictions on NDAs in employment settings or for certain types of information. Courts may also refuse to enforce NDAs that are overly broad, vague, or against public policy. Always check the laws in your state and tailor your NDA accordingly.

What is the difference between an NDA and a non-compete agreement?

An NDA is focused on protecting confidential information, while a non-compete agreement restricts a party from working for competitors or starting a competing business. Non-compete agreements are subject to much stricter scrutiny in many states, and some states, such as California, generally do not enforce them. NDAs are more widely accepted but still need to be reasonable and specific.

Can an NDA protect trade secrets indefinitely?

In many cases, yes. Trade secrets can be protected by an NDA for as long as they remain secret and valuable to your business. However, for other types of confidential information, courts may limit the duration of the NDA to a reasonable period, such as two to five years. Be clear in your NDA about what information is a trade secret and how long confidentiality should last.

What should I do if someone breaches my NDA?

If you believe someone has breached your NDA, act quickly. Gather evidence of the breach, review the NDA to understand your remedies, and consider sending a cease and desist letter. In serious cases, you may need to seek injunctive relief or damages through the courts. Consulting an attorney can help you assess your options and next steps.

Do I need an attorney to draft an NDA?

While simple NDAs can sometimes be drafted using templates, it is wise to have an attorney review your NDA for important deals, complex arrangements, or when dealing with sensitive information. An attorney can help ensure your NDA complies with state law, is tailored to your needs, and is enforceable if a dispute arises.

Key Takeaways

• NDAs are a practical tool for protecting confidential business information, but their effectiveness depends on the specific clauses included and compliance with state law.
• Key NDA clauses include the definition of confidential information, obligations of the receiving party, exclusions, term, remedies, return or destruction of information, and governing law.
• Common mistakes include using generic templates, vague definitions, overly broad restrictions, and ignoring state law differences.
• Keep clear records, update your NDAs as needed, and consider legal review for important deals or sensitive information.
• NDAs are generally enforceable, but state law and industry rules can affect their terms and enforceability.

If you have questions about drafting or reviewing a non-disclosure agreement for your business, our team can help you understand your options and next steps. Call (888) 449-8437 or email team@sprintlaw.com to get started. Where legal services are required, they are delivered by licensed lawyers at trusted US law firms through the Sprintlaw platform.