NDAs and the Sound of Silence
“When truth is replaced by silence, the silence is a lie.”
The #MeToo movement has brought Non-Disclosure Agreements (NDAs) as a way to silence allegations of sexual harassment into the public debate. In light of controversies surrounding Donald Trump, Harvey Weinstein and now – Sir Philip Green, the billionaire retailer whose brands include Topshop – much has been discussed about the legality and morality of using NDAs to prevent publicity or otherwise cover up bad behaviour.
But like any legal document, NDAs are not inherently “good” or “bad”. They are simply a tool, regularly used by lawyers in many contexts. To understand why they have become controversial, and to contribute to the debate concerning their use and abuse, we must first consider their structure and purpose.
NDAs, which are also called Confidentiality Agreements, are simply a type of contract used to prevent someone from sharing confidential information in ways which are unacceptable or damaging to another person. What information is considered “confidential” depends very much on the situation, as well as the relationship between the person providing the information (“discloser“) and the person receiving it (“recipient“).
Use of the word “confidential” to mean “intended to be treated as private” dates from the 1770s, and has its roots in the Latin word confidentia. This means “firmly trusting,” and is itself derived from confidere, which means “to have full trust or reliance.”
Confidential information is often shared for a business purpose or in corporate negotiations, especially when mergers or collaborations occur. For example, a restaurant chain looking for a deal with a food manufacturer may want to share recipes, or a fashion designer may seek a partnership with a well-known athlete who has sketches and drawings of a sports-inspired clothing range. Likewise, when a company hires a new employee, they may be given access to company client lists, manufacturing processes or other valuable data.
The basic anatomy of the NDA is relatively straight forward, and should always contain the following elements:
- A clear definition of the confidential information.
These are often heavily negotiated clauses, and it is usual to have very wordy and detailed definitions which set out explicitly what is and is not captured by the agreement. Sometimes, even the NDA itself is considered “confidential information,” which means that its terms or existence must be kept secret.The discloser will often want a broad definition of confidential information which covers not only the documents or products in question, but perhaps any derivative ideas, feedback, analysis or concepts created or inspired by the confidential information. On the other hand, the receiving party will want to keep this definition as narrow as possible.
- The key obligation to keep the information secret.
Standard wording will typically begin as follows: “In return for the discloser making confidential information available to the recipient, the recipient promises to the discloser that it shall keep the confidential information secret and confidential.”However, the obligation clause almost always contains many more rules and responsibilities. For example, the recipient may be prohibited from even indirectly sharing or hinting at the confidential information. They may also be prohibited from making copies, removing the information from a particular location, or storing it on their personal smartphone.
- The ways in which the information can be used.
The recipient will be prohibited from using or exploiting the confidential information except for the “purpose.” The purpose is the defined reason the information will be shared in the first place, for example, “to establish a collaboration in respect of the Tommy Hilfiger x Lewis Hamilton fashion line.”Disclosures of the information by the recipient to their employees and professional advisers (including lawyers and accountants) are usually permitted. In such cases, the discloser may ask that all individuals who receive the confidential information from the recipient sign a separate confidentiality agreement. While some may consider this a bit over the top, it makes sense from the discloser’s perspective that the receiver should take responsibility if its employees or advisers breach confidentiality.
- What happens if the project or deal does not go ahead, and the duration of the secrecy.
The discloser will often ask that the receiver returns or destroys the confidential information if the project or transaction fails to materialise. The parties should also establish a realistic time period for the duration of the secrecy, as it may be unreasonable to expect that the information has to remain confidential for eternity.
Seems simple enough, so what’s all the fuss about?
As mentioned above, NDAs are incredibly common and used in a wide variety of situations, ranging from complex corporate takeovers to short-term collaborations. But despite their ubiquitous nature and seemingly straightforward terms, it would be a mistake to assume that these are simple contracts.
It is rare for the parties entering the agreement to have perfectly equal bargaining power. Due to an imbalance of money, expertise, resources or even reputation, one of the parties involved will almost always be able to exert more influence over the other. This inherent imbalance can lead to the creation of NDAs which grant – or limit – rights in an unfair or improper way.
Entrepreneurs may think that an NDA adequately protects their valuable information when it is divulged to a potential investor. But unless the definitions and obligations are sufficiently locked down, little may prevent the investor from stealing the entrepreneur’s ideas.
Similarly, some unscrupulous companies may attempt to force their employees to enter into NDAs in an attempt to prevent whistleblowing or discrimination lawsuits. Matters can become very complex when an individual who has a grievance against a powerful boss is threatened with dismissal or further harassment, unless they sign an NDA. Moreover, a new common extension of NDAs is the inclusion of a “non-disparagement” clause. This goes beyond the protection of confidential information, and requires employees to never speak negatively about their employer or former employer.
In both the United States and the United Kingdom, lawmakers and courts have begun to establish clearer boundaries about the enforceable scope of NDAs. In the court of public opinion, powerful individuals who weaponise NDAs in an attempt to stifle access to justice, impair free speech and limit creativity are already losing. Regardless of the reason for entering a NDA, you owe it to yourself to ensure the document is checked first by a lawyer, and that your rights – and remedies – are adequately protected.