Non-Disclosure Agreements (NDAs) are a legal tool used in business, especially in situations regarding employment, technology or in circumstances that may require access to sensitive information.
Despite their reputation, NDAs do not have all-powerful legal rights to gag individuals. NDAs cannot be used to hide illegal, criminal or illicit conduct.
In this article, we look at how NDAs work and much more.
Here goes…
What Is an NDA and How Does it Work?
An NDA is simply a legally binding contract where one or more parties can decide not to disclose certain information.
An NDA can be Unilateral or Mutual.
A Unilateral NDA is an agreement where one person agrees to keep certain information confidential that the other discloses.
A Mutual NDA is an agreement where both parties disclose and agree to keep the information shared confidential.
The types of information that can be covered by an NDA include:
- Trade secrets
- Business strategies
- Intellectual property
- Financial data
- Customer lists
- Proprietary processes
Legitimate NDAs will specify what information is considered “confidential”, how long the agreement lasts, permitted disclosures (who can be told the information, lawyers or courts, for example) and the penalties if the NDA is breached.
When used properly, NDAs help promote trust and allow sensitive business talks to take place without fear of disclosing sensitive information.
However, it’s important to ensure that NDAs are not used inappropriately.
The Legitimate Benefits of NDAs
Here are some legitimate uses for an NDA:
1. Protection of Trade Secrets
Organisations often rely on trade secrets and technological innovations to gain a competitive advantage.
In this case, it may be prudent to have an NDA in place to protect the proprietary information.
Without an NDA, organisations would find it hard to share their confidential ideas with partners, investors and even employees.
A signed NDA allows the information to be shared with repercussions if the agreement is breached.
2. Certainty
NDAs help provide certainty around how sensitive information can be shared. This can help minimise disputes and misunderstandings.
3. Privacy and Reputation Management
In certain areas, such as business disputes or employment, NDAs can be used to provide privacy to protect both sides from public disclosure without implying any wrongdoing.
4. Encouraging Open Negotiations
Often, before negotiations begin, NDAs will be signed so more information can be shared without fear of disclosure, so both parties can have open and detailed conversations.
Parties are more willing to negotiate candidly when sensitive discussions are confidential.
Illegitimate Uses – NDAs Cannot Conceal Illegal or Illicit Activity
Despite popular opinion, NDAs do not circumvent the law. Courts, in particular the US and the UK, have been clear on the matter:
***An NDA is unenforceable if it is used to conceal criminal activity, regulatory breaches, or other unlawful conduct.
Examples where NDAs can fail include attempts to silence:
- Criminal behaviour
- Fraud
- Sexual assault or harassment
- Money laundering
- Regulatory violations
- Whistleblowing disclosures
Most NDAs will state explicitly that disclosures that are required by law, for example, to law enforcement or the courts, are permitted.
Even if the clause is not written in the agreement, courts will read this limitation into the agreement so disclosures can be made to the courts or law enforcement.
In the USA:
EEOC v. Astra USA, Inc., 94 F.3d 738 (1st Cir. 1996)
In the UK:
“It was already the case that a non-disclosure agreement, irrespective of its terms, cannot validly seek to prevent a person from reporting a crime to the police… and cannot validly seek to prevent a worker from whistleblowing…” – Victims and Prisoners Act 2024 guidance (GOV.UK).
Examples of Struck Down NDAs.
The Harvey Weinstein Case (US).
One of the most famous examples of NDAs being struck down is the case of film producer Harvey Weinstein.
Weinstein used NDAs in settlement agreements to silence multiple victims of sexual assault over decades.
In 2020, Weinstein was convicted in New York and sentenced to 23 years. In December 2022, Harvey Weinstein was convicted in California of another rape and sexual assault charge and sentenced to an additional 16 years.
While the NDAs initially discouraged victims from speaking publicly, they did not protect Weinstein from prosecution.
Prosecutors were able to rely on testimonies despite the NDAs.
UK law is equally firm: NDAs cannot prevent disclosures in the public interest.
Philip Green / Arcadia Group (UK).
In the UK, NDAs were used by companies associated with businessman Sir Philip Green.
Green’s business dealings came under intense scrutiny after allegations of harassment and bullying.
Parliamentary privilege was used to reveal allegations despite existing NDAs.
Whistleblower Protections
Most importantly, US federal law also provides strong whistleblower protections. NDAs cannot lawfully prevent disclosures to bodies such as:
- The SEC
- The Department of Justice
- OSHA
- Congress
Companies that have attempted to use NDAs to silence whistleblowers have faced regulatory penalties:
SEC Charges the Brink’s Company with Violating Whistleblower Protection Rule
What Entrepreneurs Must Know
Many new entrepreneurs often ask if it is necessary for potential investors to sign NDAs.
After all, you are presenting your great idea, and you are concerned about your idea being shared with third parties.
However, in practice, many investors are reluctant to sign NDAs, and many will refuse. Entrepreneurs should not push for NDAs at the early pitch stage.
The reason is that investors are exposed to hundreds of founders, often with similar or competing ideas.
Signing an NDA in the early stages would put them at risk of being sued if they were already talking to someone with a similar or competing idea.
Entrepreneurs should look at other legitimate means of protecting their ideas, such as trademarks or patents.
Read these articles on Patents, Trademarks and other forms of protection:
By all means, if your venture involves very sensitive information and you are further along the line of signing a deal, then NDAs may have value.
However, in the early stages, it may be frowned upon and even considered naïve by some investors.
Read this article on how to send your pitch to investors:
Final thoughts
Counter to popular belief, NDAs do not give blanket power to the issuer of the agreement.
It’s important to note that if the NDA is attempting to silence wrongdoing, illegal activities, or circumvent reporting to law enforcement or Congress, the NDA is likely to be unenforceable.
NDAs cannot be used as a means of intimidation.
However, NDAs are useful in a legitimate business context to allow the exchange of sensitive information during business negotiations without the fear of inappropriate sharing of sensitive information with third parties.
Entrepreneurs should be aware that if they attempt to use an NDA with a potential investor early on in the pitching process, it may spoil the relationship, or they may be considered naïve by the investor.
NDAs may be useful once an investor is seriously interested, but entrepreneurs should look at other means of protecting their ideas, such as trademarks and patents.
Finally, if you have signed an NDA and are being harassed or the NDA is attempting to silence information that is in the public interest or is attempting to suppress dubious activity, you have the right to divulge that information to the relevant authorities without repercussion.
Good luck!
This article is not legal advice. Laws can vary depending on your jurisdiction. You should always seek advice from a qualified lawyer who specialises in the area of law related to your circumstances in your jurisdiction.
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