What is a Non-Disclosure Agreement?
The definition of a Non-Disclosure Agreement, or NDA, is a legally binding contract between two parties that covers the terms for sharing and preserving confidential information. It is legally recognized as an implied contract which establishes a confidential relationship between two parties. The terms of an NDA can vary greatly, but generally speaking it will include specific provisions regarding what information will or will not be considered confidential, who can or cannot view the information in question, when said information can or cannot be shared, and under what circumstances the relationship can be terminated. They can be written, oral, or implied, however, implied contracts can open up the door to further litigation if information included in one could be considered confidential , but does not appear on a formal contract.
NDA’s are common in many segments of the professional world. For example: Parties to a merger or acquisition often use NDAs to prevent the leaking of sensitive material or information about that merger or acquisition. A contract employee or contractor may have access to sensitive company information that they should not be sharing. A company that hires a private investigator may want to put an NDA in place to prevent sensitive information from being leaked (and ensure that the documents provided to the investigator are secure). These are just a few examples, and there can be unlimited situations where a non-disclosure agreement may be needed.
Essential Components of a Colorado NDA
In Colorado, a non-disclosure agreement is governed by contract law, which means that the precise terms and requirements for an NDA can vary widely. A valid NDA in Colorado does not require any specific language or level of detail, although it must generally be clear in its intent and specify what information is covered by the contract. When drafting or negotiating a Colorado NDA, be sure that it includes:
- the definition of protected information to be covered by the NDA (note that the Colorado State Constitution protects trade secrets from disclosure if they meet certain requirements);
- the date when the NDA goes into effect;
- the time period during which the parties will be required to maintain confidentiality;
- a reasonable period of time for which the NDA will remain in effect (Colorado law will enforce NDAs for a maximum of three years);
- how the information will be used (only for business purposes);
- a provision outlining any penalties for losing or improperly using confidential information; and
- a list of persons or parties who will have access to the information.
If the NDA will be executed by partnership, corporation, or some other type of business entity, be sure to include a warranty in the contract that the individual signing the NDA on behalf of the company has the authority to enter into this type of agreement.
Enforcing Non-Disclosure Agreements in Colorado
While certain cases have questioned the enforceability of non-disclosure agreements, they are routinely found to be enforceable. Courts will generally not declare them unenforceable if they contain reasonable terms. Most non-disclosure provisions, or "NDA’s" as they are commonly called, can be enforced as long as the attorney fees, if called for in the agreement are awarded to the prevailing party. Knowledge gained while working for your employer is secret and you have a duty not to disclose it to others in order to keep it secret. In Arizona, there is a duty of confidentiality owed to one’s employer.
Under Colorado law, an employer seeking enforcement would have to show: (1) that the information is secret and unknown to persons with whom the employer competes and to persons who could otherwise benefit from its use or disclosure; (2) that the information is secret because it is the subject of reasonable efforts under the circumstances by the employer to maintain its secrecy; and (3) that the information derives independent economic value from its secrecy. See, River West, Inc. v. Nickel, 1996 U.S. Dist. LEXIS 10087 (D. Colo.); Products, Inc. v. Ethicon, Inc., 589 P.2d 505, 514 (Colo. App. 1978).
In addition to complying with the above, an employer seeking enforcement of its confidentiality provision also has to show that it has been and is likely to be economically harmed by the disclosure of the information or the breach of the agreement. The key issues are whether a legal duty of confidentiality is owed, whether the subject information is covered by that duty, and whether the confidential status of the information was lost as a result of its disclosure. Your former employer may claim that your use of the knowledge you gained while employed by them will harm them, keep you from engaging in freely chosen and lawful competition, and that you are harming them when you use that knowledge and skills.
Exceptions and Limitations for Non-Disclosure Agreements
Limitations and Exceptions to Enforcement of Non-Disclosure Agreements in Colorado
Non-disclosure agreements should generally be interpreted in accordance with their plain meaning, but the Colorado courts recognize several limitations to enforcement of NDAs. A non-disclosure agreement is subject to two limitations regardless of the context: first, no contract containing a confidentiality provision may be enforced if the information is not a protectable interest under the law; second, confidentiality is not absolute, and a court will usually balance the parties’ privacy interests when deciding whether to enforce an NDA. Nearly every type of information qualifies as protectable at some level, but for many types of information, the analysis will vary depending on circumstances surrounding the information, such as context or the relative cost of collection. The Colorado courts recognize two exceptions to enforcement of NDAs: (1) for disclosures made to whistleblowers; and (2) for disclosures made while illegally obtaining the information. Whistleblowers are not bound by non-disclosure agreements. By statute , 18 U.S.C. § 1514A(a)(1) protects whistleblowers from being retaliated against for disclosing information related to acts of fraud, corruption, or other unlawful activity. This protection extends to independent contractors and officers of corporations. In addition, any provision of a confidentiality agreement that proposes to limit or prohibit disclosures made by whistleblowers is generally void and unenforceable. While NDAs may make certain whistleblower disclosures a contractual violation, those provisions are unenforceable to the extent they restrict the disclosure of information that is protected from disclosure by 18 U.S.C. § 1514A/ Colorado False Claims Act (§ 24-60-1617). The same is true for disclosures made while illegally obtaining the information; an employee may reveal trade secrets he/ she stole from an employer because the theft itself was a crime.
Tailoring NDAs for Colorado
It is essential that NDAs are tailored to Colorado law and the specific business situation of the company seeking to employ a potential new hire. It is important to note that Colorado courts have strictly construed the terms and conditions of NDAs and will not protect a party to the NDA that has breached an agreement that was not carefully crafted and tailored to the party’s business needs.
The following are a few tips to help you properly customize your NDA for use in Colorado:
•Identify the parties: You must specifically identify who you consider to be a "disclosing party" and what type of confidential information is being disclosed. This does not mean simply providing a generic category or business function in the NDA (i.e., "sales" or "marketing"). It is important to also identify the department (i.e., Sales Department, VP of Sales, etc.) and to identify the specific types of confidential information (i.e., customer lists, pricing schedules, etc.) being disclosed. The identity of the disclosing party is critical in order to make sure the disclosing party is properly identified in the NDA and to ensure the NDA is enforceable if there is a breach. If the appropriate parties are not listed and the correct types of confidential information are not clearly identified, the disclosing party may find itself without the necessary terms and conditions under which to enforce the agreement.
•Confidential information: Generally speaking, confidential information includes any information that is proprietary information to your company and is not publicly known. However, depending on the nature of your business, the confidential information may include or exclude certain types of information. One of the best ways to determine what confidential information should be listed in an NDA is to conduct an internal audit of your business. A general audit should include an evaluation of the labeled areas in your office, company phone system, computer network and server for files or information that should be confidential. It is also important to take into consideration the types of information employees or management may have access to that would be a threat to the company if released publicly or to a competitor. After conducting the audit, you can determine if you have any additional confidential information that should be protected in the NDA.
•Mutual vs. unilateral NDAs: As mentioned previously in this blog, there are mutual NDAs and there are unilateral NDAs. When determining which type of NDA to use, it is essential that the parties to the agreement consider the likelihood that the company’s confidential information may be disclosed. If the counterparty needs to see the company’s confidential information before entering into the NDA, that is a sign that the counterparty may disclose the company’s confidential information if they are not bound using a unilateral NDA. In other cases, where there is high likelihood that both parties’ confidential information will be disclosed and used by the counterparty, a mutual NDA will allow the company to protect against the misuse of the counterparty’s confidential information. Thus, a mutual NDA would be the best option. However, in both cases, before either party enters into an NDA, an evaluation of the business needs and likelihood of a breach should be conducted.
•Requirements under Colorado law: In addition to tailoring the NDA to fit your company’s business needs, it is also important to read and understand Colorado law when crafting the NDA. If the NDA will contain any restrictive covenants, it is important not to enter into an NDA that would otherwise violate Colorado law. An employer cannot bind an employee to a post-termination non-disclosure obligation without the employee’s consent. In addition, every employee in Colorado is deemed to have access to "trade secret information" and is deemed to be subject to its nondisclosure and use restrictions. Under the Colorado Uniform Trade Secrets Act, restrictive covenants "binding an employee by express or implied agreement, contract, or policy" are enforceable if they are entered into after the employee has been employed for two years of less, provided they are reasonable in scope and serve a legitimate purpose.
Common Myths About Non-Disclosure Agreements
Many people tend to dismiss the need for an NDA as a non-issue, believing that their relationship with the other party never required a written agreement. However, in Colorado, an NDA does not necessarily have to be a separate agreement. Instead, proprietary obligations may be included as terms of the relationship between the parties. A common example of this is an employer/employee relationship. Just because a written agreement was never signed between an employer and employee does not mean that the employee has no obligation to protect sensitive information belonging to the employer.
Another common misconception is that a non-disclosure agreement is only necessary when sharing detailed proprietary information. However, even sharing general or high-level information about a business can be considered confidential if it is treated as such . In addition, sharing such information without a non-disclosure agreement can result in irreparable harm to the business because the other party may use information acquired as a result against the business supplier or customer, even if used only as a comparison.
Another area of misunderstanding is the belief that NDAs are unnecessary. Some believe that if their business customer does not require an NDA, one is unnecessary. While relying on your business customers is ok, this should not be a reason to avoid an NDA as the individual or company that is engaged at such high levels clearly has access to valuable information that should be protected.
Lastly, many falsely consider that because they do not have any trade secrets, an NDA is unnecessary. Any information that is treated by one of the parties as a secret to which the other has access is covered by an NDA. This could include customer lists, pricing, suppliers or anything else that would be sought out by a competitor to give them an edge.