To NDA or Not to NDA: The Art of Strategic Silence or Open Mic Night?

Despite the significant advantages that NDAs provide, SMEs can often shy away from such use. The most common reasons for not taking advantage of appropriately prepared NDAs include:

• Resource constraints will always be a significant factor for SMEs, and calculating when to utilise those resources must be balanced against the longer-term interests of the business. However, opting either not to have one or to use a low-cost alternative comes with risk, unless the very subject matter to be shared is of zero or low value and importance. Consider the nature of what it is that you are potentially disclosing. Is it an important and fundamental trade secret or other IP asset? Consider the risk and adverse impact on your business should the trade secret fall into the hands of a competitor. What ability will you have before the courts to prevent its disclosure and commercial use?  Will you be able to recover legal fees should you need to enforce your rights before the courts? Drafting and negotiating a suitably relevant and robust NDA helps to create a further valuable asset for your business. Your ability to effectively enforce your NDA can be seen as part of that investment in protecting your company’s longer-term interests.

• SMEs can be particularly vulnerable in the business environment, and therefore personal relationships and trust are often highly valued and significant. Using an appropriate NDA will only strengthen rather than erode such business relationships. But it is not uncommon for businesses to consider the use of NDAs to be negatively viewed and potentially risk undermining the very relationships an NDA would otherwise preserve. Should a party question the use of an NDA, that will be a signal to you that either the trade secret to be disclosed (and subsequent business risk to you should it be inappropriately used) is not properly understood, or perhaps you need to rethink that particular business relationship? Do not allow yourself to think or be persuaded that an NDA should not be needed simply on the presumption of trust alone.

• The perception of limited bargaining power can be an influential dissuader for SMEs when considering the use of NDAs. This is most often at the outset and formative stages of the relationship, where perhaps there is uncertainty and a misconstrued belief that the use of such agreements will be seen as obstructive and naive. But in fact this is probably the most important stage to raise any genuine and proportionate NDA requirement, with such explanation providing the other party with a potent indication of your suitability with the partnership. In the same way that an NDA enhances trust between parties, its use will also show the strength of your convictions and belief in your own business and its assets. It will be inevitable that a business partner will recognise and respect your position, leading to greater faith in you and the business relationship. Consider that even where you are negotiating with a much larger entity, they are more likely to understand the importance and impact of NDAs to the extent they might be concerned if the need for one is seemingly ignored.

• Ease of collaboration in certain sectors or industries may be seen as of higher value and advantage. Therefore using an NDA could be perceived as a barrier to open communication and co-operative partnering, and a potential hand-brake in fast moving industries.  Again choosing a particular style and more relevant NDA could provide both protection for the parties and promote innovation, without unnecessarily restricting data flow or compromising on protection. Much of course will depend on the resources of the parties, but it is important to look at ways in which an NDA can both protect and be supportive of the parties, taking account of their particular environments and projects. 

Notwithstanding some reticence in the use of NDAs, consider the various business risks when not properly exploited:

• Some SMEs may be concerned that the very act of introducing an NDA could draw attention to the confidential nature of their information, potentially increasing the risk of leaks or breaches. Nonetheless without an NDA, businesses are more likely to be vulnerable to the unauthorised disclosure of sensitive information. Most usually this will cause competitors to gain access to your trade secrets, proprietary technology and intellectual property, or strategic plans. This in turn leads to significant losses to your business including profitability, adversely affects planned growth and market share, impacts upon your ability to maintain a competitive market-edge, and throttles opportunities for your business to innovate. In some cases the loss of confidential information simply culminates in the collapse of the business.

• Reputational damage can arise where clients, partners, and stakeholders may lose trust in a business that cannot adequately protect sensitive information. This will be exaggerated where there is also a consistent failing with regards to data integrity, data breaches, and cybersecurity risks that arise from a lack of diligence in implementing appropriate protocols. This can in turn lead to employee departures, especially those in key positions, who may have greater confidence in taking a company’s valuable knowledge to competitors without consequence.

• Increasing potential for legal disputes arising, higher legal costs, and greater risk of an inability to enforce the desired protection. In the absence of any NDA (or the use of one that is ambiguous, simplistic, overly restrictive, or too general in nature), businesses will find it challenging to pursue effective and cost-efficient legal action against those unauthorised disclosures or misuse of confidential information. Legal disputes may become more frequent, will be more expensive, time-consuming, and more challenging to enforce, with an increasing risk of losing that market edge and innovation to a competitor.

• Partnerships will be compromised. In collaborative ventures, the absence of NDAs will discourage potential partners from sharing crucial information, thereby hindering effective collaboration and innovation. This, in turn, can impede the progress of projects, and ultimately delay growth and the success of the business. In business negotiations, the absence of NDAs can often weaken a company’s bargaining power. Without the assurance of confidentiality, businesses are likely to be hesitant to share sensitive information.

• Decreased Company Valuation. Investors and potential buyers often consider the effectiveness of a company’s ability to protect its intellectual property and confidential information when assessing company value and its ability to deliver suitable returns. If a company is not able to protect its own assets, it is highly unlikely to attract suitable investors. Certainly for a company not to use NDAs or to have potentially ineffective NDAs, it is most likely that its overall valuation will be negatively impacted.

The legal framework surrounding NDAs in various international markets, usually reflects a balance between the need for confidentiality and the principles of transparency and fair competition, as relevant for within that jurisdiction. As you would expect NDAs exhibit nuanced differences in their application and interpretation across different territories, and while the fundamental purpose of NDAs remains consistent, variations can arise due to jurisdiction-specific legal frameworks.

In the US, it is important to note that each State may have particular differences from another, and therefore choice of jurisdiction will be very important as it will ultimately determine the enforceability of certain clauses. These will include different statute of limitations regimes which may vary and dictate by when court action must be initiated following a breach. Non-compete and non-solicitation clauses can be subject to different interpretations with greater scrutiny in some other states. The use of liquidated damages ought to follow specific state-law requirements to ensure enforceability. It is also important to consider that whilst most US states have adopted the Uniform Trade Secrets Act (UTSA) it should be noted that each state can still modify and vary those provisions. Therefore trade secret laws are not necessarily uniform or harmonised across the US. Differences of interpretation and what may be permitted in one state but not another include a complete prohibition of non-complete clauses and the application of the ‘inevitable disclosure doctrine’ (eg California); statute of limitations vary from state to state; exemplary damages can be available in cases of willful and malicious misappropriation in North Carolina and Utah, with Utah’s statute also allowing for its application to government agencies; and New York State having not adopted UTSA, prefers its own common law regime and statute law to regulate trade secrets applying principles of equity and fairness.

Even less so as compared with the US, there is no EU harmonisation of European Law in connection with NDAs. Therefore as before, special attention needs to be given to the jurisdiction and specific legal requirements of that country if adopting local laws when disclosing sensitive information. In addition to having regard to the General Data Protection Regulation, which imposes stringent data protection requirements upon the parties, additional differences can include the enforceability of non-complete clauses including scope and duration; some EU states have specific laws pertaining to IP ownership created by employees; translation requirements may apply to enforce NDAs in particular countries; confidential information can be defined differently across the EU through domestic case law and statute, potentially placing a limit upon enforcement; and the availability of injunctive relief, damages, or other remedies may be subject to subtle national variances.

NDAs play an important role in facilitating open communication and collaboration, to enable businesses to confidently share proprietary information without fear of unfair exploitation. This is particularly vital in contexts such as fundraising and investment, where disclosing financial and strategic details is essential for attracting potential investors. The legal advantages offered by well-prepared NDAs, including enforceability, protection against breaches, and clearly defined remedies, underscore their significance in mitigating risks and enhancing the overall security of business transactions.

In navigating the complexities of today’s global and competitive landscape, businesses can view NDAs not only as protective mechanisms but also as strategic tools that contribute to the establishment of robust partnerships, innovation, and sustained growth. As the information age continues to evolve, the judicious use of NDAs remains a cornerstone in preserving confidentiality, safeguarding intellectual property, and fortifying the foundations of trustworthy and fruitful business relationships.