Non-Disclosure Agreements (NDAs): What You Need to Know and How to Use Them

Table of Contents:

1. Understanding NDAs and Their Essential Functions
2. Legal Requirements and German-Specific Considerations
3. When to Use NDAs and Their Limitations

What is a Non-Disclosure Agreement (NDA)?

Non-disclosure agreements (NDAs), also known as confidentiality agreements or confidentiality disclosure agreements, are legally binding contracts designed to establish confidentiality rights and obligations between the contractual parties. To protect sensitive data, these agreements are critical in various scenarios, such as onboarding new employees or during the initiation of business partnerships.

NDAs specifically safeguard an individual’s or organization’s information privacy, distinguishing them from other business contracts, such as service or sales agreements, which primarily address the terms of service or transaction conditions.

In international comparison, NDAs are subject to diverse legal obligations. Especially with German law, there are certain aspects you need to keep in mind.

The Essential Functions of a Non-Disclosure Agreement

A non-disclosure agreement serves a crucial dual purpose: ensuring confidentiality and protecting sensitive information. NDAs are usually utilized to protect various types of information, from product specifications and client lists to business models and embargoed communications. By legally mandating confidentiality, NDAs prevent the unauthorized sharing of protected details with competitors or other third parties, guarding against both intentional and accidental breaches.

Key functions of an NDA include:

• Identifying Protected Information: NDAs define what shall be considered confidential information, setting clear boundaries on what can and cannot be disclosed, and applicable exceptions.
• Legal Obligation for Confidentiality: Signing an NDA imposes a legal duty to maintain information secrecy, with any leak potentially constituting a breach of contract and consequent damages.
• Safeguarding Patent Rights: For inventions in development, an NDA helps preserve patent eligibility by preventing public disclosure.

How to Define Your NDAs to Comply with German Law

One of the key issues in German law is the definition of particular confidential information and the resulting confidentiality obligations. Under the current regulatory landscape, it is no longer possible to declare your know-how to be a trade secret. As is oftentimes the case with legal matters, under the new legal framework, you need to specify the subject very precisely. Various approaches to solving the problem have been established in practice:

Since the introduction of the Act on the Protection of Trade Secrets (GTSA) in 2019, which implements Directive (EU) 2016/943 (TSD) it is possible to refer to the legal definition of “trade secret” in Sec. 2 No. 1 GTSA (in German: Gesetz zum Schutz von Geschäftsgeheimnissen). According to the section, it needs to be

• A secret and therefore of economic value,
• The subject of appropriate confidentiality measures by its lawful owner,
• Of legitimate interest in keeping it confidential.

The main issue with a required “legitimate interest”

With this approach, you need to be cautious, given the requirement of a “legitimate interest”. If you refer to the legal definition it should be made explicit that trade secrets are nevertheless protected if this requirement is not given.

Because this solution is still very broad, to minimize the risk of protection gaps, it is advisable to combine it with a predefined catalogue of:

• Positive Examples: They can be used if the information that needs protection is known at the beginning of a business relationship.

• Negative Examples: They could be used to seclude a list of non-secret information while the remaining information is confidential.
• Exact References: Or the particular information or documents could be exactly referenced.

Often times, a combination of those elements is used to ensure comprehensive protection. Either way, there must be a need for confidentiality, which means you need to have a legitimate business interest in keeping the information confidential.

Non-Disclosure Agreements often times turn out to be embedded in “general terms and conditions”

Furthermore, this solution could fall under the German regulations of general terms and conditions (GT&Cs) - in Germany also known as “Allgemeine Geschäftsbedingungen” or “AGB”.

But if you use a standardized NDA clause for your contracts, you need to ensure its legal soundness. For instance, if your definition of a trade secret is too broad and general, it could violate the transparency requirements of Sec. 307 (1) sentence 2 of the BGB. These “catch-all” clauses constitute an unreasonable disadvantage for the other party and are therefore invalid. 

When is a Non-Disclosure Agreement Necessary?

NDAs are crucial when sensitive information needs to be shared inside and outside your organization, whether with potential investors, new employees, or during strategic partnerships. Below are key situations where an NDA is vital:

• Product Development and Outsourcing: Safeguard technical, financial, or proprietary data during negotiations and outsourcing relationships (e.g. freelancer) related to your products or technologies.
• Employee Relations: Protect your organization's confidential information accessible to employees during and after their tenure (e.g. employees involved in potential transactions).
• Partnerships and Investments: Secure sensitive data discussed during negotiations with potential partners or investors.
• Client Onboarding: Prevent legal exposure by managing client-sensitive information securely.
• Mergers and Acquisitions: Ensure that financial and operational details shared during these processes are confidential, including information handled by third parties.

Additionally, NDAs are instrumental when dealing with contractors, vendors, or exploring joint ventures to ensure that all shared information remains confidential.

Note: The Special Features of Employment Contracts within German Jurisdiction

One possibility to enforce confidentiality is to implement contractual penalties. This is especially useful because compensatory damages are very hard to prove.

In Germany, penalty clauses - which are not allowed in US or British jurisdictions - are still subject to GT&C controls, which ensure that all parties are treated fairly.

For example, the remuneration of the other contractual party and the seriousness of the breach of duty need to be taken into account. In comparison, courts in the US do not allow the idea of a contractual penalty but enable so-called “liquidated damages”. This differentiation, in advance, enables one to determine the consequences of a potential breach in terms of damages. In German law, reasonable treatment is ensured in Sec. 9 of the GeschGehG. The law allows action to be taken if the clause imposes disproportionate legal consequences on the other party.

Key Components of a Non-Disclosure Agreement

Every NDA should comprehensively address the following elements:

• Identification of Parties: Identifies all parties involved, including any third parties, specifying their roles within the confidentiality framework.
• Scope of the Agreement: Specifies what constitutes confidential information within the context of the agreement to prevent ambiguities.
• Obligations and Liability: Details the responsibilities of each party and their liability for breach of contract.‍
• Duration: States how long the information must remain confidential.‍
• Return or Destruction of Information: Outlines procedures for handling sensitive information once the business relationship ends and/or the term of the NDA expires.‍
• Exclusions from Confidentiality: Identifies any information not covered by the NDA, such as public knowledge or information previously known to the parties.‍
• Remedies for Breach: Describes legal actions or penalties in response to contract breaches, including possible damages or injunctions.

Limitations of Non-Disclosure Agreements (NDAs)

While NDAs are valuable for protecting sensitive information, they have inherent limitations:

• Enforcement Challenges: NDAs can be difficult to enforce since proving damages or securing injunctions can be complex (e.g. when terms are too broad or when challenging if certain information is public or not).
• Public Interest Exceptions: NDAs cannot prevent the disclosure of information if it serves the public interest, such as in matters of illegal activities or public safety.
• Scope and Time Limitations: Protection is only for information explicitly defined within the NDA and is often time-limited. Once the NDA expires, the information may no longer be confidential.
• Jurisdictional Issues: The effectiveness of an NDA can be limited by jurisdictional differences, especially if parties are in different regions.
• Reputational Risks: Using NDAs can sometimes harm an organization's reputation, particularly if perceived as a tool for covering up misconduct.

Organizations managing multiple NDAs may face challenges without standardized language. Developing a standard, adaptable NDA through expert consultation can mitigate these issues, ensuring that the confidentiality agreement meets the organization's needs effectively.

How GAIA helps you create and sign a NDA

GAIA streamlines the creation, signing, and management of Non-Disclosure Agreements (NDAs), providing an all-in-one solution that enhances efficiency and oversight. With GAIA, you can easily create NDAs directly on the platform without the need for traditional Word or Google Sheets formatting. Once created, NDAs can be electronically signed by all parties using GAIA's online signing. This process not only saves time but also ensures all documents are securely managed and readily accessible, giving you a comprehensive view of all active agreements. GAIA simplifies these processes, making it an essential tool for legal document management.

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Ready to learn more about how you create, sign, and manage your NDAs with GAIA?