Non-Disclosure Agreement (NDA)

April 05, 2024

NDA - Non-Disclosure Agreement - Confidentiality agreement

If a merger or other business co-operation between companies or between companies and freelancers or other external service providers such as agencies and other consultants is in the making, the question of entering a non-disclosure agreement, i.e. an NDA, is usually quickly brought up. This is perfectly reasonable, as sensitive and confidential information is disclosed and exchanged in all of these situations. Often, at least one party produces such a document. But do you really need it and if so, what provisions should it include and what mistakes should you avoid?

What is an NDA?

The abbreviation NDA stands for non-disclosure agreement and refers to an agreement in which the parties undertake to keep confidential information confidential. Sensitive information may be exchanged between the parties as part of contract negotiations or an application process. This is often necessary in order to be able to speak openly and exchange relevant knowledge.

The recipient(s) of the information (an NDA can be unilateral or bilateral) agree to keep this confidential information and business secrets secret.

A contract between two or more parties

The non-disclosure agreement is a contract that applies exclusively between the parties entering into it, i.e. it only has legal effect inter partes, i.e. between the parties to the agreement. An NDA can only oblige one party to maintain confidentiality. In this case, it is a unilateral NDA. If both parties to the agreement are bound to confidentiality, this is referred to as a bilateral NDA. The commitments can be the same or different for both parties.

Confidential information and business secrets

Confidential information is generally information that is not known to the public and which the parties have an interest in keeping secret. This may include business plans, strategies and concepts, customer lists, manufacturing processes, software code, sales figures, etc.

The German Trade Secrets Protection Act (GeschGehG) also offers protection. There are both differences and an overlap between confidential information and trade secrets.

According to Section 2 GeschGehG, information only constitutes a trade secret if it is

secret and therefore of commercial value,
is the subject of appropriate confidentiality measures by the legitimate owner and
there is a legitimate interest in maintaining secrecy.

The GeschGehG applies automatically, i.e. the protection of this information does not have to be contractually negotiated. However, "appropriate confidentiality measures" must also be taken here. This means that a contractual arrangement in the form of a non-disclosure agreement to protect trade secrets will also be required here.

Scope of an NDA

The content of an NDA is subject to contractual freedom, i.e. the parties, e.g. companies, can determine the content of the agreement themselves. The freedom of contract ends where conflicting laws set limits or where there is a conflict with overriding legal principles.

Contracting parties and definition of what is confidential information

In addition to determining the contracting parties, it is important that the project or the scope of the collaboration and the information to be protected are defined as specifically as possible (but also as abstractly as necessary). In the event of a dispute, it must be clear to the parties which information is to be protected and which is not. It may make sense to categorise the information into different levels of confidentiality, depending on who should have access to it (high: company management, medium: necessary employees and low: all employees).

Handling confidential information

It must also be determined exactly how the information is to be handled. For example, is it permitted to pass it on, and if so, to whom? May copies be made? Is only processing for a specific purpose permitted or should this restriction not apply?

Term of protection

The duration of protection should also be defined, whereby companies may also have a legitimate interest in permanent confidentiality in many cases or depending on the content of the information.

Procedure in the event of breaches

The parties can regulate the consequences of breaches themselves.

Return and deletion of information

Agreements are often made on what should happen to information, i.e. documents or data, at the end of the contract or cooperation. Both the return and destruction of such information may be considered. Irrespective of this, the relevant data protection regulations apply.

Customer protection agreement

A customer protection agreement is often part of an NDA. This regulates the contractual partner's obligation not to use customer names, lists or customer-related data for their own business purposes or to pass them on to third parties. In most cases, this is accompanied by a ban on entering into business contact with the customers themselves or through employees or third parties. In principle, these regulations are a permissible means of preventing competition. However, such an agreement is subject to a strict standard of permissibility. It should be clear exactly which clientele is meant, in case of doubt by naming them. A local restriction to a certain radius or a certain federal state may make sense. There may also be a time restriction. The decisive factor here is always the question of proportionality and should be examined on a case-by-case basis.

Breach of the confidentiality obligation

If a trade secret is the subject of the breach, various consequences can be considered, including imprisonment or a fine pursuant to Section 23 GeschGehG, liability for damages pursuant to Section 10 GeschGehG, damages for immoral damage pursuant to Section 826 of the German Civil Code (BGB) and a contractual penalty. The latter is often explicitly agreed in NDAs. It is true that the law stipulates anyway that the party who breaches its obligations must compensate the resulting damage. However, it is often difficult to quantify the amount of damage caused by a breach of confidentiality. For this reason, it is possible to generalise the damage. However, care must be taken when formulating this: excessively high or arbitrary penalties can jeopardise the validity of the agreement. It makes sense to use a flexible provision according to which the contractual penalty in the event of a breach is left to the reasonable discretion of the infringer, while at the same time the infringer has the right to have the appropriateness of the amount of the penalty reviewed by a court ("Hamburg custom").

Ineffectiveness and consequences

If very general internal company information is to be covered by the confidentiality obligation without a more specific definition, this is too unspecific and usually ineffective. Equally ineffective is an obligation that effectively makes it impossible for the contractual partner to exercise his profession or that effectively amounts to a non-competition clause and does not provide for compensation for non-competition .

Ineffective, but unfortunately frequently encountered, are provisions on the transfer of rights of use of intellectual property. Hidden in the middle of the (usually unilaterally formulated) NDAs is an often extensive provision which, for example, is intended to transfer the rights to use a text, image or other copyrighted work to the other party without restriction and irrevocably. This provision is inadmissible and ineffective.

The limits of the effectiveness of an NDA are always reached when compliance with the obligations would have unreasonable consequences for one of the contracting parties.

If the NDA proves to be ineffective, the contracting parties are not bound by the contractual agreement. However, they must comply with the statutory confidentiality obligations (as ancillary obligations from any main contract, GeschGehG).

You need an NDA or would like to have an NDA reviewed. We support you in protecting your legal and economic interests in the best possible way and in effectively formulating the relevant key points or reviewing existing templates or submitted documents. Get in touch with us.