NDA Red Flags: What to Watch Before You Sign

NDAs Are Common, But Not All Are Fair

Non-disclosure agreements are standard in business, but poorly drafted NDAs can expose you to significant risk. Understanding the red flags can help you negotiate better terms or avoid problematic agreements.

Definition Red Flags

• Overly broad "confidential information": If the NDA defines confidential information as essentially everything the company has ever shared or will share, the scope may be unenforceable or unreasonably burdensome.
• No exclusions: A well-drafted NDA excludes information that is publicly available, independently developed, or already known to you. Missing exclusions are a red flag.
• Residuals clause missing: In some industries, information retained in your memory ("residuals") is carved out from confidentiality obligations. If your work involves learning general skills, this matters.

Obligation Red Flags

• One-sided obligations: If only you are bound by confidentiality while the other party shares your information freely, the agreement may be unfairly structured.
• Unlimited duration: While some trade secrets warrant indefinite protection, most business information has a limited shelf life. NDAs with no end date deserve scrutiny.
• Non-compete disguised as NDA: Some NDAs include clauses that effectively prevent you from working for competitors. This goes beyond confidentiality and may be separately unenforceable depending on your state.

Liability Red Flags

• Liquidated damages clause: Some NDAs specify a fixed penalty amount for any breach, regardless of actual harm. These can be excessive and may not hold up in court.
• Injunctive relief without notice: Clauses that allow the other party to seek a court order without notifying you first.
• Indemnification for third-party claims: Being required to cover all costs if the other party is sued based on your alleged breach, even before any determination of wrongdoing.

Practical Red Flags

• No process for returning or destroying confidential materials: The NDA should clearly state what happens when the relationship ends.
• Covers pre-existing knowledge: If the NDA applies retroactively to information you already possessed, this may be problematic.
• Restrictions on reporting illegal activity: An NDA cannot legally prevent you from reporting violations to government agencies like the SEC or EEOC.

When to Consult a Lawyer

Consider consulting an attorney if the NDA includes non-compete provisions, unlimited duration, or liquidated damages clauses. A lawyer can also help if you are uncertain about what constitutes a breach under the agreement's broad definitions.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.