What, Exactly, Is an NDA?

If you pay any regular attention to the news cycle (or for that matter, network TV police procedurals), you’ve probably noticed one legal term popping up over and over again: non-disclosure agreements, or NDAs. Over the past few years, NDAs have been used by the wealthy and the powerful, from Harvey Weinstein to the President of the United States to Theranos CEO Elizabeth Holmes, to silence former employees or people in their inner circle from speaking out against them. And as more information has emerged surrounding the mechanisms by which large corporations and the uber-wealthy use NDAs to maintain this culture of silence, more people are speaking out against them, to the degree that New Jersey governor Phil Murphy recently signed legislation rendering them unenforceable.

“These secret settlements can ultimately endanger the public by hiding sexual predators from law enforcement and the public,” Senate Majority Leader Loretta Weinberg, the sponsor of the bill, told the New Jersey Globe. “They are being used by those who have the money to pay for privileged immunity.”

But what actually are NDAs, what is the cost of breaking them, and what does the future of NDAs look like now that legislation like Weinberg’s is becoming more widespread? We asked a few lawyers to explain.

What are NDAs, and how did they become widespread?
NDA stands for “non-disclosure agreement, though it’s also known as a confidentiality agreement. Either way, it’s a clause in a legally binding contract that requires the signer not to disclose sensitive information, with significant financial penalties if they breach the agreement.

No one quite knows “what evil genius defense lawyer came up with the idea of NDAs. It’s a damn good question,” says Neil Mullin, a partner in the firm Smith Mullin and a trial and appellate lawyer who has fought NDAs for Gretchen Carlson, among other defendants. But we do know they initially arose around the 1970s, as a way for nascent tech companies to protect their intellectual property.

In theory, NDAs are intended to protect a company’s financial interests in guarding proprietary information, says Jason Bach, an attorney based in Las Vegas. “If you’re working at Apple and your job is to design the new iPhone, it makes sense that you’ll have to agree not to release that information and they’ll have you sign an NDA,” he says, adding that NDAs are common “any time you’re dealing with intellectual property or any type of design or development.”

That started changing, however, around the 1990s, when Mullin says that NDAs started to become more common in employment contracts and settlement contracts in various industries. “You couldn’t even settle minor cases with non-controversial clients without agreeing to an NDA,” he says. He speculates that NDAs became more popular because the legal firms representing big companies had adopted them for themselves. “They may have instituted a regime of secrecy in their own workplaces, and they liked it, and they recommended it to their own clients,” he says. 

These days, NDAs “come in two different ways,” says Mullin. The first is in the context of an employment contract, regardless of what industry you’re in: “when you take the job, they give you a confidentiality agreement you have to sign — take it or leave it.”

This can be problematic for a few reasons, chief among them that NDAs can effectively bar employees from speaking out against any questionable or even criminal activities they see at a company. “If you see discrimination or the company pouring pollutants into the river, you can’t tell anyone about that,” says Mullin. “If you see sexual harassment or assault, you can’t tell anyone about that. You are giving up, very broadly, your right to tell anyone in the media, anyone in the public, anything that goes on in the company.” And when NDAs are given to government employees — as President Trump reportedly did to staffers on his 2016 campaign, basically prohibiting them to disparage him, any member of the Trump family, or any Trump-related organization — this poses obvious issues when it comes to hampering free speech. 

Additionally, low- and mid-level employees are increasingly being asked to sign NDAs, even when they may not have access to any proprietary company information to begin with, says Bach. “If you’re a cashier at Walmart and they want you to sign an NDA to not reveal their financial data — a cashier wouldn’t have any idea as to the financial data of the entire store. That would be an unreasonable NDA to ask someone to sign when they don’t even have that information.” Under such conditions, “NDAs can be used to exploit people,” he says.

The second most common context in which an NDA is seen is in the negotiations process for, say, a sexual harassment lawsuit, in which a company’s lawyers want to reach a financial settlement with the plaintiff. In such cases, a settlement will usually be accompanied by the plaintiff signing an NDA. But the emotional costs of reaching a financial settlement under these terms can be devastating.

“It has a tremendous negative emotional impact on victims of assault. [Imagine being] a victim of assault and you’re told you can never speak of it,” says Mullin. “We’ve seen many NDAs that are so broad that women believed they couldn’t speak to therapists about the trauma. So these have a terrible effect on human beings.”

What are the penalties for breaking an NDA?
If you sign an NDA, there are severe financial penalties for breaking it, says Mullin. “The costs range from $25,000 to $100,000 or even $750,000 per breach,” meaning per individual time you divulged confidential information to someone else. Additionally, many NDAs require that the plaintiff return all settlement fees, and some even require that the plaintiff pays the legal fees the company assumes if you violate the NDA and have to go to court. Basically, “these are really scary provisions,” he says.

There are notable exceptions to the enforceability of an NDA: for instance, if you witness illegal activity at a company, an NDA cannot prevent you from reporting it, nor can it bar you from participating in an official agency investigation of illegal activity. But most employees do not know this, which allows employers to use NDAs to intimidate them into staying silent.

Additionally, while the financial costs of violating an NDA are staggering, the long-term emotional costs may be even more so. Employees are often terrified to break an NDA for fear that they might be rendered “a troublemaker once they are let go,” Orly Lobel, a professor of labor and employment law at University of California San Diego, told the Columbia Journalism Review in 2017. “Even if they knew no court would enforce an NDA against them, most people who are risk averse are not going to test the limits.” And since many companies will only provide severance on the condition that their employees sign an NDA, most will make the decision to do so under extreme emotional and financial duress.

What’s the current status of NDAs?
Today, NDAs have become incredibly widespread, to the degree that Mullin estimates that “tens of millions” of employees are likely required to sign an NDA as a condition of employment; in the United States alone, approximately one third of employees have signed contracts containing this type of restrictive language.

Yet after it was reported in 2017 that Weinstein had used NDAs to silence his accusers for years, with one of his former assistants breaking an NDA to expose her own alleged abuse, many started to question whether NDAs weren’t just being used to protect company secrets, but also to protect alleged criminals. “When you have repeat predators like Roger Ailes or Weinstein, if the first woman signs an NDA, then the women coming up behind never know what happened,” says Mullin. In this sense, “NDAs have served repeat predators in the workplace well.”

For this reason, there has been a push in the legal community to ban NDAs, render them unenforceable, or render them enforceable only in specific circumstances. (In California, for instance, NDAs are primarily limited to proprietary internal company information, meaning that they do not apply to former employees who have been subject to discrimination or harassment.)

New Jersey’s legislation is a step away from rampant misuse of NDAs, as is the growing number of people who are breaking NDAs to protest the practice, such as alleged former Trump inamorata Stormy Daniels. But the country still has a long way to go in undoing the process of normalizing NDAs and making clear that they shouldn’t be part of business as usual, says Mullin. “I think some people are being brave and coming out, but I think in general people are still frightened and silenced,” he says. “There are a few exceptional people who have taken great risks. But no, NDAs are alive and well in the US. And it’s a regime of silencing.”