NDAs and NCAs both function to protect the interests of the business, but they have different functions. NDAs are crafted to protect confidential information from being disclosed, while non-competes prohibit a person from working with competing companies or starting a similar business for a specified period of time.
This blog explains what each agreement covers, how they differ, when to use them, and the legal considerations involved.
Introduction
In today’s competitive market, companies must safeguard their confidential information, trade secrets, and market advantage. To achieve this, two commonly used contracts are –
- Non-Disclosure Agreements (NDAs) – Prevent the sharing of sensitive information.
- Non-Compete Agreements (NCAs) – Prevent working for or starting a competing business.
Although they may be included in an employment agreement together, they are legally different. If the scope of the NCAs is not understood, it could mean ineffective agreements are drafted or parties may have enforcement issues in court.
What is a Non-Disclosure Agreement (NDA)?
An NDA is a legal agreement that restricts the receiver from disclosing or utilising confidential information for any reason other than what was agreed upon.
Key Features –
- Purpose – Protect sensitive business information.
- Covers – Trade secrets, client lists, product designs, marketing strategies, and other proprietary data.
- Duration – Often remains in effect for a set period, sometimes indefinitely for trade secrets.
- Parties – Can be one-way (unilateral) or mutual.
What is a Non-Compete Agreement (NCA)?
An NCA prohibits an employee, contractor, or business partner from working for competitors after they exit a business relationship.
Key Features –
- Purpose – Prevent competition that could harm the business.
- Covers – Working for competitors, starting a similar business, or poaching clients.
- Duration – Usually valid for a defined period (e.g., 6–24 months).
- Geographic Scope – Limited to specific regions where competition is likely.
NDAs vs Non-Competes – The Key Differences
| Aspect | NDA (Non-Disclosure Agreement) | NCA (Non-Compete Agreement) |
|
Goal |
Protects sensitive information from being disclosed or misused by the recipient. | Prevents the individual from engaging in business activities that compete with the employer or client. |
|
Scope |
Applies specifically to defined confidential information such as business strategies, pricing models, or product plans. | Applies to competitive conduct, which can include starting a rival business, joining a competitor, or soliciting customers. |
|
Duration |
It can last for years, sometimes indefinitely, for trade secrets, regardless of whether the person is still engaged with the business. | Usually limited to a short, reasonable period (e.g., 6–24 months) after leaving the business. |
|
Enforceability |
Generally, it is easier to enforce if the confidential information is clearly defined and proven to be valuable. | Harder to enforce in some jurisdictions due to restrictions on limiting a person’s right to work. |
|
Parties Bound |
Can be one-way (only one party is restricted) or mutual (both sides agree not to share each other’s confidential info). | Almost always, one-sided binding only binds the individual, leaving the business. |
|
Impact on Career |
Minimal – allows the person to continue working in the same industry as long as they do not disclose protected information. | Significant – can limit the person’s employment or business opportunities in certain industries or locations. |
When Should You Use Each?
Use an NDA when –
- Collaborating with third parties like vendors, contractors, or consultants who will have access to sensitive operational data.
- Pitching ideas to investors or potential partners and you want to ensure your intellectual property is not shared without permission.
- Hiring employees in roles with access to client databases, software source code, marketing plans, or research results that could be valuable to competitors.
- Discussing acquisition or merger opportunities where financials and trade secrets are revealed during negotiations.
Use an NCA when –
- Hiring senior staff or executives whose departure to a competitor could cause immediate business loss.
- Entering joint ventures or partnerships where competitive activity during or after the agreement could harm the collaboration.
- Selling a business and wanting to prevent the seller from opening a similar company in the same region for a set time.
- Protecting specialized training investments – for example, if you provide unique, high-cost training that gives an employee a competitive edge in the industry.
Legal Considerations
- Jurisdiction Matters – Non-compete enforceability varies widely. Some countries and states limit or ban them entirely.
- Reasonableness Test – Courts assess duration, geographic scope, and necessity. Overly broad restrictions are often struck down.
- Combination Clauses – NDAs and NCAs can be combined in a single agreement, but each should be clearly defined.
Common Mistakes to Avoid
- Using a non-compete where only an NDA is needed.
- Drafting vague or overly broad restrictions.
- Not specifying a clear duration or geographic limit in NCAs.
- Forgetting to define what qualifies as “confidential information” in NDAs.
Conclusion
While NDAs and Non-Compete Agreements protect business interests, they are different aspects. NDAs protect information, while NCAs impose limits on competitive behaviours. Typically, if you are choosing to require either one or both of these types of agreements, you should be doing so in a way that protects your company and is not in violation of any existing or eventual laws.
If you are going to draft either type of agreement, ensure that you have checked local laws for compliance and sought advice on the recommended process when drafting either document in high-stakes arrangements or across borders. Some practitioners suggest that what you have attended to, more than a series of checked boxes in order to establish a business association, is a risk mitigation tool for your business.
