What is an NDA?
Sometimes called confidentiality agreements, and more recently “hush agreements”, non-disclosure agreements provide the guidelines for use, and restrictions on use, for information being provided by one party, “the discloser” to another party, “the recipient.” There is no one-size-fits-all agreement and the variations can be quite substantial from one agreement to another. Some are one-way obligations while others provide mutual obligations for both parties. Some appear to be mutual but are heavily favoring one party over the other. Whether you are the one who will be providing an NDA, or the one reviewing one requested by the other party, you need to be familiar with these documents and their use in business.
When does an NDA make sense?
NDAs should be used when one party is revealing sensitive or proprietary information and trade secrets to another party and where the loss of secrecy in that information could result in financial or competitive disadvantage. Many companies won’t enter NDA’s for initial meetings and that can make legal and commercial sense. Rather, an NDA can be more appropriate at subsequent meetings when the subject matter to be communicated is clear and the parties have expressed interest in deeper discussions with more detailed information.
I know this is a bit hyperbole, but imagine this scenario:
“Hello, you never heard of me. I want to meet to talk with you. I can’t tell you what the meeting is about because all the information is secret. So, I’d like to have you sign this agreement and promise not to ever talk about or do anything we discuss at the meeting. Again, I can’t tell you what the meeting is about until after you sign away your legal rights and spend money to have your attorney review this document.”
Now imagine the thoughts running through the mind of the person on the other end of the call or email. What would your reaction be in this situation? For this reason, I suggest that the initial meeting be very general (a 10,000 foot overview as they say) and not reveal any sensitive or valuable details. Rather, discuss the general subject matter and gauge if there is interest in taking the discussion further in a future call or meeting after NDAs have been signed by the participants. Doesn’t that make more sense?
While this list is hardly comprehensive, situations where NDAs might make sense include where the following subject matter may be revealed:
- Business strategies, plans and financials
- customer lists and marketing data
- technical information that reveals how to make your product or deliver your services
- due diligence
- outsourcing, consultants and independent contractors
Should you spend time and money to get an NDA in place?
If you would be negatively affected by public release of the information, yes. Trade secret protection is lost if you don’t take the most basic steps to protect information you claim is confidential and proprietary. If you don’t take such a minimal step to protect it, the courts won’t protect it either if you try to bring a claim for trade secret misappropriation. NDAs are relatively low cost documents that can provide substantial protection, rights and remedies. The remedy can include financial compensation or the right to seek a court order preventing breach of the agreement and exposure/use of your confidential information. The latter is called injunctive relief, and is often a more important right than money damages. It can prevent the damage from being done in the first place or at least minimize it by immediately stopping the problem behavior.
The NDA should be carefully crafted to provide procedures for how information exchanged will be treated and controlled by the recipient. It will also detail how claimed confidential information is to be identified. Not everything disclosed qualifies for protection. Attempts to include such classes of information will likely be ineffective and unenforceable. There are some well-established legal exceptions that are usually reiterated in the agreement reminding the parties of these legal principles and confirming the intention to follow them.
How do I review or draft an NDA?
Before you can evaluate an NDA, you need to identify:
- Precisely what is being exchanged
- What part is confidential
- How confidential information will be provided/disclosed/exchanged
The terms of your NDA need to contemplate the what and how of the data protection guidelines. For example, if it is in writing, can copies be made? Must they be marked “confidential”? What about oral disclosures or physical prototypes? While there are some typical standard clauses, it is important that they be carefully reviewed to be sure they make sense in terms of how your employees actually operate on a day to day basis. If they don’t actually do what is set out in the agreement, it has little, if any, value since protection will be lost for failure to comply with the agreement terms.
Whether you need an attorney depends on the financial value of the confidential information sought to be protected. Experienced executives who work with NDAs often may be comfortable enough to not require attorney oversight unless there are exceptional circumstances. Most NDAs are one-sided and favor the party who drafted it. If both sides will be revealing sensitive information, the agreement should be balanced and provide reciprocal right to both parties.
There are some sections and clauses you can expect to see in an NDA.
This seems simple and obvious. But, don’t be fooled. It is critical to be sure the right parties are bound to the agreement. Is the right company listed? Is the person individually bound? Does he or she have the authority to sign company contracts? Does he or she represent more than one business entity or an entity not yet formed? Is the representative actually an employee of the company or an independent consultant? As you can see, there are a lot of potential pitfalls for the unwary or inexperienced.
The definition of confidential information
While you may be tempted to have a laundry list of every kind of existing information, the best NDAs are detailed and specific in terms of identifying the actual information types involved in the transaction. Can’t hurt to include more, can it? Well, it actually could. You may unintendedly restrict your future business activities or subject your business to battles over ownership and ability to use information in the “gray area.” Some agreements are so broadly drafted, they could be interpreted to include what you had for lunch. Okay, not really, but you get the point. Think about including written notes and copies in the scope of protected information.
Detail the purpose of the disclosure and how the information can be, and cannot be, used for by the recipient. Limit to the purpose of the exchange and restrict it from being used for other purposes, and especially for he disadvantage of the discloser.
Who should have access to the information? How should it be stored? Can copies be made? What can be done with the information? Can samples be analyzed and tested? Can mechanical devices be opened up to see what’s inside? Can software be decompiled and unencrypted? Does it need to be returned at the end of the review period? Can copies be kept for legal/insurance purposes?
What is the shelf life or period in which the information has value? When will it no longer be important if the information got out or someone used it? Be realistic. Not everything is a valuable secret forever. Technology changes too rapidly for that to be true. The longer the period, the more difficult it may be to enforce.
When there’s a will, there’s a way. People can “design around” you and use your confidential information to “inspire” their own version to compete with you. Or, seeing how brilliant your team is, they try to hire them away from you. Why pay he mark-up when they can put them on payroll much cheaper?
Restrictions have to be carefully tailored so they don’t prevent someone from getting a job. The test is for the protection to be as narrow as possible to still protect the business’ legitimate interests, especially in terms of duration and geographic scope. If it is important enough for the employee not to work for the competitor, you may need to pay them NOT to take the job for it to be enforceable. (They wouldn’t be working for you, they would be home being paid not to work.)
NDAs are commonly used in business. As you review more and more NDA documents you will become familiar and comfortable with the range and scope of these agreements . You’ll recognize when important clauses are absent and when some are overreaching. You will be able to suggest acceptable revisions as you become comfortable with a range of different clauses and situations. One day it will be like your cell phone, as you wonder how you ever lived without one.