Revised and updated July 26, 2020
In business, there are numerous instances in which you may want to share confidential information with another party. But the key to doing so safely is making sure that the other party is bound to respect the confidential information you provide them and not use it to your detriment.
One common way to protect the secrecy of confidential information given to another party is through the use of a Non-Disclosure Agreement, which is sometimes also referred to as a “Confidentiality Agreement” or “NDA.”
In this article, I will explain when it makes sense to have a Non-Disclosure Agreement as well as the key terms that agreement can include.
When Does a Non-Disclosure Agreement Make Sense?
When does it make sense to require another party to sign a Non-Disclosure Agreement? There are probably many instances where it may be appropriate. But the principal situations are those in which you wish to convey something valuable about your business or idea, but still want to ensure that the other side doesn’t steal the information or use it without your approval.
Here are some typical situations where you may want to use a Non-Disclosure Agreement:
- Presenting an invention or business idea to a potential partner, investor, or distributor
- Sharing financial, marketing, and other information with a prospective buyer of your business
- Showing a new product or technology to a prospective buyer or licensee
- Receiving services from a company or individual who may have access to some sensitive information in providing those services
- Allowing employees access to confidential and proprietary information of your business during the course of their job
Non-Disclosure Agreements probably don’t make sense for startups trying to raise funding from venture capital investors, as most venture capitalists will refuse to sign such agreements.
Mutual vs. Non-Mutual NDAs
Non-Disclosure Agreements come in two basic formats: a mutual agreement or a one-sided agreement. The one-sided agreement is when you are contemplating that only one side will be sharing confidential information with the other side. The mutual NDA form is for situations where each side may potentially share confidential information.
Although there is always some appeal to using a mutual form of NDA, I really shy away from the mutual form if I’m not planning to receive confidential information from the other side. One way to decide this early on is to let the other side know that you don’t want to receive any of their confidential information, so you don’t see the need for a mutual form if they ask for one.
Sample forms of NDAs can be found the Forms and Agreements section of AllBusiness.com.
The Key Elements of Non-Disclosure Agreements
Non-Disclosure Agreements don’t have to be long and complicated. In fact, the good ones usually don’t run more than a few pages long.
The key elements of Non-Disclosure Agreements:
- Identification of the parties
- Definition of what is deemed to be confidential
- The scope of the confidentiality obligation by the receiving party
- The exclusions from confidential treatment
- The term of the agreement
The Parties to the Agreement
The parties to the agreement are usually a straightforward description set forth at the beginning of the contract. If it’s an agreement where only one side is providing confidential information, then the disclosing party can be referred to as the disclosing party and the recipient of the information can simply be referred to as the recipient.
The one tricky part here is to think about whether any other people or companies may also be a party to the agreement. Does the recipient expect to show the confidential information to a related or affiliated company? To a partner? To an agent? If so, the NDA should also cover those third parties.
What Is Deemed Confidential?
This section of the NDA deals with defining what confidential information means. Is it any information? Is it information that is only marked in writing as “confidential”? Can oral information conveyed be deemed confidential?
On one hand, the disclosing party wants this definition of confidential information to be as broad as possible to make sure the other side doesn’t find a loophole and start using its valuable secrets.
On the other hand, if you are the recipient of the information, you have a legitimate desire to make sure that the information that you are supposed to keep secret is clearly identified so that you know what you can and can’t use.
Oral information in particular can be tricky to deal with. Some recipients of information insist that only information conveyed in writing need be kept confidential. And, of course, the party giving oral information may say that that is too narrow. The usual compromise is that oral information can be deemed confidential information, but the disclosing party has to confirm to the other side in writing sometime shortly after it has disclosed so that the receiving party is now on notice as to what oral statements are deemed confidential.
Scope of the Confidentiality Obligation
The core of the Non-Disclosure Agreement is a two-part obligation on the receiver of the information: to keep the confidential information in fact confidential and not use the confidential information itself.
So the first part is that the recipient of the confidential information has to keep it secret. And this usually means that the recipient has to take reasonable steps to not let others have access to it. For example, reasonable steps could include that only a few people within the recipient’s company have access to the information and they are all informed of the nature of the confidentiality restrictions.
The second part is also crucial—that recipients can’t use the information themselves. After all, the last thing you want is for them to take your great idea or mailing list and make a kazillion dollars from it.
If the scope of the NDA is broad enough, then you can sue for damages or to stop the recipients if they breach either their confidentiality obligations or their non-use agreement.
Exclusions from Confidentiality Treatment
Every NDA has certain exclusions from the obligations of the receiving party. These exclusions are intended to address situations where it would be unfair or too burdensome for the other side to keep the information confidential.
The common exclusions include information that is:
- Already known to the recipient
- Already publicly known (as long as the recipient didn’t wrongfully release it to the public)
- Independently developed by the recipient without reference to or use of the confidential information of the disclosing party
- Disclosed to the recipient by some other party who has no duty of the confidentiality to the disclosing party
The NDA can also deal with the situation in which the recipient of the information is forced to disclose the information through a legal process. The recipient should be allowed to do that if forced by court order without breaching the NDA as long as the recipient has warned the disclosing party in advance of the legal proceeding.
Term of the Agreement
How long should the NDA last? Some attorneys may argue that the NDA should last forever. Why should someone have the right to use your confidential information at any time?
But if you are the recipient of the confidential information, you probably want to insist on a definite term when the agreement ends. After all, most information after a certain number of years becomes useless anyway, and the cost of policing confidentiality obligations can become expensive if it’s a “forever” obligation.
So if you agree to a term, what is reasonable? Well, it really depends on the industry you are in and the type of information conveyed. In some businesses, a few years may be acceptable because the technology may change so fast as to render the information pretty much worthless.
Most agreements that I see (if they have a term) have a time limit of one to three years. But your NDA also needs to say that, even if the term is ended, the disclosing party isn’t giving up any other rights that it may have under copyright, patent, or other intellectual property laws.
More Provisions That May Make Sense for the NDA
You may also want to add some other bells and whistles to your NDA to protect your company from further issues, depending on your situation. Here are some ideas:
- Employee Solicitation. If the recipient has significant access to your employees, you may want to insert a clause that prevents the recipient from soliciting or hiring your employees for 12-24 months. The other side may sometimes agree to that, with some carve-outs. For example, the recipient may want the limitation to apply only to those employees that they have come into contact with during their review of information or interviews.
- Jurisdiction in case of a dispute. If you are the disclosing party, you want to make sure that if there is any dispute as to whether the other side has lived up to its obligations, the dispute will be handled exclusively in your city. You don’t want to have to travel far away and incur additional costs to enforce your NDA.
- Injunction. Make sure that you have a clause that gives you the right to injunctive relief to stop the other side from breaching the agreement. This clause simply says that you can get a court order stopping the other party from doing the breaching act (as opposed to just getting money damages after it’s too late).
- No rights in the receiving party. It’s sometimes helpful to have a clause that says that just because you are going to share confidential information with them, the other side doesn’t get any rights to your ideas or even a right to enter into a deal with you.
Copyright © by Richard D. Harroch. All Rights Reserved.
Read all of Richard Harroch’s articles on AllBusiness.com.
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