Non-disclosure agreements (“NDAs”) create contractual relationships between a party that has confidential or trade secret information and another who will be given access to that information. NDAs can be unilateral or mutual.
An NDA may be a standalone agreement or exist in another document, such as an employment agreement, an independent contractor agreement, an invention disclosure agreement, a patent or technology license, a product development or manufacturing agreement, or another contract that governs a business relationship where it is necessary to protect designated information from unauthorized use and disclosure.
A well-drafted NDA typically includes the following provisions:
- The Parties Bound by the NDA.
- Purpose of the Agreement.
- Definition of Confidential Information.
- Confidentiality Exceptions.
- Use/Disclosure Restrictions.
- Duration of the Agreement.
- Return or Destruction of Information.
- Injunctive Relief.
- Miscellaneous Terms and Considerations.
PARTIES
A basic aspect of an NDA is the proper identification of the parties who will be bound by the agreement.
The parties may want to include their representatives and affiliates in the NDA, such as their employees, agents, consultants, contractors, or subsidiaries, as well as attorneys, accountants, financial advisors, and investors. This will allow the parties to share the confidential information with these third parties without violating the NDA.
The parties should make sure that these third parties will be bound by the same obligations and restrictions as the parties themselves. The NDA may include a clause indicating the receiving party can disclose the confidential information to its representatives and affiliates “provided that such representatives and affiliates have signed a written agreement to be bound by the terms and conditions” of the NDA.
The receiving party may be required to limit disclosures to specifically named employees or to employees on a need to know basis. It is not unusual for an NDA to require the receiving party’s employees to sign a separate “undertaking” by which the receiving party acknowledges that the information is confidential material of the disclosing party.
A definition should be included which defines “affiliates” as entity that is controlled by, under common control with, or controls a party to this Agreement usually though ownership of a fixed minimum percentage.
PURPOSE
By tying disclosures to a specific business purpose, each party can make informed decisions about what information will be shared, reducing unnecessary or overly broad sharing of sensitive data.
DEFINING CONFIDENTIALITY
The definition of “Confidential Information” is a crucial element of an NDA. The definition should be clear and tailored to encompass and be limited to the information needed to achieve the purpose for the disclosure.
A disclosing party will often want to define confidential information broadly to ensure comprehensive protection. A receiving party may want a specific definition appropriate to the nature of the contemplated disclosure to minimize uncertainty protect itself from the unforeseen risks. A receiving party may want written disclosures to be marked as “Confidential” to avoid doubt as to what is being claimed as confidential.
A broader definition may be suitable when a substantial amount of confidential information will be disclosed, or if multiple disclosures are expected to be made over an extended period of time.
The NDA should identify the types and categories of information that the parties intend to protect. Clarity helps avoid misunderstandings as enables parties to more easily recognize confidential information and comply with their confidentiality obligations.
A broad definition might define “Confidential Information” as meaning any and all confidential and/or proprietary knowledge, data or information of the disclosing party including, by way of illustration, (a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques; and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and information of such a nature or disclosed under circumstances, such that it should reasonably be considered confidential.
Every state but New York has adopted the Uniform Trade Secrets Act in one form or another. The UTSA defines a trade secret as meaning information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Parties should consider the definition under applicable state law is suitable for purposes of their NDA. An expanded or narrower definition of “trade secret” can be included in the NDA, as may be appropriate.
If third-party personal identifiable information will be provided, the NDA should oblige the receiving party to comply with any applicable personal data privacy laws and regulations.
At the outset, the parties need to decide if confidential information will include only written disclosures (in any tangible form or medium) or both written and oral disclosures. Inclusion of oral disclosures is problematic. In such cases, an appropriate safeguard will be included which provides that oral information is protected only if it is specifically identified in writing within a fixed time after the oral disclosure.
EXCEPTIONS
NDAs almost always include certain standard exceptions to confidentially. The exceptions typically include information that:
- Was already in the receiving party’s possession before disclosure by the disclosing party.
- Is or becomes publicly known through no wrongful act of the Receiving Party.
- Is disclosed to the receiving party by a third party without restriction on disclosure.
- Is independently developed by the receiving party without use of or reference to the disclosing party’s Confidential Information.
A less frequently exception pertains to disclosure of Confidential Information specifically authorized in writing by the disclosing party. However, the parties can always separately agree to designate specific information as not confidential.
Owners of confidential information are often worried that their information may be known in certain obscure contexts. Accordingly, the exceptions may be limited by a further provision that: “Confidential Information will not be excluded from protection simply because it is part of broader information that falls within an exception. A combination of confidential features will not be excepted merely because individual elements are known; the combination as a whole must be known for the exception to be applicable.”
The NDA should also indicate that the receiving party can disclose the other party’s information as required by law, judicial or governmental order, subpoena, discovery request, civil or criminal investigative demand or similar process with notice to the disclosing party. The NDA may provide for steps that are to be taken if the recipient receives a subpoena or other discovery request or court order that will require it to disclose any of the confidential information.
Some agreements limit exceptions by requiring that the recipient “document” that information was in its possession, later received by the recipient from a third-party who is not under any obligation of secrecy to the discloser, or prove the independent receipt of the information from a third party. Less frequently, an NDA may require the recipient to document that the information was in its possession within a certain period of time after the information is disclosed by the discloser.
USE/DISCLOSURE RESTRICTIONS
NDAs should contain specific provisions that restrict the receiving party’s use and disclosure of the confidential information.
As a minimum, the receiving party undertakes to: (1) use such confidential information solely for the purpose of performing its obligations under the agreement and, unless specifically permitted pursuant to this agreement, not disclose the confidential information to any other person or entity; (2) hold such confidential information in confidence, and unless otherwise specified, with the same degree of care with which it protects its own confidential or proprietary information but no less than a reasonable degree of care; and (3) restrict permitted disclosure of the confidential information solely to persons or entities with a need to know the confidential information in relation to the performance of the agreement and who have been advised to maintain such confidential information in confidence.
An NDA may include prohibitions on the use or analyses to which the information may be subjected. The receiving party, for example, may be prohibited from analyzing samples to determine the ingredients or formulations of ingredients in a composition. In the case of computer software, the recipient may not be allowed to decompile the computer code.
DURATION
The length of time that information must be kept confidential is usually limited. This is important from the recipient’s perspective, as longer agreements can impose significant administrative burdens. Therefore, many agreements limit the confidentiality obligation to a period of 3 to 5 years. However, a longer term may be necessary for information that cannot be reverse-engineered, even after commercial use. The confidentiality period can be measured from the date of disclosure or, in some cases, from the date of termination of the NDA.
Importantly, some courts have ruled that when a party’s confidentiality obligation expires, so does the trade secret protection. To prevent the loss of protection for information that continues to qualify as a trade secret, the disclosing party should include a provision such as:
“However, for any item of confidential information that is a trade secret under applicable law, the confidentiality obligations herein shall survive the expiration of the ____ year period and remain in full force and effect as long as the information remains a trade secret under applicable law.”
Standalone NDAs should be viewed as short term agreements which allow the parties to determine whether they will proceed with a further arrangement. The further arrangement may be a product development agreement, a joint venture, a license, a distribution agreement, a manufacturing agreement, etc. which should typically supersede the NDA and, if necessary, include separate confidentiality agreements appropriate for the further arrangement.
RETURN OR DISCLOSURE OF CONFIDENTIAL INFORMATION
The receiving party may be obligated to return or destroy confidential information upon termination of the agreement. However, the advisability and acceptability of such provisions should be carefully considered, especially when the NDA is reciprocal. If the received information is integrated into the receiving party’s own confidential information, returning the information may be impractical.
Furthermore, it is prudent to retain a copy of the confidential information. This is essential for the defense of future claims of improper disclosure, as the receiving party may otherwise have no means to establish what was provided.
Many firms employ archiving policies that automatically duplicate server, database images, electronic communications and other electronic data in the cloud. Isolating discrete pieces of information within these backups can be impractical. As a result, a safer approach is often to modify the return obligation to exclude confidential information integrated into an automated archiving process conducted in the ordinary course of business, ensuring that archived data is not available for any business purpose. In such cases, confidential information obligations of the receiving party must survive and remains subject to the terms of the agreement and be treated as confidential.
INJUNCTIVE RELIEF
It is essential that the disclosing party have the right to promptly stop unauthorized uses or disclosures of its confidential information.
NDAs regularly contain a provision that states unauthorized uses or disclosures will cause irreparable harm thereby allowing the disclosing party to seek a court injunction barring use and disclosure.
Issues can arise when the injunctive wording allows for relief without the requirement to post a “bond”. An enjoined party may experience significant financial and operational disruption from an injunction, especially if it is later found that the injunction was unwarranted. A bond serves as a form of protection for improper injunctions. Strategically, without the bond requirement, there is a higher risk that a disclosing party may seek injunctive relief even when harm is not truly irreparable or where the grounds for the injunction are weak. This can unduly pressure a receiving party, particularly if the disclosing party is a larger entity with more resources.
A receiving party should also object to the inclusion of a one-way requirement that it pay the attorney’s fees of the disclosing party. Inclusion of attorney’s fee provisions can unduly pressure a receiving party with limited resources. If the issue arises, a compromise position is to require that the prevailing party will be reimbursed its reasonable attorney’s fees.
NO LICENSE
It is customary to include a provision in the NDA that indicates that the parties are not granting or obliged to grant any license under an existing or future patent or other proprietary right. Such grants, when appropriate, are usually the subject of separate agreements between the parties.
MISCELLANEOUS TERMS AND CONDITIONS
Notices are used for significant communications under a confidentiality agreement, for example, requesting the return or destruction of confidential information, providing written descriptions of orally disclosed information. The NDA should include a notice provision that clearly sets out the notification process upon receipt of a demand. The NDA ought to specify that any modifications are effective only when signed by all parties.
The NDA should include a severability provision to ensure that if any part of the NDA is found to be invalid, illegal, or unenforceable, the remainder of the NDA will remain effective and enforceable.
Other miscellaneous terms of an NDA typically include a no warranties provision, survival of the confidentiality and other sections, damage limitations (indirect, incidental, consequential, punitive), a choice of governing law, an anti-assignment clause or the conditions under which assignments of the parties’ rights and obligations may occur, provisions for execution in counterparts and for facsimile execution, signatory authority, a disclaimer of joint venture or principal-agency obligations, an integration (entire agreement) clause.
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The foregoing overview outlines key components of non-disclosure agreements. NDAs vary significantly based on the agreement’s purpose, the type and extent of information disclosed, its value and sensitivity, and the expected duration. Some NDAs may be as simple as a single-page document while others will require more detailed terms. To ensure effectiveness, it’s essential that parties thoughtfully create equally balanced NDAs which are specifically suited to their intended relationship.