This article is written by Lara Murrar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here she discusses “Non-Disclosure Agreements (NDAs)”.
Nowadays all corporates and businesses have very important and sensitive information, data, strategies and assets that give them more benefits among other competitors. It’s that important information that allows them to continue being profitable. But what happens when the important information like trade secrets for a corporation or a business were leaked to a competitor? That corporation or business will lose its benefits, and accordingly its profits. That’s why many businesses and corporation insist that their employees and/or vendors and/or contractors sign non-disclosure agreements, or NDAs.
What is a Non-Discloser Agreement (NDA)?
A Non-Discloser Agreement (NDA) is also known as a confidentiality agreement, it is a binding legal contract that establishes a confidential relationship among its parties, in which it prohibits the receiving party of certain type of information from sharing that information for a specified period of time or it prohibits the receiving party from using such information other than in connection with the defined purpose of the Agreement, in this case, the NDA may be called a mutual non-disclosure agreement. On the other hand if one party is only sharing its confidential information then a unilateral NDA protecting only the disclosing party’s confidential information will be appropriate, and in the case of more than two parties, a multi-party NDA will be needed in order to ensure all shared information is protected.
NDAs purpose is to allow its parties to freely share sensitive information without any fear that it will end up in the hands of competitors, and to prevent sensitive and confidential information from becoming public knowledge. For example, if a contractor comes across the secret formula for the famous drink Coca-Cola, he would be prohibited from telling anyone else without facing serious legal consciousness costing him a lot of money.
Non-disclosure agreements are frequently used in the business world, particularly in relation to employees, intellectual property (trade secrets) and partners. NDAs are also used when a business aims to entering into negotiations with others. In addition NDAs can also be signed at the conclusion, like when a partner decides to leave the business.
NDAs are usually customized to fit the circumstances of a specified transaction and who will be sharing confidential information, and what should be considered as confidential information, that’s why companies should take extra care when defining what type of information is considered confidential under an NDA, and for how long the parties must that information confidential.
For example, if an NDA is entered into in connection with a potential mergers and acquisitions transaction it will require different provisions than an NDA entered into in connection with discussions with a potential investor.
Notwithstanding the above, the information that is being protected under an NDA may include a marketing strategy, sales plan, potential customers, a manufacturing process, proprietary software, internal research and data.
If a party breaches an NDA is, the affected party may seek court action to prevent the defaulting party from any further disclosures, and the affected party may sue the defaulting party for monetary damages.
Why signing a Non-Disclosure Agreement (NDA) is so important?
Non-Disclosure Agreements are very important for businesses in order to keep the competitive advantage among these businesses. For example, if a company is developing a new product, or developing something for sale, that company may need to contract out or hire someone to help. Business owners need to discuss proprietary or sensitive information most of the time with other individuals or companies. Having a signed confidentiality agreement in writing can reduce the risk of intellectual property theft. Without such a signed non-disclosure agreement, any information disclosed in trust can be used for wrongful purposes or be made available to the public accidentally or in accidentally, because even when you are talking to someone else in basic terms about your product/service, you might be telling that other person your “secret” whether you recognize it or not. As even a few small details about that product or service could give someone an idea to start something similar to what you just did. Just like KFC secret recipe which no one can use or copy, one’s product or service should be protected and kept a secret for as long as possible. And in order to keep one’s confidential information safe one must make sure to sign an NDA when he/she has to consult with anyone else in order to make their product or service work or to get their advice. If you think about the information you are about to disclose, it makes sense to give yourself that extra insurance that the person you are talking to will not talk to others.
It does not take long to prepare an NDA, and once you have a written one, it is very easy to add new names and companies. You actually only need to get an NDA written once, and then you can use it over and over for new products, services and contractors.
One should never underestimate the value of an NDA when doing business, because sometimes it might not be the person you spoke to that stole your ideas, but a person that they talked to after talking to you.
But Lawyers are the Exception
The only time one does not need to worry about signing an NDA is when he/she is talking with a lawyer about their product/ service. But for sure, this discussion should be in order to obtain legal advice in order for there to be client- lawyer confidentiality. This is true for any lawyer that represent or do not represent the disclosing person, for instance, patent lawyers are legally bound to the strictest confidence by the United States Patent Office.
What should an NDA include?
When drafting an NDA one must keep in mind that an NDA should be as short as possible in order to make it appear as a simple agreement, so that it will not raise any red alerts when reviewed by an untutored eye. Unfortunately, many startups and/or small businesses fall for this trap and tend to sign NDA’s without consulting with a lawyer first, which will result in these companies agreeing to provisions that would cause problems for them in the future.
In order to guarantee the safety of the confidential information in any dealing, the following provisions should be included in an NDA:
Parties to the Agreement
The parties to the agreement should be described at the beginning of the agreement. If the NDA is a unilateral 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 be referred to as the “recipient party”.
In addition, an NDA should also include a clause that specifies who else the recipient may disclose the confidential information to during the term of due diligence and business negotiations.
For example, the recipient may have their own accountants and lawyers who may need to review the information. Or, they may contract a third-party to perform some tasks. These third-party recipients of the confidential information are critical to the performance of NDA and should be included in the NDA.
Defining what is considered as Confidential Information
The parties to the NDA should specify what is considered confidential information and what is not. Taking into consideration that each party tries to protect its interests, as the disclosing party tries to widen this definition as much as possible to make sure the recipient doesn’t find a loophole and starts using the disclosing party’s valuable trade secrets or Know-hows.
On the other hand, the recipient of the confidential information shall make sure the information he/she is supposed to keep secret is clearly identified so that he/she knows what can and can’t be used.
Information Excluded from being Confidential Information
Every NDA has to include a clause that excludes certain type of information from being confidential. The common exclusions include information that are:
- Already known to the recipient;
- Already publicly known, as long as it was not due to the recipient wrongful act;
- 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 is under no obligation of the confidentiality to the disclosing party.
NDAs should also include a clause that allows the recipient to share such confidential information under certain circumstances, like when the recipient of the information is forced to disclose the information by a court order without breaching the NDA, subject of course to the recipient warning the disclosing party in advance of such court order.
NDAs should include a time limit regarding the term of the obligation of the receiving party. Setting a short period of time to protect the confidential information risks losing the confidential status of the relevant information which may lead to the unintended free transfer of such information. When setting the NDA term one should keep in mind that some trade secrets are defined based on the market value of the company, therefore NDAs regarding important trade secrets like Coca Cola would include unlimited term of protection, in order to guarantee the interests of the company. Therefore, the term should be determined according to the nature of the information disclosed, as it can either be ordinary confidential information or a trade secret. In case of a trade secret, it is highly recommended to set an indefinite term for the Agreement.
Return of Confidential Information
The NDA should include a clause stating how and when the recipient has to return or destroy the confidential information at the end of the agreement or when it is terminated for any reason.
Due to the use of hard drives, drop boxes, thumb drives, email storage, etc. it’s nearly impossible to completely destroy or return all the information shared electronically.
That’s why such clause aims to inform the recipient that all received information must be returned or destroyed. If the information is difficult to erase, the clause should state that the recipient is prohibited from using the information in the normal course of business or sharing it in the future.
An NDA should include a clause that specifies the acceptable remedies in the case of a breach by the recipient. The costs of a breach can be hard to calculate or prove, so a mutual in advanced agreement as to what constitutes an acceptable remedy will help the disclosing party avoid a long legal battle later on.
This clause should explicitly state that the disclosing party preserve its right as to seek equitable remedies.
Responsibility for Legal Fees
An NDA should include a mutually agreeable clause that clearly states who shall be responsible for legal fees if a suit is filed regarding the disclosure of confidential information. Even if that means clarifying that each party will be responsible for their own fees, regardless of the outcome.
More Provisions to include in an NDA
When drafting an NDA, one should make sure to include the following Boilerplate clauses:
- Employee Solicitation: If the recipient has access to the disclosing party’s employees, the disclosing party should include a clause that prevents the recipient from soliciting or hiring its employees for 12-24 months for example.
- Jurisdiction: The disclosing party, should include a clause that states that if there is any dispute between both parties regarding the BDA, the dispute will be handled exclusively in the disclosing party’s city.
- Injunction: when drafting an NDA one has to make sure to include a clause that gives the affected party the right to injunctive relief to stop the other party from breaching the agreement. This clause simply states that the affected party can get a court order stopping the other party from doing the breaching act.
- Non-Binding clause: an NDA should include non-binding clause, because NDAs are often initiated prior to negotiations for a merger, partnership, temporary project, or other similar collaboration, it’s important to include a clause that allows both parties to terminate the relationship at any point.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.