What is an NDA?
A non-disclosure agreement ("NDA"), also referred to as a confidentiality agreement, is a legally binding contract that establishes a confidential relationship between parties. The parties signing the NDA agree that sensitive information pertaining to the other parties' affairs or business will not be made available to others.
Drafting a strong confidentiality agreement is crucial for any business or individual that has information of value. An experienced business lawyer can help ensure that your confidentiality agreement, or any confidentiality agreement that you sign, is protecting your rights.
Our lawyers here at Newburn Law have extensive experience ensuring our clients have thoughtful, strong confidentiality agreements. This article describes why a strong confidentiality agreement is important and how to ensure your agreement is strong. If you have any questions, we can help you.
The Importance of a Good NDA
A strong NDA is important for any business to properly protect valuable proprietary information of the company, such as trade secrets, customer lists, designs, and valuable know-how. Companies must share certain information when soliciting investments, obtaining new clients, hiring key employees, or finding potential partners in a business venture.
NDAs are a legal framework to maintain the trust needed to engage in such relationships and prevent proprietary information from being disclosed and undermining the inherent value of that information. Without a binding NDA, the information disclosed to another party is at substantial risk of misuse: being used maliciously by the receiving party, shared or sold to competitors, or made known to the public. Executing NDAs is a key safeguard that allows companies to negotiate freely with multiple different parties without fear of unwanted disclosure.
When does it Make Sense to Use an NDA?
Executing an NDA is a logical and prudent move in various business contexts. For example, a startup company soliciting funds from venture capitalists or other investors will want to have strong NDAs to prevent their valuable ideas from being stolen and shared with another company. Companies hiring outside consultants or third-party service providers, who handle or receive sensitive data, might require the consultants to sign NDAs to prevent them from disclosing that data during and after their work for the company.
Requiring the signing of an NDA is still a recommended precaution even when an outside party has access to seemingly less valuable information, like email lists, if the company has invested substantial expense and time in accumulating that information.
Companies might require full-time employees to sign NDAs when the employees have access to proprietary processes, supplier and manufacturing agreements, or client lists. NDAs prevent these employees from leaving the company and using that information to open a competing business. Another context where an NDA is paramount is when a company seeks to sell or license a product or technology. Companies will use NDAs to prevent potential purchasers from using the information disclosed as leverage in other negotiations.
Key Elements of a Strong NDA
Besides naming the parties to the agreement, there are five key elements that every NDA should include and concentrate on developing:
Defining Confidential Information
How confidential information is defined determines the entire scope of the NDA. This section defines what information will be subject to the NDA, meaning anything not included in the definition is free information for the receiving party to use without limitation. We further discuss the crucial elements of defining confidential information below.
Obligations of the Parties
Any NDA should clearly detail the responsibilities and requirements of the parties as it pertains to the confidential information, especially the receiving party, in a one-sided NDA. The receiving party should be required to protect the information from unauthorized disclosure and refrain from using the information for personal gain. In most cases, these obligations include safeguards and reasonable steps that must be taken to prevent access from outside parties.
This section should also list out who exactly will have access to the information and, in some situations, make certain employees sign separate NDAs requiring them to keep the information secret. The disclosing party can also require the receiving party to return any physical embodiments of the information after the contract or relationship has terminated. Sufficiently drafting this section is paramount because the disclosing party needs to reference it in cases of a breach.
Exclusions to NDA
NDAs must account for the practical reality that sometimes parties must share confidential information outside the normal course of business and other exigent circumstances.
For example, an employee must disclose information to a third-party service provider who requires the information to perform their job adequately. Other typical inclusions include information that is already publicly known, information that is already known to the recipient, and information that a party receives from an outside source, not in violation of the agreement. Recipients are also typically allowed to disclose confidential information as part of a legal proceeding.
Deciding what is an appropriate term for keeping the information secret involves two competing interests. Ideally, the disclosing party wants the term to be indefinite, forcing the receiving party into secrecy forever. Conversely, the receiving party wants a definite term to avoid liability from an NDA entered into a decade ago. The NDA's term should be a definite date or indefinite to prevent any misinterpretations if a breach does occur.
Remedies for Breach
Finally, an NDA needs to address what happens when a breach occurs. Potential consequences may include:
- Liquidated damages
- The immediate termination of an employment or service provider agreement,
- Termination of a contract, and
- Award of attorney's fees and costs for the non-breaching party.
An injunctive relief provision is usually included, stating that monetary damages would not be adequate to remedy a breach, so the non-breaching party is entitled to seek an injunction to prevent the breaching party from causing further harm.
Unilateral vs. Bilateral
NDAs can either be unilateral, where only one party has obligations to keep the information secret, or mutual (bilateral), where both parties have at least some responsibilities. Unilateral NDAs are frequently used for hiring employees or service providers because these workers generally won't be providing any confidential information. Rather they will only be receiving a company's information while working for them.
While a party disclosing information, and therefore seeking an NDA, might always want a unilateral NDA, there are situations where a mutual NDA will be required. For instance, companies contemplating a merger will virtually always execute mutual NDAs. This is mainly because both the companies will be disclosing confidential information during the due diligence process.
Similarly, mutual NDAs are standard when contemplating a joint venture. A mutual NDA makes sense when selling a company or licensing a product because the seller or licensor will want the buyer or licensee to provide assurances with their confidential information that they can meet the payment.
When presented with a unilateral NDA, some parties may instantly insist upon a mutual NDA, even though it is anticipated that only one party will disclose information. This tactic is used to incentivize the drafting party, or the disclosing party, to make the NDA provisions more balanced by presenting the possibility that a receiving party could later become a disclosing party. If presented with this situation, you should consider whether the other party will actually ever receive your confidential information and try countering this demand if the disclosure will never happen.
Proper Confidential Information Definition
As previously discussed, the confidential information definition is the most paramount provision in an NDA. The disclosing party usually endeavors to draft this provision as broadly as possible "all information given to the receiving party, whether oral or written."
Conversely, the recipient wants to ensure that the information is clearly defined and not of such a broad nature that the recipient is unsure what can be disclosed and what cannot. Some provisions require all physical materials provided to the receiving party to be labeled as confidential. One contentious issue is whether oral information can be considered confidential or if it must be in writing.
One solution is to allow oral information to be treated as confidential if the disclosing party provides that information in writing within a short-specified time period. Careful thought should be given to this definition when drafting. The receiving party will not let you go back and expand on the definition if you forget something.
Pitfalls to Avoid
Critical mistakes can be made when drafting an NDA, resulting in the agreement being invalidated or with courts refusing to enforce them. Here are some common pitfalls to avoid when drafting:
Defining Confidential Information too Broadly
While it may seem appealing to simply define all information disclosed to a receiving party as confidential, do not use a catch-all clause. Doing so can invite the wrath of courts. For example, in Trailer Leasing Co. v. Associates Commercial Corp, an Illinois federal court refused to enforce an NDA where the definition of ‘confidential' was considered too broad. Limit confidentiality to what is truly necessary to be kept secret or require all information provided to be marked as confidential.
Naming the Wrong Party
Always check a party's name on a state entity website before executing an NDA. Simple mistakes, such as misspelling the party's name or forgetting to include the word 'Limited,' can invalidate the NDA. Also, remember that a company's trade name, the name it does business under, is frequently different than its legal name. You must include the party's legal name, not its trade name, to ensure the agreement's validity.
Courts will be hostile to confidentiality provisions that are unreasonably onerous or anti-competitive. Demanding that confidentiality be preserved indefinitely when the information doesn't warrant such extensive treatment is an example of unreasonable behavior.
For instance, in Lasership, Inc. v. Watson, a Virginia Court ruled an NDA was unenforceable because the provisions that stopped an employee from sharing information about the employer were too broad. The provision covered information that wasn't confidential and also required the employee to keep the information secret forever. Providing context and temporal restraints on a receiving party's obligations will prevent an NDA from being ruled as unenforceable.
Not Limiting Access to Confidential Information
Do not forget to include provisions mandating access controls on the confidential information you provide. For example, suppose you do not specify what persons associated with the receiving party can have access to the provided information. In that case, it will be presumed that all employees, with or without authorization and not bound via individual NDAs, can have access to such information. Reasonable safekeeping procedures could include not allowing photocopies to be made without permission and requiring information to be kept in a secure location that can only be accessed by those with 'need to know' the status.
Lack of Guidance for Compelled Disclosure
There are certain occasions where outside parties, like the federal government, can compel a receiving party to disclose information. Compelled disclosure can nullify the protections NDA offers. Still, you should include a provision requiring the receiving party to provide sufficient notice of compelled disclosure orders to allow you to seek legal protective remedies if such disclosure occurs.
As described throughout this article, NDAs can range in strength depending on who the parties are and who drafted the NDA. Always ensure that your NDAs protect your rights by consulting with a knowledgeable business lawyer.
We help our clients understand how to protect their rights through an NDA and ensure compliance with any NDAs they've entered into.
Contact us today to learn how we can help you.