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Non-disclosure agreements, which are a form of confidentiality agreement, are a critical first step for all transactions, and there are major implications for each provision.
Before sending over financials or starting negotiations, each party must take legal precautions to protect information like proprietary information, business plans, know how, trade secrets and other forms of intellectual property. A non-disclosure agreement is a binding legal document, where the parties agree they will protect confidential information.
With trade secrets and business information, nothing can destroy the value faster than making it public and freely available, especially after a party has invested time, money and effort in developing them. Mutual NDAs also protect information that could be sensitive or embarrassing, such as medical information. (Imagine if KFC’s 11 herbs and spices blend suddenly became public knowledge, or if your bank account number and account balances were suddenly freely available!)
The parties will be required to make reasonable efforts to protect each other’s information in accordance with the terms of the NDA, but sometimes, secrets are shared or confidential information becomes public, either from a rogue representative, a data breach, or through an act of corporate espionage. If the NDA isn’t mutual, then only one party may benefit from the NDA. If two companies exchange financial information in contemplation of a merger, but the NDA isn’t mutual, and they aren’t both obligated to protect the financial information they receive, then there could be a lot of uncertainty about what information is confidential and who can access it. If the terms of the NDA aren’t properly drafted for the situation, in the case of unauthorized disclosure, the non-breaching party may find that either its confidential information wasn’t protected properly, or that its rights and remedies are so limited, there’s no realistic hope of recovering damages or getting other relief in the event of a breach of the non-disclosure agreement.
Should you have a mutual non disclosure agreement or a unilateral NDA? With a mutual NDA, each party has the same legal rights, and responsibilities, to protect the information, and they will both face consequences, including potential legal action, if these obligations are breached.
If only one party is disclosing information, such as sharing financial information with a landlord or employees, then it’s pretty unlikely that the disclosing party will breach the NDA. The receiving party has the confidential information, and they are responsible for protecting the confidential information, and will suffer the consequences if the NDA is breached. In that case, the disclosing party is the party that really needs the protection.
For example, if an individual is sharing financial information with a potential landlord, then the landlord should be obligated to protect the sensitive financial information. The individual isn’t receiving any confidential information from the landlord, so a mutual NDA probably isn’t necessary for the two parties in this scenario.
A mutual NDA should be written to protect both parties - clearly stating the length of time the NDA is effective and narrowly defining what "confidential information" is (more on this below). The liability will usually fall on the receiving party that wrongfully disclosed the information. If both parties are sharing information back and forth, then it’s more important that the agreement is mutual.
If one company shares confidential information about its technology with a potential manufacturer, and the manufacturer shares confidential information about its capacity and capabilities, then both parties need to be sure their information is protected by the other to retain its competitive advantage. The parties will also want to agree on other key clauses, such as what laws will control in the event of a dispute over the enforcement of the agreement, or how the NDA can be altered or terminated if the parties want to change it. An NDA is a contract, and both parties are legally compelled to follow it.
While each NDA is unique to its circumstances, there are a few key clauses to always consider. These clauses may determine if the NDA is enforceable or not, or what the remedy is available to the non-breaching party.
Anything that is not in the public domain, and which the receiving party doesn’t know about independently, can be considered confidential information. It’s important not to define confidential information too broadly - that’s an invitation for litigation and could affect the agreement's effectiveness.
A good example of a clause that defines confidential information is:
Confidential Information is information that is non-public and confidential information, whether written, oral, electronic or otherwise, together with copies and extracts thereof, and all analyses, compilations, studies, notes, summaries, memoranda or other documents prepared by or on behalf of the recipient, which contains or reflects any such information.
When in doubt, marking information as “Confidential Information” before sharing it (and making sure it's encrypted if it’s being shared electronically) is a good way to make sure the parties know and understand that the information being shared is confidential.
If this information is so valuable that it needs to be kept a secret, then why is it being shared? It could be to evaluate a business transaction, to collaborate on an invention, or to review sensitive information in order to make health or employment-related decisions. Whatever the reason, it should be narrowly tailored and clearly defined, which will also give it a better chance of being enforceable.
An example of a narrowly defined purpose is:
In connection with certain business arrangements or transactions between the parties that are under consideration or currently in place, the parties will exchange Confidential Information to accomplish such purpose.
The disclosing party doesn’t want to inadvertently grant rights to the recipient party to use or exploit the confidential information. That’s a business decision to be made after the information is exchanged and evaluated. When the confidential information is finished being used, the receiving party should return it to the owner or destroy the information, which will minimize the risks of an inadvertent breach of the NDA.
Two key dates matter for the time period of an NDA: the start date/effective date and the end date. The NDA might be fully signed, but the obligation to keep the information confidential might not start until actual confidential information is exchanged, which might not be for months after the NDA is signed. So even if the NDA itself has expired, a proper NDA will make sure obligations to protect confidential information confidential survive the expiration or termination of the NDA.
Also, a perpetual NDA is much harder to enforce than an NDA with a definite end date. For example, a secret recipe might be protected for a long time, but how valuable will current market intelligence be in five years? Most NDA last between two and five years, or perhaps for the life of a person (if the confidential information shouldn’t be shared while they are alive, for example). It’s situation-specific, and it is important to consider if the value of the information will change with the passage of time.
First, make sure that the disclosing party can actually disclose the information. A disclosing party could be the recipient of another party’s confidential information, then (unintentionally or not) turn around and disclose that other's confidential information to a third party. A representation and warranty that the party is authorized to share the information that it is sharing is recommended.
Second, there are always exceptions to sharing confidential information - it could be on a need-to-know basis or due to legal requirements. If employees, contractors or other representatives need access to a party’s confidential information for a specific purpose, then limit the sharing to the performance of that purpose and make sure those individuals also have a duty of confidentiality, the specific details of which may need to be set forth in related documents instead of the same instrument. There could be multiple NDAs involved in a single transaction.
Third, a government or other regulatory body may require disclosure of confidential information for investigative or audit purposes. In that case, the owner of the confidential information should get prompt notice, so that they have time to intervene and get a protective order if they choose to do so. Additionally, the information should still be treated as confidential; just because a regulatory authority has access to it doesn’t necessarily diminish its value in a commercial setting.
If the parties reside in different jurisdictions, and an NDA is breached in a third jurisdiction (perhaps where a meeting took place), then what rules control in resolving disputes? A well-drafted NDA will determine jurisdiction, which can inform how confidential information is protected and shared, as well as litigation strategy.
Delaware is a popular venue for businesses, because the courts are very familiar with corporate matters, but if two businesses are located in Texas, it might make more sense for local law to control.
Alternatively, California is known for being very friendly to individuals, so companies that are located there might choose an alternative jurisdiction that is more business-friendly. If companies are located in different countries, and possibly doing business in a third, or more, locations, it makes sense to agree on jurisdiction, instead of figuring it out if and when a breach occurs.
Alternative dispute resolution mechanisms (such as mediation or arbitration) often allow for more latitude and reduced costs resolving disputes - and the proceedings (and their results) can often be kept confidential. Negotiation is often the least expensive method, and requiring that the parties attempt a good-faith resolution, instead of heading straight for a lawsuit, may save time and money for everyone. Whatever the method that is chosen (or eliminated), it’s important to know what rights and remedies may, or may not, be available based on the resolution methods that are agreed to in the NDA.
Sometimes, things just go wrong and a non-disclosure agreement is breached, for whatever reason, and a party (usually the one disclosing the information) suffers damages or irreparable harm, either to its reputation, its finances, its business prospects, or a combination of all of these factors. The parties to an NDA may agree to limit damages, for example, by waiving consequential damages, or capping damages entirely.
Two companies may agree to limit any damages that may be recovered to the amount of fees paid (or payable) in a specific period of time, like 12 or 24 months, for example. The parties could also agree to retain or waive their other rights, such as the ability to address a threatened breach of an NDA, and not just an actual breach. A party may find that an injunction or specific performance is a better remedy than a lawsuit. It’s very specific to the transaction, and it’s important for the parties to be aware of the consequences of accepting or waiving these rights.
Before you sign your name to that NDA, consider the consequences if something goes wrong. If an individual is signing it in his or her own capacity, then he or she is personally liable for a breach. For example, receiving the blueprints to an invention and then posting them on the internet for anyone to use, could get you sued by the creator of the blueprints, and you could be personally liable for monetary damages.
On the other hand, if there are companies involved, the signatory not only needs the capacity to sign the document, but should also be aware of the rights and liabilities of each party under the NDA. All confidential information might have to be specifically marked “confidential” for it to receive protection, or if an employee leaks secret information, the company could be liable and may have to pay a large amount financially, unless the employee also signed an NDA, and then they could be held personally liable. The nature of the information that is being exchanged could change, so it’s important to stay within the limits of the NDA, or to have a mechanism in place for amending and making edits to the NDA.
If a party shares sensitive or confidential information with anyone else, without an NDA, then the receiving party doesn’t have any obligation to protect it.
The NDA should not require the parties to do business together; this is an exchange of information only, perhaps to determine if they should work with each other. It’s best to stick to the exchange of confidential information in an NDA and discuss business terms after the information has been exchanged and reviewed.
It’s usually fairly simple to identify the purpose and term of an NDA, but it can get a little trickier when determining non-business terms, such as jurisdiction and liability. It makes sense to invest in an NDA that has been reviewed by someone with legal knowledge, and Documate makes it easy to take care of the legal terminology while easily customizing an NDA.
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