What Can Go Wrong – It's Just A Non-Disclosure Agreement

A Non-Disclosure Agreement (“NDA”), also known as a Confidentiality Agreement, is an agreement that precludes the use of confidential information provided by one party (a “Disclosing Party”)  to another party (a “Receiving Party”) for any purpose other than that expressly contemplated by the agreement.  Such agreements are routinely used in business. For example, when one party desires to enter into discussions with another party with respect to a potential business relationship or transaction, it is frequently necessary for the disclosing party to communicate confidential business and/or technical information to the other party in furtherance of the relationship or transaction. 

 

NDAs can be either unidirectional or reciprocal.  A unidirectional NDA contemplates disclosure of confidential information from only one of the parties to the other.  A reciprocal NDA contemplates the disclosure of confidential information from each party to the other and obligates each receiving party to maintain in confidence the other’s confidential information upon the terms set forth in the Agreement. 

Things Can Go Wrong

It should not come as a great surprise that from time to time, a party will utilize a form of NDA they have found on the Web, an NDA that may have been appropriate from some other transaction or an NDA provided by the other party without a lot of consideration for the content of the agreement.  This can be a colossal mistake.  Perhaps, since NDAs have a well understood premise – i.e. that the receiving party should hold the received information in confidence – these agreements are dealt with more casually than some other agreements.

 

I am reminded of a situation in which a potential client advised he had disclosed quite a bit of his confidential technical information to a large company.  He was considering granting a know-how license that would permit the large company to utilize his “confidential information.”  When I inquired whether an NDA had preceded the disclosure of his information to the potential licensee I was assured that this had been addressed by his office manager.  As it turned out, an NDA had in fact been signed, although upon review of the NDA, it was discovered that the signed NDA was a unidirectional NDA that protected confidential information disclosed by the potential licensee.  The NDA included no limitations with respect to the use or further disclosure of the information already disclosed by the potential client.

 

The complexity appropriate to any NDA can vary considerably based on the contemplated business relationship or transaction.  The provisions in any NDA should be commensurate in complexity with the transaction under consideration. One would seldom need a 20 page NDA for a small value transaction. 

Terms For Consideration

Some terms to consider when entering into an NDA are listed below:

1. What uses should be permitted by a receiving party with respect to a disclosing party’s confidential information?
2. Should the NDA be unidirectional or reciprocal?
3. How long should the receiving party be required to maintain the received information as Confidential Information?
4. Who, at the receiving party, should have have access to the confidential information of the disclosing party?
5. What information of a disclosing party should not be considered Confidential Information even if so designated by the Disclosing Party? Typically, the recipient of information deemed confidential by a disclosing party is not bound to retain the information in confidence if the information is publicly known, already known to the recipient or if the information falls within certain other classifications of information  for which no expectation of confidentiality would be appropriate.
6. When is the NDA terminable by a party and what are the obligations of the parties upon termination of the Agreement with respect to the return or destruction of a party’s Confidential Information?
7. Should the receiving party be precluded from using information obtained from a disclosing party to fashion or amend patent claims in a pending patent application of the receiving party?
8. Other terms involving ownership of information, disclaimers with respect to accuracy or completeness of disclosed information, injunctive relief in the event of a breach by a receiving party, non-solicitation of employees of the other party, governing law and arbitration provisions, among others may be appropriate for specific circumstances.

Generally, it is recommended that NDAs be prepared or reviewed by counsel prior to execution.