Non-Disclosure Agreements- Protecting Business’s Proprietary Information

When are NDAs Used? Should NDA’s be Mutual? Eleven Insights

Non-Disclosure Agreements, or ʺNDAs,ʺ are commonly used legal tools that businesspersons sign to protect the confidential information, sometimes also referred to as proprietary information, that is expected to be disclosed between them.

In a standard Non-Disclosure Agreement, the parties to the agreement define the confidential information that will be exchanged between them for a specific “business purpose,” and restrict its disclosure and use to a limited number of people on a “need to know” basis so the business purpose can be accomplished.

Here are eleven insight on NDA’s:

1. When are NDAs Used?

Entering into a major commercial agreement, or business alliance is, generally, preceded by discussions and negotiations bearing on whether the prospective arrangement is desirable.

During such discussions, it is usually necessary for the parties to exchange confidential information so that each side can assess the bonafides of the potential deal.   To protect against the disclosure of confidential information, parties will enter into a NDA.

A NDA is designed to promote the free flow of information, giving the parties the assurance that critical information will be shared only with people who need to know such information to evaluate the potential transaction, and will not end up in the hands of competitors.

A NDA would cover, for example, information disclosed to a potential purchaser during a product trial of specialized software.

Not only are NDAs used to protect against the disclosure of technical knowhow, they are frequently used by companies to prevent their employees, contractors, and suppliers from disclosing sensitive company information to third parties, such as financial projections, marketing and business plans, and customer lists.

2. Should NDAs be Mutual?

All companies of a certain size and experience have ready-to-use NDA templates which they can readily present.

Many of these NDAs will be unilateral in nature (protecting the larger party, but not, necessarily, the other, smaller, party). If both parties need to share confidential information and stand to be harmed by an inappropriate use or disclosure, then the NDA should be mutual.

As was discussed in an  earlier published article on negotiating and surviving the business deal of a lifetime (see Articles Series, Louise Valiquette,“ Negotiating and Surviving the Business Deal of a Lifetime: A Legal and Practical Approach”) even small companies can have proprietary information, including trade secrets, that can be misappropriated and so should be protected.

3. What Information Should Be Covered?

There should be a comprehensive definition of “Confidential Information” using non-limiting language so that all potential information of a proprietary nature is covered.

A well-written clause would cover, for example, “all business, scientific, technical, commercial information, including, but not limited to…”

A statement, such as “all information to be exchanged between the parties” is likely to be adjudged overbroad because it necessarily encompasses general knowledge that would not be considered proprietary.

The advantage of consulting with an attorney knowledgeable in this area would be to obtain a better understanding where the line should be drawn between overly general and overly specific language.

Nor would it be practical to have a NDA cover only information specifically marked as “Confidential” when provided, or, if communicated verbally, identified as being confidential, with a request to have some form of printout marked “Confidential” to follow the verbal communication.

As a practical matter, only having a NDA cover documents marked “Confidential” simply ignores the pace at which communications occur between parties to a negotiation, which can lead to information inadvertently being disclosed for not being marked correctly.

The reviewer of a document containing such “Need to Mark” clause should either delete it or mitigate it by adding that confidential information includes not only information identified or marked as such but also “information which a reasonable person would consider to be confidential.”

4. Exclusions

Not all information deemed by a party to be “confidential” is necessarily so: NDAs almost always provide that information that already was, or becomes part of the public domain through no fault of the recipient, or information already known to, or independently developed by the recipient, is not protectable.

This last exception is tantamount to the recipient’s saying to the discloser: “I had the same idea.”

Where this last exclusion becomes an issue, the disclosing party should demand from the recipient documentation showing clearly that the recipient previously had independently developed the information at issue.

5. Restrictions on Use

With “Confidential Information” now defined, the NDA can properly restrict its use to the recipient and/or the recipient’s representatives who need to know such information to accomplish the stated business purpose, be it evaluating a potential transaction between the parties or making a decision on the acquisition of a product.

Representatives of the parties to an NDA, themselves, should be bound to the recipient by similar confidentiality requirements that are no less stringent than those in effect between the disclosing party and the recipient.

6. Protection of Confidential Information

While some NDAs provide that the recipient shall protect the disclosing party’s confidential information as if it were its own, it should also be provided that the recipient should, at minimum, be held to a reasonable standard of care.

In this regard, NDAs, generally, impose on recipients of confidential information an affirmative and proactive duty to notify the disclosing party as soon as the recipient becomes aware of an unauthorized disclosure of information that would constitute a breach of the NDA, and to collaborate with the disclosing party so that it can regain possession and control of its information so as to prevent any further damage.

We know that recipients are responsible for breaches committed by their representatives.

This duty of notification and collaboration is designed to mitigate damages overall, and thus reduce the extent of the recipient’s liability.

Next page: Insights 7-11 and Takeaway