Make sure your Non-Disclosure Agreement protects your secrets

As compared to other contract forms, NDAs (aka Non-Disclosure Agreements or Confidentiality Agreements) may appear to be seemingly simple and straightforward. However, this plain vanilla contract form can include some hidden traps that may result in severe consequences. Here are the basics of an NDA and some of the associated blind spots.

Mutual vs. One-Way

Generally, there are two types of NDAs – mutual or one-way. With a mutual NDA, both parties are disclosing confidential information and are held to maintaining the secrecy responsibilities of the agreement. One-way agreements place the duty to maintain the confidentiality of the information disclosed on only one of the parties.

Broadly speaking, mutual NDAs tend to be the more even-handed type of confidentiality agreement. If both parties agree to the same level of responsibilities, then everyone is equally protected. However, this is theory – and nothing beats thoroughly reviewing the contract to make sure this is really the case.

What is included in “confidential information” exactly?

The most critical part of a Non-Disclosure Agreement is this definition. It sets the stage for the rest of the contract. After all, the central purpose of a Confidentiality Agreement is to create a relationship of trust where all sides can feel comfortable discussing sensitive, secret information. Furthermore, getting this section right is pivotal when dealing with trade secrets. Because trade secrets lose all protection when they are revealed, NDAs are a relatively straightforward way of ensuring your trade secret is protected. Or, at the minimum and in a worst-case scenario, provides you with some recourse should the other side misuse or improperly disclose your trade secret. (Here is a broad definition of trade secret and some additional useful information from the World Intellectual Property Organization).

The definition should include all information that is to be protected. Think about your business, what gives you your competitive edge and what you would not want outsiders to find out. This type of information may range from technical product specifications all the way to your sales plan or customer lists. This section should establish the parameters or subject matter of the information to be disclosed, but not actually include such confidential information. The NDA itself may not be a protected confidential document.

Also, the definition of confidential information cannot be overly broad because it will be too difficult for the party receiving information to follow, and may be found to be unenforceable in court. As a result, the receiving party will seek to narrow the scope of the definition as much as possible. Methods to narrow the definition include: requiring that the information be specifically marked as confidential; limiting confidential information only to information disclosed in writing; laying out the information to be considered confidential; or specifying dates of disclosure.

And then there are the exceptions to confidential information. . . . Typically, they are preestablished by law, and include any information created or discovered by the receiving party before entering into or independent of any involvement with the party disclosing the confidential information.

What are each side’s responsibilities regarding the confidential information?

After clarifying the parameters of confidential information, the next most important clause determines what the persons receiving the information can do with it.

Below are a couple of clauses that should put you on the defensive, and may need careful analysis.

  • Is the receiving party getting the right to also use your confidential information as well as learn of it? This may be considered a license, and you will have to review very closely any language allowing use of the information.
  • Are you promising not to share the confidential information with anyone other than the recipient singing the NDA with you? If so, this many be an exclusivity clause precluding you from speaking with anyone else. Such a clause could have a significant impact on your bargaining power further down the road.
  • Does the contract include any language negating a confidential relationship? Then, this may not be an NDA after all but a contract that causes you to lose the confidentiality of any information you provide. Look for language such as “agreement does not create a confidential relationship” or “no confidential relationship is established or implied by the disclosure of information”.

How long does the NDA last?

Assuming the parameters of the confidential relationship have been well defined, then you will need to make sure that the protection offered by the agreement will last long enough to maintain your secret’s protection. So be wary of Non-Disclosure Agreements that allow the other side to disclose information in only a matter of months. Typically, NDAs in the U.S. last for five years, although two or three-year terms are also frequent.

Make sure you are covered if there is a dispute. Remedies and some additional, final considerations…

There are two final aspects to check: which state jurisdictions will hear the case should there be a breach of the agreement; and what are remedies provided for by the NDA. The remedies should be clearly laid out, since proving damages in these types of disputes may be difficult. Typically, NDA should provide for injunctive relief allowing you to stop the other side from continuing to improperly disclose or use your confidential information. In addition, a fee shifting clause can also be useful because it provides that the loser will pay the winner’s attorney’s fees and expenses.

These are just the main potential traps to look out for when evaluating an NDA. And when presented with an NDA from another party, if ever in doubt or your instinct just does not make you feel comfortable with signing it, always get it reviewed by an expert. It may seem trivial at the time, but could have significant negative consequences further down the road.