Before your company considers sharing its technology or other proprietary information with a potential strategic or commercial partner, you will want to ensure that the information is kept secret and cannot be used for any unauthorized purpose. This is where a non-disclosure agreement (“NDA”) may be useful to you.
An NDA is a legally binding agreement that sets forth the obligations of the persons who receive confidential, non-public information from the company who has disclosed it. A non-disclosure agreement may be one-way – in that it only obligates the recipient to protect the confidential information of the disclosing party – or it may be mutual – in that it obligates each party to the agreement to protect the other party’s confidential information.
NDAs are also known as confidential disclosure agreements or confidentiality agreements. Regardless of the name, the scope of what the agreement covers will vary depending on the context in which it’s signed, the type of transaction the parties intend it to cover, and the industry in which you’re working.
NDAs are meant to provide assurance that a defined universe of information that is shared between parties will remain confidential and not be used for any purpose other than the purposes permitted in the NDA. Please be aware that in some contexts NDAs are not the norm. For example, most venture capitalists will not sign a non-disclosure agreement with an entrepreneur seeking funding from that investor in the United States.
When you’re presented with your counter party’s form of NDA, or receive substantial comments on your form of NDA, keep a few important questions in mind:
1. Who will have access to your confidential information?
You may want to limit the recipient’s disclosure of your confidential information to employees or outside advisors who have a “need to know” the information because of their involvement in the transaction contemplated, and that are themselves obligated to maintain the confidentiality of your information.
2. How is “confidential information” defined?
As the party disclosing confidential information, make sure you review the definition closely to ensure it actually covers everything you want to keep confidential. Dispassionately as possible evaluate and identify the information that is truly sensitive and for which you must preserve confidentiality.
If you anticipate disclosing potentially patentable inventions, make sure they are covered by the NDA. For example, under U.S. patent law the failure to preserve the secrecy of the invention will trigger the beginning of the grace period which requires you to file for a patent within 12 months of a public disclosure. Other foreign jurisdictions may have similar requirements. Under United Kingdom and European law, there is no such grace period and any disclosure you make that is not covered by an NDA could prejudice your rights in any future UK or European patent application.
3. Do you need an export control provision?
Please keep in mind that if a country has export control laws, such as the U.S. and the UK, these laws may cover not only the export of goods, but other transactions you might not expect. For example, disclosing technical information to a foreign entity or foreign national may implicate export control laws. Penalties for violating export controls can be significant. Ask your lawyers to give you some guidance on what they see in the context of that specific industry or transaction.
4. What is the purpose of sharing the confidential information?
Make sure you state the purpose of signing the NDA in the agreement itself. This will clarify the purpose of the relationship you wish to have with the counter party to the agreement, and help to ensure the recipient of your confidential information does not use it in ways that are unintended and detrimental to your company. Any use beyond the stated purpose should require the disclosing party’s prior written consent.
5. How long should the recipient of confidential information keep it a secret?
Your NDA may state that the confidentiality obligation survives in perpetuity and thus has no fixed termination date. Comments you receive from the counter party may state that the confidentiality period is limited to the term of the agreement or a fixed time after disclosure of the information.
Before you insist on perpetual secrecy, think about whether the information you’re sharing will become publicly available in the future. For example, if you are sharing the fact that you have an exclusive supply agreement, the terms of which are confidential, but you intend to reveal this partnership on your website within a few months after you raise a round of financing, there is really no reason to negotiate for a perpetual term. On the other hand, if you’re disclosing information that you believe are trade secrets, you may need to insist on perpetual secrecy because trade secret protection extends for as long as the information remains secret.
Remember that the “term” of an NDA can refer to either the duration of the confidentiality obligations or the duration of your information-sharing relationship with the counter party. Be careful to keep these two different timelines in mind when you’re negotiating your NDA.
6. Is there a “residuals” clause in the NDA?
A residuals clause allows the recipient to use, without restriction, some “residual” information that is received during the course of the relationship between the parties. The clause usually covers information that a party’s personnel recollects from its unaided memory. A residuals clause can raise concerns for the disclosing party because it potentially allows the recipient to use any and all recollected confidential information for any purpose without violating the NDA.
If the proposed NDA contains a residuals clause, and you’re a disclosing party, consider including a provision that makes abundantly clear that the NDA does not grant the other party a license to your intellectual property rights for any purpose whatsoever simply because the recipients personnel can recall the information from memory from having negotiated a transaction.
7. Should you sign a one-way or mutual NDA?
In a one-way NDA only one of the parties receives confidential information, and thus is subject to confidentiality obligations. In contrast, in a mutual NDA, both parties to the agreement receive confidential information and thus both are subject to the same standards of confidentiality. Deciding which format to use depends on who is actually going to receive confidential information.
If you do not expect or do not wish to receive any confidential information, then you should be cautious about binding yourself to legally enforceable obligations, especially if the party who discloses information to you is or may become a competitor. On the other hand, if a potential privately held purchaser presents you with a one-way NDA that protects only your confidential information, you may want to consider a mutual NDA to facilitate your assessment of the purchaser.
You can sign an NDA in a number of different situations. For instance, when you are discussing a potential strategic relationship or a key customer relationship or in the context of a merger or other reorganization. Whatever is the reason, you should strive to strike a balance between being judicious about what you disclose so you can move the deal forward and standing firm on points that are non-negotiable, like protecting your trade secrets. By always keeping your business objectives in mind, and the above list of questions handy, you will have will a more meaningful discussion with your counter party and increase the chances that your transaction will be a success.