Janet P. Knaus
You have an idea for a new product and want to share it with another company hoping it will form a strategic alliance with you for the development and sale of that product. Or maybe you have hired a consulting firm to review your current business practices and will be sharing financial and other sensitive data as part of this engagement. How do you make sure that your information is kept confidential?
One way to protect your information is to enter into a nondisclosure agreement ("NDA"). Sometimes these agreements are called confidentiality or secrecy agreements. Regardless of their titles, the purposes are the same: to prevent someone from using your information for his or her own benefit and disclosing your information to others.
While often referred to as "boilerplate" and signed after a quick review (if any), NDAs vary in form and should be customized to fit your situation. Whether you are signing or drafting an NDA, there are a few tips to keep in mind.
1. Use the Right Form of Agreement.
You might be asked to sign an NDA that restricts only your use of information disclosed to you but says nothing about your information. This type of agreement is known as a unilateral NDA and only restricts one party. If there will be a mutual exchange of information, a bilateral NDA should be signed. A bilateral NDA prevents each party from disclosing the other's proprietary information.
2. Carefully Read the Agreement.
While this tip might seem obvious to you, we are often asked to counsel people who signed agreements without reading them because they "looked pretty standard" or the other side told them it was "boilerplate." After the relationship goes south, they are surprised to learn that buried at the end of the NDA is a noncompete provision and the provision is legal and enforceable. You should carefully read the NDA to make sure there are no surprises and you can live with all of its terms.
3. Define What Is Considered Confidential Information.
The NDA should define exactly what information will be considered to be confidential information. If you are the party disclosing the information, you will want the definition to be as all-inclusive as possible. On the other hand, if you are the receiving party, you will want to see as narrowly focused a definition as possible.
4. Distinguish Between Confidential Information and Trade Secrets.
Trade secrets cannot be precisely defined. Generally speaking, a trade secret is information that is not generally known or readily accessible by proper means and gives you a competitive advantage over your competitors because they do not have access to the information. One of the most famous examples of a trade secret is Coca-Cola's secret ingredients.
Not all confidential information rises to the level of being a trade secret. If you will be disclosing what you believe to be a trade secret, you will want to make sure that your NDA distinguishes between confidential information and trade secrets. This is important because many NDAs have an expiration date after which the receiving party is free to use and disclose the confidential information. With a trade secret, you will want the restrictions to last for so long as the information remains a secret.
5. Include the Standard Exceptions.
Your NDA should contain the following standard exceptions:
- Information that is now or subsequently becomes generally available to the public other than as a result of your wrongful disclosure.
- Information already known by you.
- Information made available to you by a third party who was under no legal duty not to disclose it.
- Developments that you make independent of the disclosed information. Without these exceptions, you could be restricted from using and disclosing information that your competitors are free to use and disclose.
6. Make Sure You Can Comply With the Marking Requirement.
Many NDAs require that the information be clearly documented and marked "CONFIDENTIAL" in order to be considered as such. It might not be possible or feasible for you to comply with this requirement. Can you control what documents the consultant who is performing on your site has access to? How will you mark e-mail messages? If you find yourself in this situation, you should ask that the marking requirement be deleted.
7. Define Permitted Uses.
The name "nondisclosure agreement" is a bit deceptive because use is as generally important as nondisclosure. For example, if you are the disclosing party, you will want to prevent the other party from using the information for its own benefit. The NDA should clearly define the purpose for which the information is being disclosed (e.g., for evaluation) and what the receiving party can and cannot do with the information.
8. Specify a Term That Is Reasonable and Adequate.
The NDA should generally have an expiration date. The confidentiality obligations should not last any longer than the expected period for which confidentiality is really needed. Three years is typical; a confidentiality period of more than five years should be resisted (and may not be enforceable depending on what state law governs).
9. Request That Your Information Be Returned.
Your NDA should require that the other party return the original and all copies of your confidential information upon request. If you are the receiving party, you might want to be able to keep a set of copies as part of your work papers.
10. Specify a Remedy.
There are two possible legal remedies for disclosure breaches: monetary damages and injunctive relief. Injunctive relief is where the court orders someone to do or not to do something and will typically be the remedy you will seek in the case of a disclosure breach (e.g., an order telling the breaching party to stop disclosing the information or to return the information). Your NDA should expressly state that injunctive relief is appropriate if there is a breach.
If you have any questions, feel free to contact your WN&J attorney or Janet Knaus at 616.752.2150 or email@example.com.