The DNA of an NDA

By: James L. Young & Z. Peter Sawicki

Secrecy in business negotiations and discussions of various sorts is desirable if not necessary.  How is secrecy established and enforced?  One way is through an agreement. Recently, the acronym NDA (non-disclosure agreement) has been tossed around in the news and in some highly publicized settlement agreements both political and otherwise.

Such agreements to keep information secret in a business setting are common and may come in many forms. Besides an NDA, typical names for such agreements include confidentiality agreement, confidential disclosure agreement, or proprietary information agreement - with the name reflecting the situation. Regardless of the situation and the agreement’s name, these agreements have commonality in their DNA (their makeup).

An NDA is an agreement to keep confidential and trade secret information “a secret” when that information is going to be disclosed to another party or when the transferred information is not to be disclosed to the public. It is an enforceable contract on which injunctive relief may be obtained, and even damages.  The types of information such an agreement can encompass is limitless. Invention disclosures, test results, customer lists, passwords, data, and specifications of any kind are mere examples of a non-exhaustive list of confidential information. Often the most difficult aspect of an NDA is having it drafted, agreed to and signed before there is an exchange of the information.

In addition, such agreements are so common place in today’s world that we attorneys and often times our clients take the terms of an NDA for granted. It is a wise move to consider the basic makeup of an NDA and why some of the provisions exist. Here are some points to consider in a non-exhaustive list.

Mutual and One-sided Agreements

If the parties are working together and both want to share proprietary information, then the terms of the agreement should be mutual. By mutual, it is meant that both parties have the same obligations in transmitting information and receiving information. A mutual agreement is also referred to as a “fair” NDA. So is a one-sided agreement unfair? Why would one enter into such an agreement? Leverage is the most common reason. For example, your client is a vendor and wants the job. One-sided agreements also occur in employee-employment situations.

The Parties

Naming the parties seems simple enough. However, at the beginning such situations are sometimes quite cordial, and because the persons involved are trying to be overly polite and solicitous, some fundamental details (like who is who) may not be made explicit, So, the first order of business in an NDA (from either side) is to make absolutely clear who you are dealing with, and that they are all parties to the NDA. The parties in typical business NDAs are companies. Are a company’s employees obligated under the agreement? Does the company have confidentiality NDAs in place with its employees that are similar in terms and obligations to the NDA being considered? If there is work to be done under the NDA, then vendors, agents and any other non-employees to whom any information might be transmitted should also be required to sign an NDA. But that NDA should probably be a one-sided NDA, one similar in obligations to the original NDA of the party receiving the information and with the disclosing party having a right to pursue the non-employee for breach.

What is Confidential Information?

The heart of any NDA is the confidential information that might be revealed between the parties, and how that information is defined in the NDA. The definition is almost always presented in an exclusionary format, excluding from confidential information that which is already known to the recipient, already publicly known, independently developed by the recipient, or disclosed to the recipient by another party who has no duty of confidentiality to the disclosing party. This definition is found in every NDA. But it can be a trap for the unwary, such as those who obtain an NDA online, believing it is a "one size fits all" document. The danger here is that insufficient thought is given to the situation at hand, failing to add possible additional exclusions which may prove to be useful, or in some cases, even a more affirmative recitation of the specific type of confidential information that may be exchanged (for example, customer lists for a defined market, manufacturing specs for a product, financial information, etc.).

How confidential information may be transmitted also needs to be addressed; whether the transmission of confidential information has to be in writing, or if it can be oral, and if so, does it subsequently have to be put in writing? There are pros and cons to each method, the discussion of which is beyond the intended scope of this writing.  

Scope of Use

Obviously, the receiving party has an obligation to keep the information secret, which includes taking reasonable steps to maintain the secrecy of the information. So if some of the information is placed on a poster board or wipe board at a confidential meeting held at the receiving party’s offices, the information on that board should not be left behind in that meeting room where others (perhaps even non-employees of the receiving party) might see it. Limiting access within the company to disclosed information is a reasonable step for protecting the confidentiality of that information.

Another part of this obligation is the recipient’s use of the information for its own benefit. It is very disconcerting when the receiving party keeps the information confidential, but uses the information to run its process of making widgets at half the price. The NDA should specifically address this obligation and prohibit such use.

When Should the Confidentiality End?

“Not soon enough” is the typical view of the receiving party, while the disclosing party believes “forever” is fair.  If your client is the recipient, the NDA should have a definite term.  In technical areas where technology is changing quickly, two to five years is common as the information may be worthless beyond that time.

How is Confidential Information Returned?

When the NDA does terminate (and it will at some point), the confidential information must still be appropriately handled by the receiving party. The NDA should include a provision specifying exactly how and when the confidential information is to be returned (or destroyed/deleted) by the receiving party upon termination of the NDA.

These are but some of the building blocks of an NDA, the fundamental DNA of an NDA. Every time you are asked to create (or review) an NDA, reflect on these basic concepts and then other issues will surely come to light that will help you formulate a better NDA for your particular situation.