By Howard Novick, Esq.
Any time a business needs to share confidential information with a prospective customer, vendor or strategic partner, it should refrain from doing so unless the other party assents in writing to keep such information confidential and to not use the information except for specified limited purposes. The vehicle for obtaining such assent is typically referred to as a Nondisclosure Agreement, or "NDA".
Since your need for an NDA will typically arise during the "courting" stage of a new business relationship and since the signing of an NDA may in fact be a prerequisite for moving past that stage, you will do well to have a standard form on hand to use when you need it. The form you adopt as your standard should be even handed, concise and clear so as to increase the likelihood that the other party will execute it promptly, with minimal if any time needed for review, negotiation and revision.
Whether you are evaluating your current standard form or an NDA another party has asked you to sign, you should review the document with the following questions in mind in order to determine whether it is appropriate and acceptable.
- Is the NDA mutual or one sided?
A "one-way NDA", under which one party is designated the "Discloser" and the other is designated the "Recipient", should be used only where the parties are certain, given the nature of their relationship or the context in which information will be exchanged, that confidential information of the party designated Recipient will not be disclosed to the party designated Discloser. If confidential information from both parties will be exchanged, then in all fairness the NDA should be mutual. If in doubt, go with a mutual NDA, as there is no real downside to using a mutual NDA even if information will be flowing only in one direction.
- Assuming information from each party will be exchanged, will it be a roughly even exchange or are you more likely to be either the Discloser or the Recipient?
Even mutual NDAs can be drafted so as to favor the disclosing party or the receiving party in ways I point out in items 3 and 4 below. For this reason, you may wish to have two standard forms, one pro-discloser and one pro-recipient, and use them as appropriate.
- What information will be subject to the disclosure and use restrictions in the NDA?
First, you must give some thought to the type of information that might be exchanged (such as business plans, customer lists or technological information) and verify that it is covered in the definition of confidential information. Then you must consider whether the information will be transmitted in writing, orally, electronically or a combination of all three. Lastly, you should determine whether it is practical or even desirable to require that for information to be deemed confidential the disclosing party must either label it as such or, in the case of non-tangible information, submit a memo designating such information confidential within a certain number of days after the disclosure. The broader the definition of confidential information and the fewer the administrative requirements that must be met for the information to be deemed confidential, the better it is for the disclosing party.
- What exceptions will be carved out of the definition of "Confidential Information"?
Most NDAs list several categories of information that will not be considered confidential or otherwise subject to the use and disclosure restrictions contained in the NDA. These include information in the public domain, information developed independently by the recipient, information previously known to the recipient and information obtained from a third party who had the right to supply it. Generally speaking, the more exceptions that are listed the better it is for the recipient. Some NDAs specify that the recipient must be able to prove that the exception applies and some NDAs do not. Regardless, the burden of proof is likely to be on the recipient, because the courts will consider the recipient to be in a much better position to prove that one exception applies than the disclosing party will be to prove that each exception does not apply. For this reason, if you will be the recipient under an NDA, it would be prudent for you to keep dated records of the information received under the NDA and information received or developed outside the scope of the NDA. If you will be independently developing materials or products that are similar to the materials you will be receiving under the NDA, it may be prudent for you to implement operational procedures (such as the implementation of a "Chinese wall") which will support your defense of independent development.
- For what purpose will the receiving party be permitted to use the disclosed information?
The only appropriate permitted purpose is to help the receiving party determine whether it wishes to enter into some sort of business relationship (which hopefully will be memorialized subsequently in a separate agreement). If either party desires or expects more, then the NDA is not the right agreement to start with. The wording can be general (e.g., "... to determine whether to enter into a business relationship" or specific (e.g., "... to determine whether to enter into an agreement under which Company X will market Company Y's goods and services in Japan"). The point to keep in mind is that the NDA serves the purpose of allowing the parties to obtain information that will help them decide whether they wish to progress beyond the courting stage; the NDA does not purport to contain all the terms which would govern the relationship between the parties after the courting stage.
- How long will the restrictions be in effect?
One could argue that the duty to keep disclosed information confidential should last indefinitely, and I have seen many NDAs that have no time limit in this regard. However, in many contexts, the information exchanged will become relatively worthless after a certain amount of time. If this is the case with the information you expect to disclose and receive under your NDA, you should insert an appropriate time period. Keep in mind, however, that confidential information that is also trade secret information (a subject outside the scope of this brief article) loses its trade secret status once the obligation to keep it confidential expires.
- To whom can the recipient disclose the information, and on what conditions?
The recipient may rightfully make the disclosed information available only to its own employees, unless the NDA explicitly permits the information to be disclosed by the recipient to others. Other individuals with whom the recipient may wish to share the disclosed information may include its own consultants as well as employees or consultants of the recipient's corporate affiliates. Having explicit language permitting the sharing of confidential information with such individuals is appropriate, so long as the NDA limits permissible disclosures to those who (a) have a "need to know" in order to carry out the purpose of the NDA (e.g., in order to determine whether a business relationship will be entered into with the other party to the NDA) and (b) are under a legal obligation to keep such information confidential,
The foregoing discussion is intended to give non-lawyers a general sense of just some of the issues that might arise in a nondisclosure agreement and how these issues should be addressed. Before signing any NDA, you should have it reviewed by an attorney who understands your business and is aware of the particular situations in which you intend the NDA to apply.
Howard Novick leads the Software and Information Technology practice of Seder & Chandler LLP, a law firm with offices in Worcester and Westborough.
Copyright 2010 by Howard Novick
