By: Maks Ewendt
We have been seeing an influx of Non-Disclosure Agreement (NDA) requests and reviews lately and that’s great. It means companies are entering into the early stages of business discussions and they want to make sure that they’re protected as they move forward. NDAs are admittedly a bit mystical in their application and effectiveness, so we wanted to share a few thoughts on using them and what to look out for in the wild.
When do I need an NDA?
NDAs are most commonly used at the beginning of a business relationship with a third party when either party, or both parties, want to share their nonpublic information to advance the conversation. If you’re considering sharing information that’s vital to your company and may provide you a competitive advantage (e.g trade secrets, customer lists, or unique go-to-market strategies), you should enter into an NDA before doing so. If you’re only sharing information that is commonly known, or that is available to the public on your website, then there’s no need to create another hurdle for your pending conversation.
An extra caveat to consider is whether or not the information you’re planning to share is subject to an active NDA that you already signed with another party. It’s common for an NDA to require that if you’re permitted to share the confidential information with anyone else (usually with a need to know) that the subsequent party also be subject to confidentiality terms no less stringent. Before you share important information, do a quick check on where you got that information from
What’s the value of signing an NDA?
NDAs are often viewed as both super important and not, all at the same time. One valuable thing an NDA does is serve as a transition point in the conversation to make it clear that everything up until that point is okay to share, but now, after signing this NDA, there’s an expectation of confidentiality that everyone is aware of. The terms of the NDA (more on this below) also inform each party’s practical obligations moving forward. Most terms in an NDA aren’t too offensive, however, it’s nice to know up front what is or is not protected, how long the parties can exchange such information, and for how long they need to treat that information as confidential.
The challenge with an NDA comes down to enforceability. Since only ideas and information are exchanged under an NDA, rather than services, products, or money, it can be difficult to find effective recourse if a party breaches its obligations of confidentiality. Most NDAs include language regarding remedies “in equity,” which usually amount to injunctive relief to make a party stop disclosing information that they shouldn’t be, but that’s still a judicial process that takes time. Information has never spread faster than it does today, so irreparable damage could take place before you can stop it.
What should I be aware of in an NDA?
The first thing to look for, and an indicator of how offensive the terms may be, is whether it’s a mutual NDA (MNDA) or a unilateral NDA (there’s not another letter to add, still just an NDA). If it’s an MNDA, then both parties should be subject to the same terms, which keeps the party providing the MNDA honest about the rights and obligations included since they have to adhere to the same standards. If you do end up with a unilateral NDA, where you’re the only party bearing the obligations, then the providing party may be asking more of you than they would want to do themselves. Even if there’s only a remote possibility that you will also be sharing confidential information, aim to work with an MNDA. If the other party insists on a unilateral NDA, well maybe that in and of itself tells you something about them that you should consider.
As for important terms to catch in the NDA itself…
The definition of Confidential Information – Like most other things in a contract, the parties can define Confidential Information however they like. This usually isn’t a problem as long as you’re aware of what needs to be treated as such. Common things to look out for include: (i) information that was disclosed before the signing on the NDA (make sure you’re not already in breach before you sign); (ii) if Confidential Information has to be marked as such or if the parties “should know” that the information is confidential; and (iii) whether the existence of the NDA itself is confidential. The first rule of the NDA could be not to talk about the NDA.
The term… and then also the term – A good NDA will have two terms: (i) the term with which the parties can share confidential information under the NDA; and (ii) the term length that each party has to treat the confidential information as such. If the NDA doesn’t have a term for disclosure, then any confidential information disclosed between the parties until the end of time will be subject to the Agreement. If the NDA doesn’t have a term for the treatment as confidential, then the parties will have to treat the confidential information as such until the end of time. The “end of time” offers practical challenges that we prefer to avoid. A standard NDA term is 1-3 years from the effective date, and a realistic term for treatment of confidential information is 3-5 years either after the disclosure of the information, or after the termination of the NDA.
Carve Outs and Exceptions – NDAs are written to lock up a company’s information from any disclosure… except for sometimes. In the definition of confidential information, there’s typically a list of 4-5 carve outs that can prevent information from being considered confidential. For example, if the information was already known by the party receiving it, or developed independently by that party, or already in the public domain, then the disclosing party can’t claim that it’s restricted as confidential.
Related, if you receive a court order compelling you to disclose another party’s confidential information, you can’t be expected to be held in contempt because you signed an NDA and won’t tell, so, that’s typically an exception that’s included as well. These clauses can get a little long winded with the circumstances and steps to disclose under court order, but usually they’re pretty fair.
It’s Just Information – Since NDAs are primarily used to initiate early business conversations, it’s nice to set out what the NDA is not saying. Typically, that’s in the form of No Obligation and No Warranty clauses. The former is to establish that even though the NDA has been signed, neither party has to tell the other confidential information, and if they do, they’re under no obligation to disclose all related confidential information. The latter is just a nice disclaimer that the information that’s being disclosed does not come with a warranty or guarantee or accuracy. These help prevent parties from taking only a partial or non-developed idea and running with it into a negative result.
While the usefulness of NDAs may be up for debate, their common use in the business process is undeniable. They help facilitate the sharing and protection of businesses’ most sensitive information, so it’s important to understand what they are, and what they’re not. If you have any questions about the use of, or the terms within, an NDA, a Fourscore attorney will be glad to help.
Picture on the top is by AbsolutVision and is in the public domain.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, throughout the Southeast and in Silicon Valley / San Francisco. We also represent venture capital funds and other investors who invest in companies throughout the U.S. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.
