Intellectual Property

What You Should Know About What Others Shouldn't Know: The 5 Most Overlooked Elements Of NDAs

Non-disclosure agreements are important -- so get them right.

By  
on

In the business world, non-disclosure agreements (“NDAs”) are essential to contractually controlling the use and dissemination of the confidential information held by your company (or client). From simple NDAs designed to permit a consultant to provide services to a company to more complex confidentiality agreements designed to permit the parties to evaluate and engage in a potential asset sale, such NDAs are foundational to outlining a party’s rights, duties and responsibilities regarding the disclosure, receipt and protection of confidential information. By necessity, NDAs are some of the most prevalent documents used in business dealings in the technology sector – certain information must be kept confidential to protect intellectual property rights (especially patent rights), or otherwise ensure certain information can remain a trade secret of the disclosing party. In fact, these agreements are so prevalent that I have observed a tendency by companies (and counsel) towards rote reliance on forms for such engagements without thinking through the application of the provisions and whether the document actually reflects what is contemplated (let alone needed) for the intended transaction.

Here are my top 5 most overlooked elements in NDAs that should always be addressed before signing on the dotted line:

  1. Definitions Matter. Most NDAs will usually contain some definition of “confidential information,” but these definitions vary. Although expansive definitions attempt to cover all types of confidential information to be disclosed, they may not adequately fit your intended disclosure. You would be surprised at the number of NDAs I have be presented over the years that did not conform the confidential information definition to the information to be disclosed during the term of the agreement. Don’t fall into the form trap – always conform the “confidential information” definition to both the existing information to be disclosed, as well as any contemplated confidential information that may be developed and disclosed, during the term of the NDA.
  1. Exclusions Matter More. Any definition for confidential information matters little if exclusions to that definition undermine its effect. Certain exceptions are axiomatic – such as where (i) the information is already in the public domain at the time of disclosure, (ii) a third party who is lawfully in possession of such information (and without an obligation to keep such information confidential) discloses such information to the recipient, or (iii) disclosure is required as a matter of law or court order. Other exceptions, however, are more nuanced. For example, what about independent development of ideas? These can overlap with the existing products or services to which the confidential information applies, not to mention whether the recipient’s records prove this point. This exclusion may or may not be acceptable, and depends upon the footing of the parties and nature of the relationship. In any event, do not ignore these exclusions – you do so at your own peril.
  1. What the Government Seeks, It Can Inadvertently Take Away. It is common to see NDA provisions requiring disclosure where such confidential information is required to be disclosed by law or court order…but what is less common is language outlining a procedure that informs the discloser of such requests and takes measures to challenge or otherwise restrict the disclosure (such as seeking a protective order). Without such protections, compelled disclosure under such circumstances can erode (if not eliminate) the protections provided under an NDA. Some may disagree with this position when seen through the lens of recipient…but I believe it misses the point – an NDA is a contractual relationship between the parties, and not creating a cooperative mechanism to potentially limit such disclosures not only hurts the relationship at the outset, but can undermine the value of the confidential information providing a competitive advantage in the marketplace to the parties that exists by virtue of the relationship. In other words, helping the discloser protect its confidential information helps achieve the goals of the relationship. In practice, I have found the rewards far outweigh the risks of not outlining a cooperative mechanism.
  1. Use Needs a Purpose. Many NDAs appropriately state that confidential information cannot be disclosed to third parties, including language that rightly limits disclosure to authorized representatives… while fundamentally ignoring how such confidential information should be used in the relationship. Defining a “purpose” for the use of the “confidential information” is a useful tool that can then limit use to defined criteria consistent with the relationship of the parties under the NDA. For example, an NDA that is designed to evaluate a potential business relationship should limit the recipient’s use of the confidential information to determining whether such a transaction makes sense… not creating an implied license or otherwise obligating the parties to actually enter into such transaction. Although this clearly benefits disclosers, recipients benefit as well – such definition can be useful to ensure that the intended use is broad enough to cover the recipient’s needs while not being overly restrictive and hampering the relationship from the outset.
  1. The Term Is Only the Beginning. Many companies misunderstand the impact of the term of an NDA and its effect on ancillary elements that are equally important. First, is disclosure contemplated throughout the term of the agreement, or should it be limited to a specific disclosure period during the term? If no language is present to the contrary, disclosure throughout the term would likely be the default interpretation… and may not be in the discloser’s best interests. Furthermore, NDAs sometimes default to a specified term that does not correlate to the term needed by the discloser to protect its most sensitive confidential information. For example, what about trade secrets that may be disclosed under the NDA? Obviously, trade secrets cease being trade secrets if disclosed… so a specified term will not work if it expires before the trade secret has lost its value. Don’t think that a perpetual term is the answer either – as a general rule, contracts of continuing (or successive) performance of indefinite duration may be terminable at will. As a result, an indefinite term in an NDA involving the disclosure of trade secrets may place such assets in jeopardy. In such circumstances, good IP counsel is critical to drafting the appropriate provisions under the applicable governing law to protect such valuable intellectual property assets.

Sponsored

The above points reflect some of the problems I have found most prevalent when dealing with NDAs… but the above list is by no means exhaustive. Ownership and non-license provisions, the return (or destruction) of confidential information upon termination, governing law, venue, and severability (to name a few) — all of these provisions are extremely important and worthy of detailed review. The fact is… NDAs should always be carefully reviewed and never taken for granted. Don’t fall victim to the form bank — sometimes it’s what you, the other party and third parties shouldn’t know that can make all the difference.

Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.

Sponsored

Topics

, , , , , ,