Business Law Newsletter
Contracting for Protection – Non-Disclosure Agreements
Proprietary information, such as confidential business information, trade secrets, and intellectual property, may be worth millions of dollars. Public exposure or use by others may potentially dilute or destroy the value of such information. Nevertheless, at times, necessity requires businesses to reveal proprietary information to others. To ensure that the information revealed remains confidential and shielded from the public or competitors, a non-disclosure agreement (NDA) can be a useful device to ensure such protection.
An NDA is a contract meant to prevent the unauthorized disclosure of confidential information and to provide remedies for when such disclosure happens. An NDA may be a one-party document binding on only one individual or may involve multiple parties, usually depending on whether there is mutual disclosure. Common situations in which NDAs are used include:
- Contemplated business relationships, e.g., partnerships or joint ventures, distributorship relationships, or acquisition of one company by another.
- Obtaining financing or venture capital funding.
- Employment situations, e.g., hiring and firing.
Common NDA Provisions (Not Intended as a Comprehensive List)
- Statement of the purposes for the exchange of proprietary information.
- Whether both parties are protected and obligated under the NDA.
- Comprehensive and clear definition of the proprietary information and sources protected.
- Actual agreement that the receiving party will not use, disclose, or make copies of the proprietary information, except as allowed in the NDA.
- Agreed-upon restricted uses and treatment of the proprietary information (where it will be kept, whether it may be copied, and labeling it “Confidential”), and who will have access to it.
- Exclusions to the promise to keep the proprietary information confidential (usually includes information the receiving party already has, is publicly available, or has received from another source).
- Guidance in the event the receiving party is compelled to disclose the information, such as by a court or government order.
- How the information must be treated after termination of the NDA (usually return or destruction of the documentary proprietary information is required).
- Duration of the exchange of information and the promise to keep the information confidential, which may be different. Commonly the non-disclosure obligation lasts longer and can theoretically be indefinite, although terms of three to five years are more common. Courts have been known to shorten terms they consider too long.
- A provision that no license to use the information is being granted and no partnership or other relationship is being created by the NDA.
- Remedies for breach of the agreement, including an agreement to injunctive relief.
- Especially in employment agreements, a covenant not to use the proprietary information to compete with the disclosing party may be included (commonly referred to as a “non-compete clause”).
- Governing law, which may be crucial as states vary widely in the validity and enforcement of NDAs.
Considerations When Entering Into an NDA
States differ in the recognition and enforcement of NDAs. Courts in many states will enforce NDAs as written. However, some courts give little deference to NDAs and have invalidated an entire NDA because of just one offending provision. Other courts may rewrite the NDA to make it (and its restrictions) more “reasonable.” Some states (such as California) generally refuse to enforce NDAs against former employees when the NDA contains a non-compete clause.
Parties usually consult with an attorney to understand the laws in their respective states before entering into and placing reliance on an NDA. Important questions to consider before entering into the NDA include exactly how broad the protection will be and how long the protection will last. The answers to these questions typically depend on applicable state law and the terms of the NDA.
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