Signing a Non-Disclosure Agreement (NDA) is an important prelude to many business discussions that is too often overlooked or bypassed. NDAs, also called Confidentiality Agreements, serve to protect a company’s confidential information by imposing terms and conditions on the disclosure and use of that information by parties with whom the company shares it. If your company discloses its confidential information without first requiring the recipient to sign an NDA, you may have little or no recourse if the recipient subsequently uses the information to further its own business and/or to compete with yours. As a result, when you enter into discussions with potential business partners (be they individuals or other companies) and expect to be disclosing any confidential information, you should usually insist on the recipient signing an NDA.
An important caveat is that venture capitalists typically will not sign NDAs, and asking them to do so is usually a major faux pas. A VC may consider investing in several companies with similar business plans and even similar technologies, so signing an NDA with each company would expose the VC to claims that it misappropriated information from a business it chose not to fund for the benefit of one of its portfolio companies. The fact is that the risk of a VC stealing your idea is almost zero – it would be antithetical to their business model – so don’t lose sleep over it.
Whether you are disclosing confidential information or receiving it (or both), there are a few standard NDA concepts you should understand:
- Scope of Use. An NDA should define the purpose for which confidential information is being disclosed (ex. negotiation of a potential license) and the permissible use of such confidential information (ex. evaluating the technology to be licensed). The party disclosing the confidential information will want the description of the purpose and permissible use to be narrowly tailored to the situation, whereas the receiving party may prefer a broader definition that might, for example, allow the recipient to use the confidential information to evaluate possible business deals with the disclosing party other than those already under discussion (ex. an acquisition of the disclosing party).
- Definition of Confidential Information. Information disclosed pursuant to an NDA is usually identified as confidential in one of two ways: (1) the disclosing party is required to label all confidential information as “CONFIDENTIAL” (or something similar), which also requires the disclosing party to reduce all confidential information to writing; or (2) “Confidential Information” is defined in the NDA to include any information that falls into given categories. Requiring all confidential information to be reduced to writing and labeled as such is usually strongly resisted by the disclosing party because of the burden of labeling and the risk that some confidential information will be disclosed orally or visually but not reduced to writing, and therefore not protected by the NDA. On the flip side, a receiving party will resist a definition of “Confidential Information” that includes categories of information it deems too broad, such as a catch-all category for all information the receiving party should “reasonably know” is confidential.
- Exceptions and Exclusions. There are a few exceptions to the definition of “Confidential Information” that are included in most NDAs: (1) information already in the public domain at the time it is disclosed or that later becomes part of the public domain other than in violation of a confidentiality obligation; (2) information in the possession of the receiving party at the time of disclosure or independently developed by the receiving party without reference to the disclosing parties confidential information; and (3) information the recipient receives from a third party other than in violation of a confidentiality obligation. NDAs also typically include an exclusion from the recipient’s obligations where disclosure is required by law. If such an exclusion is included, the disclosing party will want to be sure the NDA requires the receiving party to promptly notify it of required disclosures and, where possible, gives the disclosing party an opportunity to appeal the determination that disclosure is required.
- Residuals. A touchy topic in negotiating an NDA can be the right of the receiving party to make use of knowledge obtained as a result of having access to confidential information and retained in the memory of the recipient’s employees. Receiving parties argue that because this “residual” knowledge cannot be extracted from the employee’s brain or separated from knowledge the employee obtained from other sources, it would be unreasonable to prohibit the use of such information. Disclosing parties will seek to eliminate or at least limit the scope of any residual rights.
- Term. The duration of a recipient’s obligation to maintain the confidentiality of information disclosed pursuant to an NDA should depend on the type of information disclosed. Where confidential information truly has an unlimited lifespan (ex. Coke’s secret formula), it makes sense for the confidentiality obligation to continue indefinitely. It is often the case, however, that confidential information has a more limited shelf life, in which case it would be appropriate to allow the receiving party’s obligations to expire after enough time has passed.
It is important to remember that while NDAs typically contain a few standard provisions, the devil is in the details and each transaction is different. Before you recycle an old NDA for a new deal, you need to be sure that the terms of the NDA, particularly the definition of “Confidential Information,” are appropriate.