NDAs Need to be Part of Your Business DNA

Full Disclosure About Non-Disclosure Agreements

Confidentiality Agreements, also known as Non-Disclosure Agreements or “NDAs,” are an important tool for your business operations.  The “NDA should be part of your business DNA” and we explain below some of the key issues about why, when and how you should use an NDA as part of your business operations.

Why:

In many cases, your company’s confidential information may be among the most valuable assets that your company has.  The “secret sauce” or confidential information of your company might include important customer lists, the unique way that you conduct your business, proprietary business ideas and inventions, financial information, supplier terms, software code, sales and marketing plans, employee information, etc.  The value of this information often will be destroyed if your competitors have access to it.

An NDA is an agreement that determines how you and your company, on the one hand, and other people and companies, on the other hand, can use the confidential or proprietary information that is being exchanged.  The NDA determines what is (and what is not) confidential information, who can access it, how it can be used, the time period for non-disclosure, how disputes are resolved and other important contractual terms.

Also, in order to achieve trade secret status for certain business processes and other proprietary information, you will need to take reasonable steps to protect and maintain the secrecy of your proprietary information.  As you might suspect, a court will not help you protect your trade secrets if you are not willing to make the effort to do so.  You also may have additional legal protections if you can show that certain items of your business are trade secrets.  Confidentiality or non-disclosure agreements are an important part of your efforts to protect your company’s key information and assets and achieve trade secret status.

When:

The NDA is an important part of your company’s DNA and you continuously should be on the lookout for opportunities to put one in place.  A solid, well-crafted NDA can help protect your company when the person on the other side of the table uses your company’s confidential information improperly.

There are many situations when you should put an NDA in place, including when you:

• Hire an employee or engage a consultant (note that you should use a proprietary information agreement that has confidentially and non-disclosure obligations, as well as invention assignment obligations to your company so that your company owns the work product created by the employee or consultant);
• Want to enter into a business deal, such as a joint venture, licensing agreement, or manufacturing, supply or co-marketing arrangement;
• Plan to sell your company and need to enter into confidential discussions with potential acquirers;
• Start to raise money and begin discussions with investors (note that some venture capitalists will not sign NDAs, but often times seed and Angel Investors may be willing to sign an NDA to gain earlier access to your company’s confidential information); or
• Any other transaction or deal that involves your company’s confidential or proprietary information.

It is very important that you put the NDA in place at the beginning of the relationship, because there may be less incentive for the other side to negotiate, prepare and sign an NDA if you already have shared your company’s secret sauce.  If you are late in putting an NDA in place but still have the opportunity to do so, then you should make sure that the non-disclosure obligations look back to the confidential information that you provided before the NDA was signed.

How:

Like many things these days, you can “DIY” (do it yourself) or seek outside assistance (hopefully from a qualified professional).  Whether you go it alone or get some help, below are some key terms in a typical NDA for you to consider:

• Unilateral or Mutual – Will only one party provide confidential information or will it flow back and forth mutually?  This initial question will help you determine the type of NDA to use and how to position the rights and obligations under the NDA to your company’s benefit.
• Purpose – The NDA should define the purpose for the exchange of confidential information (e.g., discussions to enter into a potential strategic partnership or joint venture), so that it cannot be used for any other purpose.
• Confidential Information – Defining what constitutes “confidential information” is one of the most important terms of the NDA.  This definition needs to be sufficiently broad and customized to cover your company’s proprietary information and what you care about most.  You should take the time to review the various components of this definition, so that it covers the specific items that are most important to you company. Equally significant are the exceptions to the definition of “confidential information.”  For example, an NDA often provides that information is not confidential if it is developed independently or is disclosed publicly by another party that has the right to do so.  Be sure to review carefully what is, and what is not, confidential information.
• Access – You will need to determine who can have access to your company’s confidential information.  Is it just one person or a group of executives at the other company?  How about affiliated or sister companies and their representatives?  If the circle is broadened, then you will need to determine what confidentiality obligations they must have – do they becomes parties to the present NDA or are they required to have other similar NDAs in place before they can access the confidential information?
• Non-Disclosure – How long will each party be required to not disclose the confidential information of the other party?  If your company is disclosing confidential information, then your starting point should be that the other side cannot disclose that information so long as it remains “confidential information.”  The receiving party may push back and try to limit its non-disclosure obligations for a certain number of years.
• Term – How long will the NDA be in place and what terms of the NDA will survive its termination or expiration?  As noted above, as the disclosing party, you will want the non-disclosure obligations to survive forever (or for the longest period that you can negotiate) while your information continues to be “confidential information.”

A word of caution: As a contract, a well structured NDA certainly will help define the rights and obligations relating to your confidential information in a more complete way than a verbal agreement.  However, the contract still may need to be enforced in order to protect your rights and, in some situations, it may be difficult to prove that the other party has breached its obligations under the NDA and what the resulting damages might be.  Also, once the air is out of the balloon and your confidential information has been disclosed publicly or to your competitors, you cannot pull it back and significant damage to your company may occur very quickly. Damages for breach of contract may not be sufficient to make you whole in many cases.

If your secret sauce is important to you and your company, then you should invest the necessary time, money and effort to make sure that your NDA is providing the proper contractual protections.  Weigh the pros and cons before you download that sample NDA from the Internet or recycle the NDA that you used at a prior company.  Will the NDA work well when other side behaves badly and leaks your confidential information?

Your turn:

Please let us know in the comment box below how your company uses NDAs and what practices have helped you protect your confidential information more successfully.