An Overview of Using Non-Disclosure Agreements

An Overview of Using Non-Disclosure Agreements

A company may use a wide variety of agreements, including non-disclosure agreements, to restrict another party from using or disclosing certain trade secrets. Using written non-disclosure agreements is a great way to protect your intellectual property and communicates to the other party that you take the protection of your trade secrets very seriously. If your company is disclosing sensitive information either internally to its employees and independent contractors or externally to any third parties, you want to be sure that the recipient of that information uses it for an authorized purposes only and does not otherwise disclose the information to other parties, such as your competitors.

Formats for Non-Disclosure

There is no universal format for non-disclosure agreements. Many of the clauses that are standard in non-disclosure agreements can also be found in the following types of documents:

  • Employment agreements;
  • Independent contractor agreements;
  • Investment agreements;
  • Technology licensing agreements;
  • Corporate governance documents;
  • And more…

Who is subject to non-disclosure restrictions?

Some examples of parties that may be subject to the restrictions of a non-disclosure agreement include employees, independent contractors, potential business partners, advisors, and potential investors. If only one party is restricted from using or disclosing the other party’s confidential information, then the agreement is considered to be one-way. If both parties are restricted from using or disclosing the other party’s confidential information, then the agreement is considered to be mutual.

Maintaining a Competitive Advantage

An agreement not to disclose (or a “non-disclosure agreement”) is really intended to restrain one or both parties from using and disclosing the other party’s confidential information, with some specific exceptions. A party that wishes to restrict the use and disclosure of its confidential information would argue that the information subject to non-disclosure gives it a competitive advantage in the marketplace and that it would suffer serious harm if such information would become publicly available or known by third-parties. Many non-disclosure agreements really stress this point by specifying certain remedies, such as preliminary injunctions, in lieu of or in addition to monetary damages.

Essential Elements of a Good Non-Disclosure Agreement

As mentioned above, an agreement not to disclose confidential information or trade secrets of a party can be a separate document that is many pages in length or can appear as a series of clauses in another agreement (i.e. employment agreement, terms of service, licensing agreement etc.). In any case, there are some core terms that are essential to creating a robust non-disclosure agreement and they are listed below. Make sure you take into consideration the following important non-disclosure terms:

  • Name the parties to the transaction. The first thing you should do in an NDA is to name the parties to the transaction. If the agreement also applies to the employees, independent contractors, or affiliates of one or both parties, then that point should also be mentioned.
  • Define the authorized purpose of the disclosure. The authorized purpose is the specific purpose for which the disclosure is taking place. It sets forth the permitted use of the confidential information. For example, the disclosure could be in anticipation of evaluating a business relationship, advice, or an investment (either would be an authorized purpose). An authorized purpose could also be as specific as testing or providing feedback prior to a launch. If you are disclosing confidential information, you should make the permitted use of your confidential information is narrowly defined so that the other party is not authorized to use that confidential information for any other purpose.
  • Define confidential information. The term “confidential information” should be defined so that there is no confusion as to what types of information are considered confidential. Usually, a broad range of information types would be specified, such as trade secrets, business plans, mockups, customer lists, financial reports etc. You may also want to specify that the non-disclosure agreement itself is also considered to be confidential, as is any information that should reasonably be understood to be confidential, due to the nature of the information itself or the circumstances of disclosure, whether or not such information is actually marked as “confidential”.
  • Carve out exceptions to the definition of confidential information. There may be certain instances where either party should not be bound by obligations of confidentiality and non-disclosure. For example, a party may have independently discovered or developed similar information without reference to the confidential information and prior to their obligations of non-disclosure. Another example of an exclusion from the definition of confidential information would be any information that is publicly known and generally available in the public domain prior to disclosure by the disclosing party. The recipient of confidential information would obviously want to broaden the types of applicable exceptions, while the disclosing party would want to set strict limits. See further down this article under “Exceptions to Confidential Information” for standard examples.
  • Define the obligations of confidentiality. It’s important for the party who is disclosing confidential information to be very specific about what they expect from the other party. For example, the party disclosing the confidential information will want to limit the use of such information to any specific authorized purpose and may require that any employees, consultants, or affiliates of the receiving party also be contractually bound by strict obligations of non-disclosure.
  • Other terms, such as maintenance of confidentiality for a certain number of years (typically between 3-5 years) and a requirement to return or destroy the confidential information at the request of the disclosing party, should also be included.
  • Disclosure in advance of a business relationship. There are many more terms that are specific to the type of agreement being entered into. For example, a non-disclosure agreement that is being signed between two parties in anticipation of a business relationship may contain a clause that all confidential information is provided “as is”, without warranties and without any obligation to proceed with any future transactions
  • Disclosure in anticipation of an investment opportunity. If there is a disclosure in advance of a potential investment opportunity in a non-public company, certain securities compliance terms should be included. Both parties should provide a warranty that they are aware of restrictions imposed by the United States securities laws on the purchase and sale of securities by any person who has received material, non-public information. Often times, an investor (especially VCs) will not sign non-disclosure agreements since they do not want to limit their participation and contributions to other venture opportunities. In that case, any important securities disclaimers should be included by your company’s lawyers in the related investment documents.
  • Disclosures in anticipation of employment. An employer may want to modify the type of non-disclosure agreement, depending on the type of personnel who is signing the agreement along with the type of interest that the employer wishes to protect. For example, for senior management who may be exposed to a greater breadth of sensitive trade secrets, an employer may want to emphasize non-disclosure, non-solicitation of personnel, and non-competition. Note that there are certain jurisdictions, such as California, where non-competition agreements may be partially or entirely unenforceable, no matter the impact on the employer’s business. However, even California has exceptions to this rule so make sure you do your research or consult with a lawyer if you have any doubts.
  • Remedies. Remedies for breach of confidentiality obligations are often different from remedies for other types of contract breaches. In short, any disclosure of sensitive trade secrets and confidential information may result in irreparable harm where money damages may not be adequate. Therefore, it is essential to include contractual terms that permit the party disclosing confidential information to seek equitable remedies (in lieu of or in addition to monetary ones) such as injunctions to prevent further disclosure or require certain actions (like the destruction or return of such information to the disclosing party). Because of the time-sensitive nature of breach, the disclosing party will want to obtain these kinds of equitable remedies very quickly and will ensure that the non-disclosure agreement used supports this effort by waiving requirements to post a bond, which may lead to further delays.

Exceptions to Confidential Information

As mentioned above, exceptions to any definition of “confidential information” should be specifically stated in the subject agreement. Below are some exceptions to the definition of confidential information that are commonly found in non-disclosure agreements, and thus not subject to the non-disclosure obligations. Note that any reference to “disclosing party” means the party that is disclosing confidential information, whereas any reference to “receiving party” means the party that is receiving confidential information. Typically excluded from confidentiality obligations are:

  • Any information publicly known and generally available in the public domain prior to the disclosure by the disclosing party;
  • Any information becoming publicly known and generally available in the public domain after disclosure by the disclosing party, through no actions or inaction of the receiving party;
  • Any information in the possession of the receiving party without restrictions at the time of disclosure by the disclosing party, as shown by the receiving party’s files and records at the time of disclosure;
  • Any information obtained by the receiving party from a third party without restriction, and without breach of any obligations or confidentiality by any party, whether or not they are parties to the non-disclosure agreement; and
  • Any information that is independently developed by the receiving party without use of or reference to the disclosing party’s confidential information, as supported by the receiving party’s files and records at the time of disclosure.

Legally compelled disclosures (i.e. disclosures that are required of one party by a court of law or government body) should also be accounted for in any non-disclosure agreement. However, legally compelled disclosures do not negate the status of confidential information. The party that is subject to such compelled disclosure should be required, in writing, to provide written notice of the court or government order to the disclosing party so that the disclosing party has a reasonable opportunity to oppose, prevent, or limit any corresponding disclosures.

Simple Steps you can take to Maintain Confidentiality

  1. Use a non-disclosure agreement whenever possible. This applies equally to employees, contractors, vendors, potential investors or business opportunities. If you are disclosing your company’s confidential information, you should make sure that any authorized purpose is narrowly defined so that the recipient has a very limited right to use that confidential information, consistent only with your defined authorized purpose.
  2. Limit the disclosure of your company’s confidential information to information that is necessary and material to your discussions and only to parties on a “need-to-know” basis. Remember that the best protection for your trade secrets and confidential information is to actually treat them like secrets and never disclose more information than necessary, using your reasonable judgment.
  3. Perform regular internal audits of your confidentiality and security practices. Try to make reasonable judgments about the adequacy of your protective measures and the acceptability of the possible release of confidential information to the interested parties then work backwards to improve your company’s controls and processes. Are your non-disclosure agreements robust enough to withstand third-party scrutiny? Are you using standard, current terms that will communicate that you have done your diligence?

Other Ways to Protect your Intellectual Property

Non-disclosure agreements are just one method to protect your valuable intellectual property. A company that wants to protect its intellectual property may also seek various types of copyright, patent, and trademark registrations. Also, the company may want to implement physical and network security precautions to supplement and bolster its contractual non-disclosure efforts.

Startup Documents offers a fairly comprehensive Non-Disclosure Agreement template generator. Remember to always consult with a lawyer if you have any questions!

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