by Matt Storms
Because of the frequency of which they are used, one of the first forms that we automated at AlphaTech was the Confidentiality Agreement. Sometimes they are called Nondisclosure Agreements (NDAs), Confidential Disclosure Agreements (CDAs), Proprietary Information Agreements (PIAs) or Secrecy Agreements, but for the most part, they each are the same thing trying to accomplish virtually the same objective: limit the disclosure and use of one’s confidential information.
So, if they are all trying to do the same thing, why are there so many forms out there? The answer is that it often comes down to legal limitations, the one-way versus two-way (or mutual) nature of the agreement, and exceptions or limitations to the disclosure and use limitations. For example, many states consider when employees sign a Confidentiality Agreement it is a restrictive covenant (or noncompete). As such, to be enforceable in most states, the agreement must have “reasonable” limitations on variables such as duration. These legal restrictions are not typically the same for two businesses entering into an NDA.
The balance of this post examines the details of an NDA.
Definition of Confidential Information
Most NDAs define “Confidential Information” very broadly. There are commonly carve-outs for things like information that ends up in the public domain, information already in the possession of the recipient, and information conveyed to the recipient from someone else who was not under an obligation to keep it confidential. It is also common to see trade secrets carved out of the confidential information definition if the NDA imposes more strict obligations on use and disclosure of trade secrets. Sometimes one sees a carve-out for information that is “independently developed” by the recipient without the use or benefit of the confidential information provided by the discloser. This last carve-out is appropriate in some contexts, but not in others. Regardless, if the “independently developed” provision is incorporated, be sure that it does not permit “reverse engineering” of confidential information.
A controversial provision that one sometimes sees in NDAs is a requirement that in order to be considered within the definition of confidential information, the information must be marked “confidential” or confirmed in writing as confidential if communicated orally. This limitation is fine for arrangements that are very limited in scope and have a specific set of documents that are considered confidential. However, companies should be wary of such a limitation for continuing relationships or arrangements in which many people are exchanging a lot of confidential information. The process of marking and communicating what is confidential (consistently) can get unwieldy very quickly. A failure to follow just once this “simple” procedure of marking something confidential, can lead to disastrous results.
Use and Disclosure of Confidential Information
An important but sometimes overlooked provision is the scope of the permitted use of confidential information. The scope of use should be broad enough to accomplish the intended purpose of the disclosure (e.g., to enable the consultant to perform under a consulting agreement or explore the possibility of entering into a strategic partnership with another company), but not overly broad to enable shenanigans. The use provision should be tailored to the specific context of the intended use. Also, it is common to see a provision that enables disclosure if the recipient is legally compelled to do so (e.g., under a court order or subpoena).
No License or Warranty
It is common to have a provision in an NDA that disclaims any license or warranty being conveyed when delivering the confidential information. Sometimes, when something is delivered, there can be an implied warranty or license associated with the item being delivered (that the information is accurate, that it works, that it doesn’t infringe on the rights of others, that the recipient can use it, etc.). This type of provision typically disclaims those.
Duration of the NDA
NDAs typically have two elements of duration. The first element is the period during which disclosures can be made that are covered under the NDA. For example, for employees or consultants, this is typically the period during which the employee or consultant is engaged by the company. The second element is the period during which confidentiality and use restrictions apply after the agreement comes to an end. A common restriction one sees for employees is that the duration lasts for a period of two years following the end of the employment.
Governing Law, Jurisdiction, Forum/Venue
Most NDAs address which state’s (or country’s) law applies when interpreting the NDA. Many NDAs also address where a dispute will be resolved. The provision is less important when the two parties are located in the same area. It becomes more important (and often negotiated) when the parties are not located near one another or are located in different countries. Common compromises are to (i) choose one party’s state’s law (or country’s law) to govern the contract and the other party’s location as the forum/venue, (ii) delete the provision altogether, making it unclear which state’s law applies and where disputes are to be settled, or (iii) in a two-way NDA, choose a neutral but relevant state’s law to govern the agreement (e.g., Delaware, if both companies are incorporated there) and require the discloser (the company enforcing) to use the recipient’s location in the event the discloser would like to sue the recipient.
Right to Equitable Remedy
Many NDAs will include a provision that states if the recipient breaches the agreement, the discloser will be entitled to equitable or injunctive relief. In the NDA context, equitable or injunctive relief refers to getting a court order to stop the recipient from using or disclosing the confidential information. Sometimes, this type of relief can be more difficult to obtain than monetary damages. However, in most contexts involving an NDA dispute, the discloser’s top priority is to prevent the recipient from continuing to use or disclose the confidential information. As a result, the purpose of the provision is to attempt to stipulate that the requirements to get an equitable or injunctive remedy have been met.
Entitlement to Attorneys Fees in the NDA
Many NDAs contain a provision covering attorneys’ fees. Sometimes they are structured as a prevailing party obligation—the winner gets the loser to pay the winner’s attorneys’ fees. Other times, especially in one-way NDAs, the attorneys’ fees provision requires the recipient to pay the discloser’s attorneys’ fees in enforcing the terms of the NDA.
Return of Confidential Information and Materials
Most NDAs address the situation of what happens at the end of the term of the NDA with regard to materials that contain confidential information. Most NDAs require that materials containing confidential information either be returned or destroyed. Some NDAs require that if the recipient destroys the materials, the recipient is required to certify that the materials have been destroyed.
Sometimes NDAs contain a provision that entitle the recipient to retain a copy of all confidential information for record keeping purposes. Query whether maintaining a single copy for recordkeeping purposes on a server that everyone has access to is consistent with the expectations of most companies disclosing confidential information. If retaining a copy for recordkeeping purposes is included, be sure that type of issue is addressed. Similarly, sometimes the NDA will contain a provision that enables people within the recipient organization to retain the “residual” information in their memory. Of course, regardless of the presence of this particular provision, people cannot readily “delete or destroy” information in their mind without collateral grave implications. However, be sure to understand what people can do with that residual confidential information under the terms of the agreement.
Other Provisions in the NDA
Depending on the industry or substance of the disclosure, there can be additional provisions included within the NDA. For example, there can be some export limitations for certain types of information. The NDA can address those limitations. The NDA can also cover certain disclosures and limitations that are applicable to insider trading restrictions under federal securities laws. These and other issues should be considered when developing an organization’s NDA forms and when reviewing those received from another company.
by Matt Storms |