Articles

Important Issues to Consider in Non-Disclosure Agreements (NDAs)

July 20, 2017

by Michael J. Cheng

A well drafted Non-Disclosure Agreement (NDA) can be used to protect your business’s trade secrets and other confidential information in a variety of different business related contexts, ranging from a nascent stage of development (e.g., when products, inventions, or ideas are presented to investors) to the potential disclosure of financial information to a prospective buyer of your assets or company. While the law does offer some protection even in the absence of an NDA¹, implied confidentiality obligations can be difficult to prove in court, and litigation over such obligation is often burdensome and costly. An NDA creates a contractual obligation of confidentiality that confers benefits beyond resolving ambiguities that come with relying upon implied confidentiality obligations. First and foremost, having an NDA allows the parties to determine the scope of the confidentiality designation and specify each party’s obligations during the term of the NDA. The advantages are even more pronounced from a litigation standpoint, as an NDA can be crafted to provide specific remedies and pre-determine governing law, venue, and whether arbitration can be compelled. Moreover, with respect to claims for trade secret misappropriation, having an NDA in place should intrinsically support a finding by a court that the owner of the trade secret at issue has taken the necessary steps to make “reasonable efforts” to “maintain secrecy” (both of which are required under California law for trade secret protection²).

Every NDA will differ depending upon its purpose (i.e., the reason for disclosure to the receiving party) as well as the nature of the confidential information. Of course, the context in which you are preparing or reviewing an NDA will depend primarily upon whether you are the disclosing party or the receiving party – in most circumstances for the former your goal is to err on the side of stringency, while for the latter leniency is preferred.  While it is tempting to aggressively advocate for either stringency or leniency (whichever the case may be), remember not to alienate your potential partner/investor/employee/supplier/buyer/etc. or give off the impression that you are unreasonable (or worse yet, litigious). Regardless of what side you are on or how you negotiate, the following issues should always be considered when preparing or reviewing any NDA:

Mutual vs. One-Way

Often only one party will need to disclose confidential information to the other, and in such case a one-way NDA is to be used. It is not uncommon, however, for more than one party to disclose confidential information to another – the most familiar example of which is that of a joint venture. It should go without saying that using a mutual NDA when disclosure is only made by one party can create confusion and a litany of problems. Be sure not to overlook this seemingly obvious issue from the outset when preparing or reviewing an NDA.

Definition and Designation of Confidential Information

Many NDAs use generic and overbroad language to define confidential information. One commonly used definition is akin to the following: the term “Confidential Information” shall include and mean any and all information, data, know-how furnished at any time by the disclosing party whether in oral, written, graphic or machine-readable form, and which is confidential or proprietary in nature or expressed or designated by the disclosing party to be proprietary or confidential, whether or not owned or developed by the disclosing party. At first glance such language might be appealing if you are the disclosing party, but when proposing such boilerplate language remember to consider whether such a broad definition might impede or otherwise frustrate the receiving party from achieving the goal that you both originally set out to accomplish.

An NDA must also specify how the disclosed information will be designated as confidential. A straightforward method is to have all such written materials (including electronically stored information) branded with a legend or marker of confidentiality, and for any oral transmission of confidential information to be verbally designated and substantiated with a written memorandum of such designation. Bear in mind that not everything the disclosing party conveys to the receiving party will be or needs to be confidential, and so remember to require a method of demarcation that is reasonable and realistic for both the disclosing party and receiving party to abide by.

No matter how sensitive the information, exceptions might exist as to the definition or designation of the confidential information, and your NDA needs to take such potential exceptions into account. At least some of the following should be considered: (a) information that is already known or independently developed by the receiving party without use, access, or knowledge of the disclosing party’s confidential information; (b) information that properly becomes known by the receiving party from a source other than the disclosing party that is legally entitled to possess and disclose such information; and (c) information that comes into the public domain by no fault of the receiving party. If you are the disclosing party, it is advisable to include a provision that requires the receiving party to demonstrate the applicability of such exception with written documentation. If you are the receiving party, be wary of whether such written documentation requirement could be onerous or potentially result in the disclosure of your own confidential information.

Receiving Party’s Permitted Use and Disclosure of the Confidential Information

As alluded to above, NDAs can be used for a variety of purposes. A good NDA is one that takes such use into consideration and respectively limits use of the confidential information to such purpose. Additionally, there should be language that requires the receiving party to treat the disclosed confidential information with a heightened standard of care that is no less than the level for which the receiving party treats its own confidential information. Each party should also know whether the receiving party will need to disclose the disclosing party’s confidential information to any employees, associates, third parties, etc., and if so the NDA should include a provision that requires the receiving party to ensure that such employee, associate, third party, etc. be advised of and comply with the obligations of the NDA. The receiving party should strongly advocate for a provision that allows it to disclose confidential information if such disclosure is compelled by operation of law or court order. A disclosing party should respond by requiring advanced notice and an agreement by the receiving party to take all reasonable steps to limit such disclosure to the minimum amount necessary.

Term and Termination of the NDA

Every NDA should discuss two time periods, namely: (1) the disclosure period (i.e., the time between execution of the NDA and its termination); and (2) the confidentiality period (i.e., the time for which the receiving party is required to abide by the permitted use and disclosure requirements discussed above). The appropriate time length of both the disclosure period and the confidentiality period will depend heavily on the purpose of the NDA and the nature of the confidential information. The disclosure period should only last as long as reasonably required for the parties to disclose and receive the confidential information in order achieve their intended purpose. The length of the confidentiality period will depend upon how sensitive the information is and for how long such information remains valuable - typically confidentiality periods range from between 2 to 5 years, though in some cases they can last for up to 10.

Return or Destruction of Confidential Information

Depending on the nature of the confidential information and how it is disclosed, the receiving party might receive originals or copies of material containing such confidential information. The parties should thus decide from the outset the receiving party’s obligations concerning the return or destruction of those materials, as well as which party should bear the corresponding costs. In many circumstances (e.g., if the confidential information is no longer valuable) such a provision might seem gratuitous, but if you are the disclosing party don’t overlook the possibility that you will want materials returned or destroyed before the end of the confidentiality period - it’s better to be safe than sorry and therefore require compliance within an agreed upon specific number of days. If you are the receiving party, before agreeing to any time frame for return or destruction, verify whether that time frame is realistic and be sure to require that all requests be made in writing.

Miscellaneous Provisions

Lastly, each NDA should include certain miscellaneous provisions that set forth requirements and expectations that have not been addressed above. One such miscellaneous provision that a disclosing party should always want to include is a statement that the disclosure of confidential information does not confer any ownership interests, licensing rights, etc. nor is such disclosure intended to be construed as a representation or warranty as to the accuracy, completeness, condition or suitability of the confidential information.

For purposes of enforcement, a disclosing party will also want a provision under which the receiving party acknowledges the irreparable harm caused by improper disclosure and thereby agrees that the disclosing party be entitled to injunctive relief or an appropriate degree of specific performance for actual or threatened breaches of the NDA.

In the event of litigation, the disclosing party and the receiving party might each consider whether the NDA should dictate the governing law as well as jurisdiction and venue of any lawsuit or instead include a provision that requires the parties to engage in arbitration³. Each party might also consider including a provision that awards attorneys’ fees to the prevailing party of a dispute arising from the NDA – typically it is the disclosing party that prefers an attorneys’ fees provision.

Unless you are in a vastly superior bargaining position, you can expect the other side to request concessions or at least an explanation of the necessity of including certain provisions. As alluded to above, avoid the urge to adopt an adversarial mindset or otherwise approach the NDA as if the outcome were zero-sum. Instead, remember that successful negotiation requires the ability of you (or your advocate/attorney) to distinguish critical issues from relatively inconsequential ones. Such will allow you to astutely obtain favorable terms and conditions without conceding too much or otherwise appearing unreasonably tenacious.

If you require assistance in the drafting or review of an NDA or just have general questions, please contact Michael Cheng, Esq. by telephone at (408) 286-5800 or via email at michael.cheng@berliner.com.

****

[1] California courts have held that an implied confidentiality obligation exists in a variety of business relationships and transactions, such as negotiations for the sale of a business, licensing agreements, employment or independent contractor agreements, and joint ventures.

[2] See California Civil Code section 3426.1(d). 

[3] NDAs that involve highly technical or otherwise esoteric information and issues might be best resolved by an agreed-upon arbitrator with knowledge and experience in such field.