An NDA is a legal agreement between a company and a counter-party of that company to exchange information, for the purpose of a project, a licensing opportunity, marketing campaign, R&D or sourcing etc. Examples of information which can be protected by a NDA are business proposals, financial data, new ideas and trade secrets. Basically NDAs protect sensitive commercial and/or technical information from disclosure to others.
Whenever company confidential information is disclosed to any persons or company outside, it is common practice that a fully signed NDA is put in place between the parties. Without an NDA in place, it may be wise to limit to some degree any discussions or negotiations taking place. The purpose and intention of an NDA is to set out the terms and conditions under which each party will disclose confidential information to the other, to ensure that confidential information is not passed on or made public and to define the obligations of each party to preserve confidentiality for a defined period of time, from days to years.
The use of an NDA can prevent the forfeiture of valuable intellectual property rights. Under patent law, the public disclosure of the inventive idea can be deemed as forfeiture of patent rights to that invention. There are a number of standard exceptions built into NDAs, the key one being where the information is already in the public domain. In other words, if the confidential information you are trying to protect becomes public information then there is a good argument any NDAs covering it would become unenforceable.
However, NDAs are often misunderstood or used in an incorrect manner, which can have serious legal consequences. Besides which, the terms and conditions of NDAs are often times breached, without any apparent repercussions.
How does a Non-Disclosure Agreement work?
Under an NDA, the signer promises the recipient that he will not disclose certain information to any third parties, except under circumstances described within that contract. The value of the NDA is meant to be that…
- The signer is legally bound by his promise not to disclose the information to third parties.
- If he breaks that promise, the recipient can go to court to stop him and/or can sue him for damages or for other legal remedies.
The primary perceived advantage of NDAs is that they provide protection of important information at relatively little cost. The chances are that a party which signs an NDA will be persuaded into compliance by the mere threat of legal consequences if he does not.
Types of Non-Disclosure Agreements:
There are different types of NDAs such as “One-Way Non-Disclosure Agreements” and “Mutual Non-Disclosure Agreements” when talking to other companies and “Confidentiality Deeds” when talking to independent individuals.
- One way: Used when just one party is disclosing
- Mutual: Used when both parties are disclosing
- Multi-party: Used when more than two parties are involved.
- Personal: Used for contractors / temporary staff hired via an Agency where there is already an NDA in place with the Agency.
- Confidentiality Deed: Used before discussions with individuals (not a company) where there are no other agreements in place.
It is common practice within companies to have some standard NDA templates available, which brings some advantages and disadvantages to be discussed later.
The key contents of a Non-Disclosure Agreement
To complete the appropriate NDA and have it enforceable, it is important that some key pieces of information are completed. Complete full details of the parties involved, that is their full legal entity (company) name and registered office address. This may not necessarily be from where they are operating or trading.
Ideally, an NDA should contain the following:
- Registered names of all parties concerned.
- Registered addresses of all parties concerned.
- Relevant laws governing the country where the company is registered.
- The purpose of the NDA – ideally not too broad, nor too specific.
- The start and end dates of the agreement.
- Details on how the disclosed confidential information may and may not be used.
- The standard by which the parties involved will handle the disclosed confidential information.
- A provision stating that no implied license is being granted
- Signatures from both parties
- Details of who initiated the NDA on behalf of the first party?
The NDA should be signed by the parties involved and by persons authorised to sign such legal documents.
When defining the ‘purpose’, the wording should be as accurate as possible. In other words, the purpose should cover the subject of the negotiations but only the subject of the negotiations. One can for example name the technology or solution and usually, it is a good idea to mention the company name in the purpose. One should avoid using internal project or prototype names in the purpose.
Defining the purpose well protects the company’s confidential information as the other party is only allowed to use the company’s information in order to fulfil the purpose. Therefore a narrow purpose limits the (mis)use of the company’s confidential information. If there is a need to cover several areas of co-operation, it is often better to sign several NDAs rather than one with a comprehensive purpose. Clearly define what you are trying to achieve in the purpose section.
If the NDA is too general or too broadly worded, the non-disclosure agreement may not be enforceable and if you are too specific you may not cover every aspect needed. A good example of “purpose” is “to evaluate a pilot Web based service using end-user generated content”. A bad example is “to evaluate Web based services” (too general) OR “to evaluate a Web based service for Amsterdam using content generated by the 14 to 24 age group (too specific)”.
Some challenges to consider
Just to clarify, an NDA should be better than no NDA, but there are some challenges related to putting a good NDA in place some legal and others non legal in nature.
- Different levels of legal & IP maturity or sophistication:
When two of more parties are seated around a table, it is important to remember that not all of the parties will be at the same level of maturity or sophistication when it comes to legal and/or intellectual property matters.
- Uncertainty as to what has been disclosed
A problem may arise when the NDA is not clear on what is to be disclosed, i.e. it may simply state ‘my invention’ or ‘invention relating to a specific product’, and for what purpose the disclosure is being made. It is not unknown that years later the recollections of what was disclosed and who copied what are far apart.
- Too broad definitions
Too wide or general definitions in the NDA leave it open for the other party to claim that similar and other inventions done by your R&D with no relation to his disclosure were nevertheless disclosed by him to you, it therefore covered by the NDA and thus you have no right to disclose or utilize them. Such claims can usually be fought off, but it takes time and money.
- Complex corporate legal structures
If the other party signing the NDA has a complex corporate legal structure, with say multiple owners, diverse subsidiaries, broad geographical coverage, then some thought should be given to exactly who within the 3rd party will have access to the confidential information to be shared. There may therefore be value in limiting who actually can access the confidential information, and in clearly specifying this within the NDA. The solution would be to have some control group restriction.
- The ethics of the people involved
An NDA, like all legal agreements or contracts, is only as good as the person signing it. No matter how well drafted it may be, if the person who signed it wants to breach the terms and conditions of the NDA, he will. And, more often than not, he will do it in a way that makes life difficult for you. So NDAs are clearly not a concrete protection for your confidential information. Sometimes people want you to sign them for a different reason than the one that they present.
- Enforcing the NDA
It may be relatively painless to sign the NDA, but are you willing and able to enforce it if things go amiss? Even if you have a good NDA in place, and you can clearly show the breach of it, ultimately you have to take the other party to court to protect your legal rights, which is costly and may even damage your reputation. Mediation services may be an alternative approach.
- Some NDAs are too complicated
Some NDAs are often too complicated and extremely difficult to understand by everyone except legal experts. This defeats the primary purpose of the NDA, namely to encourage the other party not to divulge confidential information. If the other party does not really understand the NDA and what is involved, then that is not a good situation and it should be avoided.
- Over zealously applied
It is good business to only use a legal agreement or contract, especially one that tries to restrict the other party’s liberty to speak, if and when you really only need it. Besides which, using NDAs too liberally just encourages more of the above problems listed.
- Issues with various statutes and laws
Various statutes and laws may nullify the protection the NDA would otherwise give. One such example is the Freedom of Information Act in the UK. This issue is more likely to occur in agreements with Government entities.
- Confidential information versus trade secrets
It is important to remember that all trade secrets are confidential information but not all confidential information is a trade secret. A trade secret is distinct from a broader category of confidential information.
If trade secrets rather than ordinary confidential information is being shared between the parties, then the NDA should clearly state this. The NDA should also contain some content that captures that fact that the parties consider trade secrets to be a special category of confidential information. The NDA should also specify separate protection durations for ordinary confidential information and trade secrets. The use of a distinct, different term of protection for trade secrets provides for indefinite protection of trade secret information. For trade secrets, the parties should ideally be obliged to main confidentiality perpetually.
Given the recent passage of the Defend Trade Secrets Act in the US and the EU Directive on Trade Secrets about to be enacted by all member states by June 2018, it is most important that trade secrets as opposed to ordinary confidential information is carefully considered when signing NDAs.
The final signed NDA results from some negotiation between the parties. Negotiation involves three basic elements, namely the process, the behaviours and the substance.The process refers to how the parties involved actually negotiate, the context of the negotiations, the parties to the negotiations, the tactics used by the parties, and the sequence and stages in which all of these play out. Behaviour refers to the relationships among these parties, the communication between them and the styles they adopt. The substance refers to what the parties negotiate over, the agenda, the issues, the positions, the interests, the options, and the agreement reached at the end.
The challenges listed earlier in this article does not mean that NDAs are useless. Far from it. Rather, they illustrate that NDAs need to be used carefully if you want actually to achieve protection for your confidential information.
Good practice with respect to properly managing NDAs involves:
- having some standard templates available (although be flexible where necessary)
- maintaining a list of authorized signatures,
- having a central data-base in place to store all such NDAs,
- having a process and system in place to manage and care for all of the actual confidential material exchanged under the NDAs,
- providing standard training material for regular training sessions on this subject matter to employees
- conducting regular audits.
NDAs are meant to protect your most important business assets, so it is important to treat NDAs just as importantly as those assets. Time should be spent to ensure that the NDA is drafted carefully and actually covers the points you want to deal with. If the NDA is not clear about what you are trying to protect, something is going wrong. Ensure the person who signs the NDA knows exactly what he can and cannot do. Do not leave him to decipher the legal wording alone. If you do want to use an NDA, be prepared to fight to protect it.
Donal O’Connell is IPEG consultant and Managing Director of Chawton Innovation Services. He provides a software solution to help companies manage the confidential information received under NDA from 3rd parties.