Non-disclosure agreements, or “NDAs,” are often relied upon at the start of a business relationship to allow the parties to disclose important information while protecting the confidentiality of that information.
It provides a “safe zone” for the exchange of important information. Whether you are requested to sign an NDA, or are requesting another party sign one, you should understand your obligations, and how the NDA will apply to protect the confidential information disclosed.
NDAs require one or both parties to the agreement to hold certain, usually defined, information in confidence. Such agreements are narrowly drawn, focused in scope and duration and best used for short-term arrangements. Once parties have determined they want to pursue a long-term relationship, it is preferrable to enter a more comprehensive agreement governing additional aspects of the relationship, and which may include confidentiality provisions.
There are two kinds of NDAs: mutual and unilateral. A unilateral NDA is one where only one party agrees to hold information in confidence. These are typically used where only one party will be providing confidential information. If it is anticipated that both parties will be exchanging confidential information, then a mutual NDA is recommended. In a mutual NDA, each party agrees to hold in confidence the confidential information of the other.
Here are some key issues to consider in reviewing and signing an NDA:
What is “Confidential Information.” The definition of what constitutes “confidential information” outlines the scope of the agreement and the protections the agreement affords. It is important to ensure that all information that needs to be treated as confidential is covered by the agreement. This includes not only reviewing the definition of confidential information in the NDA, but also any exclusions or carve-outs to the definition. Examples of typical carve-outs include information that becomes public knowledge without breach of the NDA, or information provided to the receiving party by a third party with no confidentiality obligations.
Time limits. While NDAs are often entered into at the start of a relationship, parties should pay close attention to the limits surrounding confidentiality. Disclosing parties will want the NDA and the confidentiality provisions extending indefinitely, to ensure confidential information provided pursuant to the NDA can never be disclosed by the receiving party and remains confidential. Conversely, a receiving party may not want to be bound by such terms indefinitely and prefer a set term. Provisions may be included whereby the disclosing party can demand the return or destruction of the confidential information at the end of the term of the agreement or upon the parties determining not to pursue a business relationship.
Use of confidential information. A strong NDA should outline how the receiving party will use the confidential information provided. This includes whether and how the receiving party can share the confidential information with advisors, representatives, and affiliates, what disclosure might be permitted (such as when required by law), and restrictions, such as a restriction on using the information to develop their own products. Such restriction is particularly relevant regarding intellectual property, and NDAs should note that the provision of the confidential information does not grant a license or right to the use of the confidential information. Some NDAs may include non-solicit provisions, as the disclosing party seeks to protect itself from the receiving party using such information to poach employees or customers.
An NDA is a key document particularly at the beginning of a business relationship and ought to be carefully considered before signing.