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When
and How to Use Non-Disclosure Agreements By
Jay Hollander
Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.
The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances. Summary: Many
businesses often need to reveal some of their confidential
information to new employees, independent contractors,
venture capitalists or bankers. But they want to make sure
the information stays relatively secret. This article explains
how non-disclosure agreements allow confidential information
to be revealed without fear.
Contents: This
article contains the following headings:
-
Introduction
Unilateral versus Mutual Agreements Differences in Tone
and Obligation The Basic Elements of an NDA The Consequences
of Wrongful Disclosure
-
Protect
Your Own Secrets, Too
Introduction
Most growing businesses face a peculiar problem when it comes
to their trade secrets. On the one hand, they have a particular
ace up their sleeve that they believe will give them a leg
up on their competition, or even a brand new idea that will
revolutionize the market. On the other hand, they don't have
the financial or intellectual capital to go it alone. They
must, therefore, reveal these trade secrets to new employees
or independent contractors, joint venturers, venture capitalists,
bankers, etc.
This
is where confidentiality agreements, also known as non-disclosure
agreements or NDAs, come in. Simply, NDAs are agreements
by which one or more parties, standing in a confidential
relationship to each other, promises to keep secret certain
information acknowledged by the parties to be confidential
or trade secrets. These agreements are entered into with
the tacit, if not explicitly stated, understanding that
dissemination of the confidential information to the public
or to competitors would cause harm to the disclosing party.
Unilateral
versus Mutual Agreements
NDAs
are used in a variety of situations to protect many different
types of information: financial matters, secret formulas,
marketing plans, source code, methods of business operations,
and so on.NDAs, however, are not generic, and this is where
many growing businesses make mistakes. The truth is, just
as the types of confidential information that are the subject
of NDAs are varied, so are the types of NDAs used to deal
with them.For example, NDAs can be "unilateral" or "multilateral." Let's
say your company is pursuing financing from a venture capitalist
or a financial joint venturer. The venturer doesn't really
have any secrets to give to you. It primarily has money.
On the other hand, to persuade the venturer to invest in
your company, the odds are that you'll have to disclose
sensitive company information, some or all of which may
be considered trade secret material.Naturally, you want
to make sure that your trade secrets aren't disclosed to
your competitors, since it's very possible that the venturer
you approach may also come into contact with them. Even
if this weren't true, you wouldn't want the venturer to
steal your idea and put it into practice with its own money.In
either case, a unilateral, or one-way, NDA obliges the
financier to keep your confidential information secret
and not to use it for its own benefit or disclose it, except
under certain conditions, outlined in more detail later
in this article.While it is true that, in some circles
today, you are considered a novice if you request an NDA
from an established VC firm (which presumably has a sufficient
reputation to assure you of its integrity) it's still a
good idea to consider the NDA if you have any doubts.Let's
take another situation. In today's business world, where
so many companies grow through acquisition, you may decide
to enter into a strategic combination with another company,
where both companies have trade secrets they wish to protect.In
this case, you would want to use a bilaterial, or two-way,
NDA, where there are mutual obligations between the companies
to keep each other's confidential information secret.Then,
there's the employee/independent contractor scenario, where
you disclose confidential information, like source code
or patent-pending business methods to workers, in order
for them to do their job. Here, you will likely wish to
have a combo plan, entering into both an NDA and a non-competition
agreement.
Differences
in Tone and Obligation
Because
of the differences in emphasis between these different
types of agreements, there are often corresponding differences
in their language and tone as well.For instance, in a one-way
agreement, since only one party is at risk of losing confidential
information, it's common for the disclosing party to insist
upon the other's "best efforts" (efforts above and beyond
what might be considered commercially reasonable) to ensure
protection of the confidential information.By contrast,
in a two-way agreement, since the obligations imposed upon
one side will likely be identical to the obligations imposed
on the other, there is often a tendency to create some
more "outs," knowing that each side could potentially benefit
from them.With employment related combination agreements,
there are also special considerations since the law of
non-competition and non-disclosure with respect to employees
and contractors differs somewhat from state to state and
over time. Over and above considerations applicable to
all NDAs, as discussed below, companies entering into combination
NDA and non-competition agreements will want to emphasize
provisions allowing for severance or splitting of any provisions
found to be unenforceable. Such agreements will also try
to beef up so called "non-waiver" provisions, which help
insulate companies from unintentionally waiving the protections
set forth in the agreement by the conduct of some of their
staff.
The
Basic Elements of an NDA
So,
as you can see, there are different flavors of NDAs for
different situations. Despite their differences, though,
all NDAs contain certain basic provisions required to be
effective.First, you should list all the parties who will
have contact with the confidential information, by category
and, where possible, by name. This is not necessarily as
simple as it sounds, since many companies, themselves,
have subsidiaries or strategic alliances with which they
share information. Also, your NDA should include appropriate
language both restricting the types of people or entities
with whom the other side can share the information and
requiring the other side to obtain similar NDAs from employees,
principals or agents of theirs who will come into contact
with the information.Second, there must be a recitation
of confidential relationship between the disclosing party
(the one allowing access to its confidential information)
and the non-disclosing party (the one getting access to
the confidential information).Additionally, there must
be a recitation of the confidential materials themselves.
In other words, the types of information that is expected
to be kept confidential must be stated. You don't have
to name every document, but it is wise to name the types
of information by category or with even more specificity
if the circumstances allow.Parties to a good NDA usually
articulate how confidential materials will be recognized.
Sometimes, it is agreed that all confidential materials
must be stamped "Confidential!" in bold letters. Other
times, particularly for companies that haven't had a history
of diligent trade secret classification stamping, the parties
will simply say that any information disclosed concerning
certain types of information will be deemed confidential.To
avoid disputes and potentially costly litigation, it's
usually wise to figure out a way to earmark what will be
considered confidential so as to minimize the possibility
of accidental disclosure.Third, as important as it is to
define what materials will be confidential and how the
other side will recognize them, it's just as important
to include a straightforward statement of when it will
be okay to disclose confidential information. The most
common examples here concern being free to disclose information
that somehow becomes public knowledge without wrongful
disclosure, and freedom to release information when compelled
by subpoena or other judicial or governmental process.Fourth,
NDAs are usually good only for a specified term or length
of time, even though non-disclosure provisions may continue
for some time after the end of the agreement. This simply
recognizes that many of today's trade secrets may lose
their value over time and, also, that the purpose of the
disclosure may come to an end at some point, say if a proposed
deal doesn't go through.Fifth, there should be an indemnification
provision, protecting the disclosing party against impermissible
disclosure by the receiving party.
The
Consequences of Wrongful Disclosure
But,
what if a party does wrongfully disclose confidences? What
then? Unfortunately, this is not an easy question to answer.
Yes, there is the potential for money damages and, often,
by virtue of the language of the agreement -- or the facts
-- even injunctive relief may be possible. But, usually,
once the cat's out of the bag, injunctions aren't too much
help. And proving exact money damages flowing from the
disclosure can be a challenge as well. Still, these remedies
are the best we have and, usually, the credible threat
of their use is a sufficient incentive on the part of the
party being given access to trade secrets.All of this is
why one of the biggest rules of the NDA process is to investigate
and develop some confidence in the party to which the information
will be disclosed, as well as to draft an agreement that
is clear and easy to abide by. Reduced to a pithy phrase, investigate and negotiate, so
you won't have to litigate.
Protect
Your Own Secrets, Too
The
most important thing about NDAs doesn't concern the actual
agreement itself. Instead, the most important consideration
for companies with confidential information lies in how
the company protects its own secrets across the board.The
number one defense to a claimed violation of an NDA is
that the allegedly secret information wasn't so secret
and was, in fact, disclosed to others by the company, however
inadvertently or occasionally.In the end, an NDA is only
part -- albeit an important one -- of a more comprehensive
trade secret program. Companies wishing to protect their
trade secrets must act like they, themselves, protect their
trade secrets. They must have a policy for identifying,
tracking and policing their trade secrets internally, so
they can credibly expect and require strong preventative
measures to be taken by parties with which they enter into
NDAs.
Only
in this way can parties maximize their chances of getting
what they expect from NDAs and protecting what might be
their most valuable assets from dangerous and unauthorized
disclosure.
Copyright © Jay Hollander, 2007. All Rights Reserved!
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