What’s In Your NDA? Five Questions to Ask Before You Execute a Confidentiality Agreement

August 19, 2020

As an employee, employer, purchaser, seller, financial advisor, or in another capacity, you will likely be asked to execute a non-disclosure agreement (“NDA”), also known as a confidentiality agreement. Ranging from simple one page agreements to more dense ten page agreements, not all NDAs are created equal.

An NDA is a contract between two or more parties that sets forth the terms for the disclosure and treatment of confidential information that will be (and in some cases, already has been) disclosed by one or more parties to one or more other parties to the NDA. Set forth below is a list of important questions to ask regarding your NDA:

 

1. What Information is Protected?

“Confidential Information” can mean many things in the context of a business or a transaction and can range from physical documents to spoken word. This is why it’s important to understand what constitutes confidential information as defined by the NDA. For example, if the receiving party already received proprietary information from the disclosing party in an earlier meeting, is that information covered under an NDA signed subsequent to that disclosure? What about information that is disclosed and believed to be confidential by the discloser, but not clearly marked as confidential when received by the recipient? As the recipient, you will want the NDA to only include information received on or after the execution date of the NDA. Further, the recipient will want to have confidential information marked as such upon disclosure to make it easier for them to pinpoint all information considered confidential. The disclosing party will likely push back on both of these points, insisting that all confidential information regardless of when disclosed and whether marked as such be covered by the confidentiality provisions of the NDA. It is important to understand what constitutes confidential information to mitigate any potential for dispute down the road.

 

2. Who is Obligated Under the NDA?

A seemingly simple question, but one that needs to be asked. Is the NDA unilateral or mutual? A unilateral NDA is often preferred when only one side will be disclosing confidential information. A mutual NDA is appropriate when both sides will be disclosing confidential information to the other. Mutual NDAs also can help ease negotiating as all confidentiality provisions can cut both ways. Does it make the receiving party, who is a party to the NDA, responsible for the actions of its subsidiaries that would have otherwise been in breach of the NDA had its subsidiaries been parties to the agreement? It is a common ask by disclosing parties that the recipient remains liable and responsible for the actions of its representatives and subsidiaries. Receiving parties will often push back and request language that requires them to only direct all representatives and subsidiaries of the confidential nature of the information without being directly responsible for their actions. The size of the recipient and circumstances surrounding the transaction may affect the negotiations around this point. Who can receive the confidential information once it’s disclosed to the recipient? It is market to have a list of people and/or entities that make up the recipients “Representatives,” and all parties listed under that definition may have access to the confidential information. This definition is important because as discussed earlier, the recipient may be responsible for actions of its representatives. It is common for recipients to limit the definition of “Representatives” to those people who actually receive confidential information in order to limit their obligations. All of these questions, if left unanswered, can lead to problems down the road such as a party receiving confidential information that the discloser did not believe would have access to such information. Understanding the parties who might receive any confidential information and what their obligations are, if any, is essential to properly understanding your NDA.

 

3. What is the Term?

The term of an NDA can span from months to years depending on the circumstances. In the current market, NDAs commonly last between eighteen months and two years. In some cases NDAs can have obligations that last perpetually, especially when dealing with trade secrets. For example, an NDA may have a two year term, but require that all retained information after the end of the term must remain confidential until such confidential information is destroyed. These type of provisions, while they have their place, can cause unforeseen trip wires long after the NDA is signed and thought to be terminated. Trade secret protection causes a wrinkle to this argument, as courts have held that if trade secrets become unprotected at any point, they may lose their trade secret status under applicable law. Accordingly, it is market have the confidentiality obligations with respect to trade secrets that stay in effect so long as the information constitute trade secrets . To avoid a potentially perpetual obligation, the recipient may require reasonable notice to reject the receipt of any trade secrets prior to their disclosure as well as requiring that trade secrets be clearly marked as such. This allows the disclosing parties to have their trade secrets protected indefinitely, while allowing the recipient the right to reject trade secrets and not be bound by such an obligation. Always make sure the term fits to the reasoning for the NDA to limit potential unintentional breaches.

 

4. Are There any Other Obligations?

NDAs often include substantive provisions beyond the definition of confidential information and the treatment thereof. These provisions include, for example, non-solicits, non-hires, non-disparagements, and non-competes. These provisions are particularly important when dealing with an employee or a potential transaction where the recipient of the information is engaged in the same line of business as the disclosing party. These provisions can also have their own term. Accordingly, the term of the confidentiality provision of an NDA may be different than the term of the non-compete. Further, the recipient’s representatives may not be bound by such obligations unless explicitly stated. Always make sure the terms of these provisions are reasonable and that you and your business is adequately protected.

 

5. What Happens When it’s all Over?

“Returned or destroyed” used to be the common language found in NDAs, but times have changed. In lieu of redwelds and banker boxes filled with documents being delivered by the disclosing party to the recipient, information is transferred in a digital format through emails or made available in virtual data rooms. This has led to less NDAs requiring the return of confidential information and simply requiring the destruction of such information and a certification from the recipient that it has destroyed the information. When the term of the NDA expires, it’s important to know exactly what happens and when. Does the disclosing party need to request the destruction of confidential information, or must it happen automatically?  Recipients often negotiate for the former, not wanting to be obligated to send a notice that all documents have been destroyed unless one is requested. Are files automatically saved to the recipient’s servers exempt from having to be destroyed? What about legal or administrative policies that require retention of documents? Both of these types of documents are usually carved out from having to be destroyed, but the disclosing party will often request an extended confidentiality period on such retained documents either for a period of time or until such documents are destroyed. The obligations of the recipient with respect to the confidential information upon expiration of the term is equally important as the length of the term to avoid accidental breaches of an NDA.

The foregoing fundamental questions should be adequately addressed prior to executing an NDA. Attorneys often are approached by clients after an NDA has already been signed. If it turns out that the signed NDA is unfavorable or, in the worst case scenario, doesn’t adequately protect the client’s rights, it becomes much more difficult to renegotiate the document since it has already been executed. Having an NDA fit your needs not only helps put your mind at ease from the start of your employment or transaction, but it also keeps you from stumbling over potential tripwires down the road.

If you have any questions about NDAs please do not hesitate to contact me or another attorney here at Farrell Fritz, P.C.