Most businesses maintain as confidential various forms of proprietary information like revenue projections, operating expenses, secret formulas, business plans, customer lists and any number of other forms of information that would lose value if widely disseminated. At the same time, it is often necessary to share such information to further business goals. The use of a nondisclosure agreements or nondisclosure clauses (“NDA”s) is one of the best ways to shield such information assets from unintended disclosure.
During business negotiations, nondisclosure agreements can be invaluable. While you may be confident that the deal is going to close, negotiations do not always go as planned. Therefore, it is imperative to make sure that the other party does not walk away with your confidential information.
Through a nondisclosure agreement or clause, businesses can go along way toward ensuring that their information stays confidential. In cases where information is wrongfully shared or misused, nondisclosure agreements should provide legal recourse, including at a minimum the ability to petition the court for an injunction to prevent further disclosure. Stipulating liquidated damages or providing for the recovery of legal fees might also be appropriate where an injunction would be as affective as closing the barn door once the horse, or in this case the secret, is already out.
At the most basic level, a nondisclosure agreement is a contract. The parties exchange mutual promises, on the one hand to release the confidential information and on the other the promise to protect the confidentiality of the information disclosed.
Nondisclosure agreements are not “one size fits all,” but below are some basic elements that should be considered and addressed in drafting NDAs:
- Define The Information to be Kept as Confidential: Any NDA must define what the parties agree to keep as confidential. The trick is wording the agreement so it is broad enough to cover all truly proprietary information and narrow enough not to overly burden the parties with compliance concerns. It is often helpful to provide examples of each category of data covered by the NDA. The agreement should also make it clear that it extends to both written and electronic documents.
- Consider appropriate Exclusions: To avoid future disputes, it is equally important to define what is not included in the NDA. Again, illustrative examples are often helpful. It is also helpful to exclude any information that is readily available from another source, such as public records.
- Address Permitted Uses and Disclosure: NDAs should specify that the information may only be used for a particular stated purpose, such as exploring a specified business opportunity between the parties. NDAs should also often carve out exceptions for certain people to whom the confidential information may be disclosed, i.e. attorneys, accountants, and other consultants directly involved in the transaction. The agreement should also provide, where possible, for the methodology of keeping information secret that will be considered acceptable and provisions for the return of confidential information when the relationship ends.
- Obligations of The Parties: The NDA should state whether the agreement is unilateral (binding only the receiving party) or mutual (imposing confidentiality obligations on both parties).
- Sunset Provisions: The NDA should specifically state the term of the agreement.
- Remedies: The nondisclosure agreement should spell out the remedies available to the non-breaching party. Monetary damages, liquidated damages and injunctive relief should be considered. Exculpatory provisions should also be considered where the release of otherwise confidential information is compelled by judicial process.
- Boilerplate Provisions: NDAs should also contain the standard provisions included in most contracts, including jurisdiction, venue, arbitration, etc.
If you have any questions about how to best protect your confidential business information or need assistance drafting a nondisclosure agreement, please contact me, Donald Pepe, or the Scarinci Hollenbeck attorney with whom you work.