What is a Non-Disclosure Agreement?
Non-Disclosure Agreements, or NDAs, are standard instruments used in business relationships to safeguard confidential information, trade secrets, and other proprietary data. An NDA is a contract between at least two parties that outlines the confidential materials or information they might share with each other for certain purposes, while restricting further dissemination to third parties. Asserts a nationally-respected legal scholar: "These agreements are vital not just because they prevent disclosure of a single item of confidential information but because they empower inventors to treat their inventions as the proprietary property of the inventor."
In other words , NDAs are a critical tool in protecting a company’s assets — intangible in some cases, tangible in other circumstances. NDAs can take a variety of forms and can protect many different types of information. The form and scope of the protection afforded by the NDA will depend on the intended use for the sensitive information, the regulatory and legal framework surrounding the applicable industry, and the parties’ negotiating position.
The Importance of Non-Disclosures for Consultants
Companies frequently require those who do business with them to keep certain information confidential. When engaging consultants, most companies require consultants to enter into Non-Disclosure Agreements or Confidentiality Agreements to protect the company’s sensitive, proprietary or confidential information. NDAs or confidentiality agreements for consultants should cover, among other things, the purpose of the engagement, the scope of the consultant’s work for the company, and the categories of information that the company considers confidential.
Confidential information may include information about the company’s business, internal procedures, and know-how, the company’s internal or external audits, corporate strategies, product research, development plans, finances, data processing systems, product design, customer lists, customer or client contracts, compensation, human resource policies, policies and procedures for joint ventures, information about the company, and information the company may receive from third parties.
Failure to secure an NDA or confidentiality agreement with a consultant could result in significant damages to a company. A consultant might, for example, use the information in their own business or share it with competitors. NDAs for consultants are a reasonable means to ensure that company internal information is kept confidential, or made subject to restriction on its use by the consultant.
The Tenets of an NDA
Definitions. The first step in drafting a NDA is to clearly define what information is subject to the restrictions of the agreement, including the scope of "confidentiality" and "proprietary information." Most companies cover all bases by including, in addition to specific definitions, a "catch-all" provision that covers anything that an employee or agent "reasonably believes" to be confidential. A well-drafted NDA will exclude from the definition of confidential information anything that is (a) in the public domain; (b) that was in the recipient’s possession before the disclosure; or (c) that becomes known to the general public other than through the fault of the recipient. Oftentimes a reverse engineering clause should be included so that the NDA does not prevent the disclosure of information that can be obtained by reverse engineering. Generally, the definitions should be reviewed by an attorney for compliance with applicable laws.
Obligations. A well-written NDA puts the obligations of the parties in writing, and a court will usually enforce them. The NDA should impose the same level of due care for the disclosure of confidential information as the parties would use to safeguard their own information. The NDA should also provide that the recipient cannot disclose confidential information except to those who have an explicit need to know. A good NDA will also require the recipient to keep any written records pertaining to the confidential information at its headquarters and return all copies to the discloser upon termination of the NDA. If documents or other materials containing confidential information are required to be maintained in a particular form, the NDA should provide the form.
Term of Agreement. In any NDA the time period for the protection of confidential information is critical. Typically, the time period is around five years from the date of termination of the NDA or on the expiration of each mutually agreed renewal term as set out in the agreement. When negotiating the time period, keep in mind that some confidential information will lose value more quickly than others. Many companies do not permit the use of confidential information after the termination of the relationship.
Exceptions. The NDA should also have reasonably necessary exceptions. For example, public knowledge — or knowledge that was disclosed other than in violation of the NDA — should not be subject to the NDA’s restrictions. A well-drafted NDA should ensure that changes to the NDA do not retroactively affect the period that protects confidential information that was disclosed prior to the effective date of the changes. Additionally, if a third party obligates one of the parties by way of legal action to disclose confidential information, a reasonable NDA should permit disclosure under the NDA only if the party required to disclose the information (1) notifies the other party promptly; (2) gives such party a reasonable opportunity to object to the production and seek a protective order or other appropriate remedy; and (3) limits the disclosure specifically to the required information.
Fitting Non-Disclosure Documents to a Controlling Relationship
Consulting relationships do not lend themselves to a cookie-cutter approach, but neither should Non-Disclosure Agreements. Because of the general nature of consulting projects, NDAs for consultants should typically be longer and more in-depth than those required for non-consulting relationships. While the core matters covered in a nondisclosure agreement typically remain the same, an NDA for a consulting relationship usually requires modification to take into account the fact that the consultant may work on multiple projects, at multiple locations, for multiple clients during the course of the consulting relationship.
Given the mobile nature of a consulting relationship, more specific guidance is required in an NDA to prohibit the disclosure or misuse of material or information . Also, because the consultant may be privy to more substantive information regarding a project and because consulting work may extend over longer periods of time, the NDA between the consultant and the hiring entity typically requires more attention to detail than other NDAs.
An NDA for a consultant may include provisions contemplating the consultant’s work on sub-consultant projects, and may also cover the consultant’s potential work on other projects. Confidentiality may also need to extend beyond the duration of the NDA as needed to ensure that the consultant does not benefit (potentially at the expense of the hiring entity) from having to share the same or similar technology or research. The NDAs may also include intellectual property clauses granting the hiring entity rights to the work performed by the consultant. In addition to designing restrictions specific to the consultant’s project, NDAs can and should include specific guidelines as to how confidential information may be conveyed between the consultant and the hiring entity.
Legal Reasoning Surrounding a Breach of an NDA
Investment Consultants must be mindful of their obligations under a non-disclosure agreement because the consequences of breaching a binding agreement may prove to be significant.
In most cases, if a company is able to establish a breach of a non-disclosure agreement, it can bring an action against that company in a court of law and seek one or more remedies. Such remedies may include an injunction which would prevent the offending investment consultant from disclosing, using or exploiting confidential information. In some cases, damages for any losses sustained as a result of the breach of the non-disclosure agreement may also be claimed by the company in a court of law. Injunctions may be temporary until a court rules on a final determination of a non-disclosure agreement and can also be in the form of a permanent injunction. While court orders are possible, they are by their nature very expensive and the breach of a court order may lead to serious legal ramifications including criminal penalties. While many memoranda of understanding may not end in a formal non-disclosure agreement, there are a number of actions that must still be considered. All parties involved in negotiations must remember their fiduciary duties towards their respective companies. It is therefore equally important that a company clearly disclose all material information to a potential investment consultant when such information relates to the investment consultant.
Non-Disclosure Agreement Drafting Procedure
Companies are encouraged to use NDAs when entering into relationships with outsiders such as customers, suppliers, joint venturers, potential investors, potential purchasers and lessors of assets. Such agreements require the outsiders not to use or disclose confidential information learned in connection with the relationship. Many NDAs, however, are far less protective than they could be. Good NDAs, and those which can be enforced in California, must be reasonable in terms of what information is protected and for how long. For example: Compromise, i.e., not to use or disclose the other person’s confidential information is often sufficient to protect the disclosing party’s confidential information. In such cases, the agreement might prohibit use other than for strictly permitted purposes, such as for a specific customer order, but not the disclosure of the other’s confidential information. It is also best practice to identify the confidential information that is protected. For example, if your customer, supplier, investor, etc. wants only to protect your trade secrets , use the definition of trade secrets. If they want to protect all confidential information, use that term. But using the undefined term "proprietary" does nothing. The time period should generally not exceed one year. Although the publisher of this blog recently saw an NDA with no time limitation except that it terminated five years after the customer stopped being a customer, many NDAs have no time limitation. Indeed, many NDAs prohibit use or disclosure for an indefinite time. That is not permissible in California under Civil Code Section 3426.7 unless the NDAs are between parties in competition with one another. An NDA which is not clear on the points above will not protect the disclosing party and therefore cannot be enforced in California, as recently held by a federal court in Chudacoff v. IBM (Nev.) 5:07-cv-00478-SJO-DTB. Nor will a NDAs that go beyond an appropriate scope. Perhaps in that case the parties agreed on the essential points but did not specify the essential elements properly, and the court therefore ruled that the nondisclosure obligations were too broad to be enforceable.