If you have been paying attention to the news in the past month, the Non- Disclosure Agreement (NDA) has fallen under intense scrutiny given the scandals in Washington, DC; whereby, the NDA being labeled the “hush agreement”, synonymous only with secrets, cover-ups and wrongdoing. In reality, NDAs retain many benefits and often save businesses from very public, damaging disputes, while protecting sensitive information about a company to avoid misuse and unlawful profiteering by third parties.
So why are NDA’s important and how can you ensure they are effective?
NDAs: what are they?
An NDA, a non-disclosure agreement, a confidentiality undertaking, a confidentiality letter or a confidentiality agreement are all names for essentially the same document. NDAs therefore come in many forms, but have at their core one clear purpose: to identify certain information to be provided to another and to establish how that information can and cannot be used.
When do you need to use an NDA?
One can expect to require or encounter an NDA in any situation where confidential information is being provided and the party providing that information wishes to record and regulate its treatment. Having an NDA has a number of irrefutable commercial advantages. The mere act of putting one together focuses the minds of the parties on what information is confidential and how it can be treated.
Typical examples can include:
On a business acquisition; the company seeking the acquisition would ask the acquiring party to sign an NDA relating to the confidential due diligence information about the company the acquirer will receive.
On a service-based agreement; the protocols and methods used in performance would carry an expectation to the service provider to have the recipient of the services sign an NDA relating to the confidential information he will receive to allow the provider to commence providing the service and also to the information received in the course of such service provision remain confidential.
On taking a lease; the tenant would expect the landlord to sign an NDA if the tenant needs to pass on confidential information about his business to the landlord relating to the anticipated use of the property, including but not limited to financial information, etc. NDAs are also commonplace in normal trading arrangements where customers and/or suppliers are providing or receiving confidential information.
Should you expend time, cost and effort in putting one in place?
There is no definitive answer, but many business minds feel you cannot put a price on the safety of one’s business. Others take a contrary view. Legally, subject to certain formal considerations that apply to any contract, NDAs do work. They create a contractual right for the “Information Provider” to seek a judicial remedy from the “Information Recipient” should he breach the terms of the agreement. The remedies available should, assuming the NDA is drafted properly, allow the Information Provider to choose between financial compensation and a court order preventing disclosure of the confidential information concerned. Legally, to enforce an NDA, the Information Provider will need to go to court and to show that there was a contract, to establish its terms, to establish that on the face of the facts there was a breach by the Information Recipient and then to establish the financial damage the breach has caused the Information Provider.
A well-drafted NDA and a properly managed and controlled information disclosure process can make it relatively simple to provide strong evidence under most of these heads. Proving damage could be harder, but the facts normally speak for themselves. If, for example, you have provided your secret recipe to a manufacturer and the manufacturer in turn provides it to a competitor who then uses it to produce a competing but cheaper product, it is a good bet that your sales will fall while your overheads will remain the same, or, put more simply, that you have suffered provable loss. Speculative damages arising out of a claimed breach of an NDA propose more difficulty to recovery of remedies.
The confidentiality obligation.
Despite various important provisions that exist in an NDA, including the definition of “confidential information”, and a “permitted purpose” to the NDA, but the actual ‘confidentiality obligation’ is the main clause. It sets out what the Information Recipient must do and must refrain from doing. Keeping information confidential is a given. However, you should consider stating exactly how it should be kept confidential and who may access it, and add in an obligation to return or destroy it and all copies of it on request. The more specific you are, the easier it is for you to inspect for compliance and to prove a breach. For example, where the Information Recipient is a company, consider limiting access to certain named directors and requiring it to be password-protected. Consider whether it can be shared with their lawyers or accountants and, if so, consider limiting this to a need-to-know basis.
Practical points to consider when faced with an NDA.
When to sign?
There is no question that it is preferable to have the NDA in place before you disclose confidential information. But what is meant by confidential information and at what stage should you refuse to hand over any more information without an NDA? The decision will of course be up to the party wanting to protect information, but be aware that an Information Recipient would expect to know why they are being asked to sign an NDA and the nature of the information they will be provided with, should they sign. To understand the reasoning behind this, the question to ask here is: how happy would a person be if they signed an NDA and the confidential information disclosed under it turned out to be similar to something you were already working on?
Where you might not have any choice
There will be times when you have no choice. For example, you may find that venture capitalists won’t sign an NDA and that if you are the Information Recipient and you are working with a big Information Provider, then you will be required to sign their standard NDA. You will often be confronted with decisions like this and you need to take a risk-based commercial decision as to whether to sign or whether to accept that you won't be offered an NDA. Obviously, getting the counsel and guidance from an attorney is always a positive step towards making an informed decision on the risk analysis.
What if you don't have an NDA?
There are common laws and equitable laws of confidence that can apply in certain cases and could offer the Information Provider some limited legal protection in so far as the Information Recipient may not take unfair advantage based on information received in confidence or cause a tortious interference, etc. Where you have a choice, it is best not to rely on this general rule of law, not least because it is hard to enforce and you will need to show that there was both a relationship of confidence in place and that the Information Recipient knew they were required to treat the information in confidence. However, you might also have to show why you did not enter into an NDA in the first place – especially when it is a common practice for business professionals.
Ultimately, the best protection is not to disclose confidential information at all. Where required, take practical measures to ensure the information’s confidentiality. Do not be afraid to perform your own due diligence on the Information Recipient. Assess how much you trust an opposing party, and perhaps only disclose nothing more than you have to. Mark all items clearly as ‘confidential.’ Having an NDA is a highly advisable second stage. An NDA is enforceable and, by not having one, you take a permanent decision not to require a contractual commitment to confidentiality and risk sending out the wrong signals to Information Recipients. And as always, make sure all parties sign it.
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