Non-Disclosure Agreements (“NDA”) are customary at the onset of discussions for many commercial transactions, including mergers/acquisitions and joint ventures, and are among the most common agreements that come across a corporate attorney’s desk. This article will provide a brief overview of NDAs and some guidance on certain common provisions.
The Purpose of an NDA
The primary purpose of an NDA is to restrict the disclosure of confidential or trade secret information that one or both parties do not want to become public. NDAs create a confidential relationship between the parties in order to facilitate a business transaction. However, as noted below, there are limitations on what an NDA can accomplish. For instance, an NDA cannot protect against the disclosure of information that is in the public domain or that is known to the recipient prior to the disclosure.
Components of an NDA
An NDA should include clarifying language regarding the following:
Types of NDAs.
NDAs are generally drafted between two parties. One party serves as the “disclosing party”, or the owner of the information, while the other party serves as the “recipient” or “receiving party”. A unilateral NDA binds only one party from disclosure of confidential information, whereas a bilateral NDA binds both parties. In either case, the NDA should attempt to identify the categories of people with whom the recipient can share information, such as key employees, attorneys, accountants and financial advisors. Many NDAs condition the recipient’s sharing of information with third parties on the recipient’s obligation to obtain a confidentiality agreement from such parties.
Definition of Confidential Information
There is a tendency by the disclosing party to draft an overly broad definition of confidential information. This can be counter-productive and can lead a court to refuse to enforce certain expansive confidentiality definitions. Regardless of the scope of the definition of confidential information, there are several commonly accepted carve-outs from the definition, such as information that:
- becomes generally known to the public, other than as a result of disclosure by the recipient in violation of the NDA;
- was available to recipient on a nonconfidential basis prior to disclosing party’s disclosure;
- became available to recipient on a nonconfidential basis from a source other than the disclosing party if such source was not bound by an NDA; and
- was independently developed by recipient without violating any obligations under the NDA.
Providing Guidance Where Disclosure Is Compelled. There are cases where certain parties, such as courts and administrative tribunals, have the right to force a recipient to disclose confidential information. In such cases, the compelled disclosure can nullify the protection of an NDA. Because the recipient may not be able to resist the order of a court or administrative tribunal for disclosure, and should not be put in the position of violating a court order or legal process, the NDA should permit disclosure limited to comply with the order or process, but require the recipient to give the disclosing party prompt notice so to enable the disclosing party, at its own cost and expense, to seek legal protective remedies.
What about Representations and Warranties as to the Confidential Information? Recipients sometimes want the disclosing party to represent and warrant in the NDA that the information and data being disclosed is true, accurate and complete. This request should be resisted in cases where the definitive agreements, such as stock purchase agreements and asset purchase agreements, will contain robust representations and warranties covering the disclosed information and other matters.
How Long is the Confidentiality Obligation? It is not uncommon to see a confidentiality obligation that is indefinite in duration. However, this approach may not be appropriate for data that has a limited useful life and represents an unfair burden on the recipient for the on-going costs of storing a disclosing party’s data. The recipient may hope that some of the information eventually falls outside of confidential treatment if it becomes publicly available (as described in the carve-outs above). In many cases, the acceptability of the term of confidentiality depends upon the history and the type of information being disclosed. In practice, length usually depends on the nature of the information. The length of an NDA needs to be long enough to protect the information until it has lost its commercial sensitivity. Financial or trading information becomes out of date quickly and should be protected for a period of two to five years. However, trade secrets, such as a proprietary formula, should be protected for a long period of time, or even indefinitely.
What Happens to the Confidential Information after NDA Expiration? If the intended transaction or purpose underlying the NDA does not proceed after a specific or reasonable period of time, the NDA should provide that, upon the request of the disclosing party, the recipient should return all information in whatever form it was delivered to, and stored by, the recipient (including all copies, notes, abstracts, and summaries), or should destroy all such information (and certify such destruction in writing), as the disclosing party directs. Where an NDA requires the recipient to return all information, the recipient may want to provide that its attorney can retain a copy of the NDA for the purpose of possible litigation in the future. In addition, if the information is electronically stored in the cloud by the recipient or its attorney, the NDA should contain an exception for information that is part of an automated archiving-process, provided that the information will not be made available for any business purpose.
What Remedies Exist? The NDA should state the course of action the disclosing party can take if the NDA is breached. This should include:
- the right of the disclosing party to obtain an injunction against the recipient to prevent further breaches.
- indemnification from loss to cover damages caused by the breach.
Should Disclosed Information be Marked? It is not uncommon for the recipient of confidential information to request that disclosures be marked in order to avoid confusion about what disclosures should receive confidential treatment. However, this request may cause a problem for the disclosing party, who may view the marking of confidential information as inconvenient or creating a risk that some proprietary information may not be marked through inadvertence. This difference in positions frequently leads to compromised language based on what a reasonable person would construe to be confidential information based on the nature of the information or the circumstances of disclosure.
NDAs vary depending on a number of factors, including type, duration and the obligations involved. A typical NDA should be closely examined to make sure the different interests of the parties involved are protected. A disclosing party wants to make sure that the NDA gives it complete protection to the sensitive information that it is revealing. A recipient wants to make sure that the NDA does not unduly restrict it in ways that the recipient did not expect. The bottom line is that an NDA is an important document that should be carefully examined before being executed by the parties.
If you have any questions regarding the contents of this article or any other matter affecting your business, please reach out to either Vincent Balardi at (212) 486-4035 or firstname.lastname@example.org or to Joel Morgenthau at (212) 888-4579 or email@example.com.