In our prior blog, we discussed situations where it makes sense to use a standalone Non-Disclosure Agreement (or “NDA”), and also identified situations when NDAs are less common or not typically used.
In this month’s blog we’ll discuss the specific provisions you should typically look out for and consider when reviewing an NDA.
- Mutual vs Unilateral (One-Way)
One of the first things to look out for is whether an NDA is “mutual” (each party has an obligation to not disclose the other party’s confidential information) or “unilateral” (a “one way” NDA where only one of the parties is subject to non-disclosure obligations).
Typically, using a mutual NDA as a starting point reduces the amount of redlining of the NDA. Each party stands to benefit from the confidentiality obligations of the other party. In addition, where one party offers another party a unilateral NDA, the party who does NOT benefit from non-disclosure of its information should think hard as to whether their disclosures should be protected.
Generally, unless a party has a specific reason why it does NOT want to keep confidential information it receives (and thus wishes to use a unilateral NDA that only benefits/protects its own disclosures) it is better to be safe and ensure that both party’s disclosures are covered, so usually both parties should push to use a mutual NDA rather than a unilateral NDA.
- Definition & Scope of “Confidential Information”
Most NDAs provide for a relatively broad scope of information that would be included as “Confidential Information”, which would typically include any information disclosed (the “Discloser”) to the other party (typically defined as the “Recipient”) in the course of the relationship between the parties.
Generally parties disclosing information prefer a broad definition, to avoid worrying whether a particular disclosure falls in or outside of the scope of “Confidential Information”.
However, there are certain areas that NDAs often differ in terms of treatment of information, including:
- Is “Confidential Information” limited to only written information, or would it include oral information?
- If oral information is included, must it be written down or confirmed in writing later (often within a certain period of time) for it to still be considered “Confidential Information”?
- If required to be written, is there a “marking” requirement (eg must such information be “marked” “confidential” or “proprietary” to be “Confidential Information”)
- Or should any information be protected (whether oral or written, and whether or not marked or not) that the Recipient knows or has reason to know that the information should be treated as confidential (a broader definition).
Whether to include oral information or just written or tangible information, whether to include a “marking” requirement, etc. depends on the party disclosing the information believes it may disclose information in such form, and the level of protection they seek for their information.
- Exceptions to Confidential Information
Despite the usual breadth of information included under the definition of “Confidential Information”, almost all NDAs include exclusions or exceptions to what is considered “Confidential Information”.
These exceptions typically include:
(a) publicly available information;
(b) information that later becomes publicly available (without breach of the NDA);
(c) previously known to the Recipient from another source (often requiring some documentation or proof that Recipient was in possession prior to receipt of Confidential Information from the Discloser);
(d) independently developed by the Recipient (through no use of the Discloser’s Confidential Information).
(e) right of the Recipient to disclose the Discloser’s information in response to a court order, or where such disclosure is otherwise legally required to disclose pursuant to a court order or governmental entity (provided that even with respect to such compelled disclosure, the information should still be treated as confidential, and ideally the parties should seek a protective order or confidential treatment of the information with respect to such requirement).
With respect to the above exceptions, there are often nuances in terms of how the exceptions are defined or structured to make them narrower or broader. Whether a particular party favors broader or narrower exceptions typically depends on how protective they wish to be with respect to their information (a more protective Discloser will want narrower exceptions, unless there are particular instances where the Discloser feels such exceptions may benefit the Discloser with respect to their use of the other parties’ information in a mutual NDA).
- Purpose or Use of Confidential Information
Some NDAs include a provision, whether in the preamble or recitals of the agreement, in a provision discussing the relationship of the parties, or in the definition of “Confidential Information”, that defines the purpose of the NDA.
This purpose maybe language that explains why the parties are entering in the NDA – usually because of discussions regarding a potential deal, transaction or business relationship. In some cases, this may be expressed or defined as the “Opportunity” or “Transaction” in the NDA.
Usually in these NDAs, the parties right to use of Confidential Information received under the NDA is limited to use with respect to such “Opportunity” or “Transaction”; in some cases this may be defined as a “Permitted Use”.
For Disclosers concerned about how their information is used (or for Recipients who need to be sure they can use information for certain purposes), it makes sense to review these definitions to ensure they fit the situation and needs of the party.
In addition, generally speaking use of any “Confidential Information” by the Recipient should be limited to internal use only, and pursuant to the discussion below, that the NDA itself does not address any additional rights to use, including any license to any patents, copyrights or other intellectual property of the Discloser. In such cases, external use or use of any intellectual property rights should be covered under a separate license agreement, not an NDA.
- Residuals Clauses
Sometimes companies (especially larger companies) are worried about ensuring that the many NDAs and conversations they have with various parties doesn’t block the company from creating or developing their own technology. In such cases, companies may include what is known as a “residuals” clause – that the Recipient may continue to use information it may have received from a Discloser in the “unaided memory” of the employee of the Recipient who has actually received the information.
If you are the party that is disclosing sensitive information, especially where the Recipient may potentially be a competitor, this is a provision that you should look out for and flag/remove. In some cases this appears as an exception to the definition of “Confidential Information” and should be reviewed carefully.
- Ownership of Confidential Information; Warranties/Indemnities; Return or Destruction Requirements
Generally speaking, an NDA should include a provision that clarifies that the Discloser retains rights to its Confidential Information. In addition, such provision should be clear that the NDA does not convey any rights or licenses to use the Confidential Information, including patent, copyright, or other IP rights. The NDA should be limited to non-disclosure obligations only. To the extent rights or licenses to use the information or IP are needed, those should be covered under a separate license agreement.
In addition to clarifying the Discloser’s ownership of its information, and clarifying that there is no transfer or licensing of IP rights, as a Discloser it is also often good to clarify that no representations, warranties, covenant or indemnities are being provided with respect to such information being provided. Generally NDAs are entered prior to, or adjacent to, a definitive agreement relating to the substance of the business or transactional relationship between the parties. Those definitive agreements should address any risk shifting or liability between the parties. It is customary for no payments or consideration to be made with respect to the NDA itself. Therefore both parties should avoid any representations, warranties, or indemnities that may create liability without any financial payments or reimbursement being made to compensate for such risk or liability.
Another common provision that NDAs often contain is a requirement that the Recipient party to return or destroy any Confidential Information of a Discloser at the end of the NDA Term. These provisions aren’t generally controversial, and the Discloser should be sure that an NDA contains such a provision. Note that there is often an exception relating to the right of the Recipient to retain such information as may be needed for audit purposes, or that is consistent with their document retention policies.
- Term of NDA
The parties to an NDA should be sure that the term of the NDA “fits” the nature of the relationship. For parties entering into a specific, short term transaction (such as an M&A deal, diligence regarding a specific business deal, or discussions around a potential partnership), a shorter term for an NDA may make sense. In some cases, this may be a set amount of time based on how long the discussions are anticipated to last (6 months or a year), or it may be the longer of such term and/or the time in which it takes for such a deal or transaction to occur. Usually in such instances, the NDA may be replaced by the confidentiality provisions of the definitive agreement or a new NDA if the parties decide to move forward on a deal.
In other cases, where the parties believe there will be an ongoing relationship, a longer NDA makes sense. Typically NDA terms are from 2 years to 5 years. Given it is hard to know how the parties relationship will evolve and/or whether the terms of the NDA will fit the circumstances of the parties after 5 years, parties should strong consider whether to enter into an NDA for greater than a 5 year term.
- Length of Confidentiality Obligations Post Termination (Tail Periods)
Separate from the Term of the NDA itself is the term or length of the confidentiality obligations under the NDA. While sometimes the NDA Term and the length of the confidentiality obligations are exactly the same, in many cases NDAs will have a separately defined length or duration of confidentiality obligations that extends well past the term of the NDA itself.
In some cases, where the NDA term maybe only 2 years, the length of the confidentiality obligations may extend for a period of one to two years AFTER the termination of the NDA (often referred to as a “tail period”). In some cases, especially with respect to certain types of confidential information such as trade secrets or know-how, the NDA may specifically provide that the length of the confidentiality obligations extends indefinitely or perpetually after the termination of the NDA.
While as a Discloser of information such a perpetual term maybe appealing as its most protective of the Discloser’s Confidential Information, as a Recipient of confidential information, a party should also carefully consider whether it makes sense to agree to a long (or perpetual) period of confidentiality, as that may place operations burden on the party to ensure it is keeping such information confidential.
- Non-Solicitation Clauses; Non-Competes
Occasionally an NDA template and forms (especially from larger companies) will contain either a non-solicitation provision (in which a party is not allowed to solicit or hire the employees of the other party) or a non-competition clause of some sort, or both.
A party reviewing an NDA should always be on the lookout for these provisions. Except in the context of an NDA used for M&A (see below), generally NDAs do not contain such provisions and such a provision is not necessarily customary or standard in the industry. Given an NDA is usually just a precursor to a wider relationship or longer, more detailed definitive documents regarding the parties’ relationship, such provisions (if any) are better addressed in longer form documents where the parties have a better sense of the overall relationship and whether its “worth” including or agreeing to such provisions.
A major exception to the position above, is when a party has a particular concern about the counterparty potentially using the Discloser’s Confidential Information to poach a party’s team members or compete with the Discloser’s business. These situations occur most often in an M&A context, where the potential acquiror seeks to purchase the target company, but as part of diligence, it seeks information about the target company’s technology and team. In such cases, the obvious fear is the potential acquiror does not move forward with the acquisition, but instead poaches the potential target’s team or uses the information to compete. In such cases, its best to consult with an attorney to carefully consider a non-solicit or non-compete provision, and its legality and enforceability in the relevant jurisdictions.
- Governing Law & Forum
Generally speaking its rare for parties to litigate over a breach of an NDA. This begs the question of why parties enter into an NDA. In part an NDA is about establishing the ground rules of the relationship and showing the importance that each party places on its Confidential Information, and in part of it is the “in terrorem” effect – the potential threat of litigation, however remote.
For this reason, it is still worth negotiating over the governing law (which state or countries’ law applies to the NDA) and forum (if an action is brought, in what courts can it be brought). Ideally each party would like the governing law and forum to be that of the state or jurisdiction that they reside in. However, where parties are not located in the same state/jurisdiction it comes down in part to leverage (bigger party wins) or if there is a compromise jurisdiction (often companies that are both incorporated in Delaware will agree to Delaware as a relatively governing law and forum) or the parties decide on venue/forum that is as “mutually inconvenient” as possible for both parties, to create a disincentive for future litigation.
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