What You Need to Know About The NDA

When a company is sharing its technology or other proprietary information with a potential strategic or commercial partner, it will want to ensure that the information is kept secret and not being used for an unauthorized purpose.  This is where a non-disclosure agreement (NDA) is relevant.

Put simply, an NDA is a legally binding document that sets out the obligations of the person receiving confidential, non-public information to the person disclosing it.  An NDA may be one-way (in other words, it only obligates the receiving party to protect the confidential information of the disclosing party) or it may be mutual (it obligates each party to protect the other party’s confidential information).  It is also known as a confidential disclosure agreement or confidentiality agreement, but the name of the document and the scope of what the document covers could vary depending on the context, type of transaction and the industry you are in. 

NDAs are meant to provide assurance that a defined universe of information that is shared between parties will be confidential and not used for any purpose other than the purposes permitted in the NDA.  That said, please be aware that in some contexts, NDAs are not the norm.  For example, most VC’s (other than perhaps those in the life sciences space) will not sign an NDA with an entrepreneur looking for funding in the US.

When you use your counterparty’s form of NDA or receive a heavy markup to your form, here are a few important questions to think about:

Which individuals will have access to your confidential information?

You may want to limit the receiving party’s disclosure of your confidential information to employees or outside advisors (such as the receiving party’s attorneys) with a “need to know” and that are themselves obligated to maintain the confidentiality of your information.

How is “confidential information” defined?

As the party disclosing confidential information, review the definition closely to make sure it really covers everything you need to keep confidential.  Dispassionately evaluate and identify what is truly sensitive to preserve confidentiality. 

If you anticipate disclosing potentially patentable inventions, make sure they are covered by the NDA.  For example, under US patent law, not doing so will trigger the beginning of the grace period which requires you to file for a patent within 12 months of a public disclosure; other jurisdictions may have similar requirements.  Under UK and European law, there is no such grace period and any disclosure you make that is not covered by an NDA could prejudice your rights in any future UK or European patent application.

Do you need an export control provision?

Please keep in mind that if a country has export control laws, such as the US and the UK, these laws may cover not only the export of goods, but other transactions you might not expect; for example disclosing technical information to a foreign entity or foreign national may implicate export control laws. 

Penalties for violating export controls can be significant.  Ask your lawyers to give you some guidance on what they see in that specific industry or transaction context.

What is the purpose of sharing the confidential information?

Stating the purpose of signing the NDA will provide a direction to the relationship you wish to have with the counterparty and will ensure that the receiving party does not use your information in ways that may be detrimental.  Any use beyond the stated purpose should require the disclosing party’s consent.

How long should the recipient of confidential information keep it a secret?

Your NDA may state that this obligation survives in perpetuity (that is, with no fixed termination date), but the markup you receive caps the period to the term of the agreement, or to several years after disclosure of the information. 

Before you insist on perpetual secrecy, think about whether what the information you are sharing will become publicly available in the future.  For example, if you are sharing the fact that you have an exclusive supply agreement, the terms of which are confidential, but you intend to reveal this partnership on your website within a few months after your fundraising round, there would be no reason to negotiate hard for a perpetual term.  On the other hand, if you are disclosing information that you believe to be trade secrets, you may need to insist on a perpetual secrecy term since trade secret protection extends for as long as the information remains a trade secret. 

Remember that the “term” of an NDA can refer to either the duration of the confidentiality obligations or the duration of your information-sharing relationship with the counterparty.  Be careful to keep these two different timelines in mind when you are negotiating your NDA. 

Is there a “residuals” clause in the NDA?

This clause allows the receiving party to use, without restriction, some “residual” information that is received during the course of the relationship between the parties, usually covering information that a party’s personnel recollects from its “unaided memory.”  A “residuals” clause can raise concerns for the disclosing party, since it potentially allows the receiving party to use confidential information for any purpose without violating the NDA. 

If there is a residuals clause, and you are a disclosing party, consider including a provision making clear that the NDA does not grant the other party a license to your intellectual property rights.

Should you sign a one-way or mutual NDA?

In a one-way NDA, only one of the parties is receiving confidential information and is therefore subject to confidentiality obligations.  In contrast, in a mutual NDA, both parties to the agreement are receiving confidential information and are therefore subject to the same standards of confidentiality.  Deciding which format to use depends on who is actually going to receive confidential information. 

If you do not expect to receive (or do not want to receive) any confidential information, then you should be cautious about strapping yourself to legally enforceable obligations, especially if the party disclosing information to you is, or may in the future be, a competitor.  On the flip side, if a potential privately held acquiror presents you with a one-way NDA that protects only your confidential information, you may want to consider a mutual NDA to facilitate your assessment of the acquirer  (in the acquisition context, check out this article for things to keep in mind before sharing information with a potential buyer).

You can sign an NDA in a number of different situations – when you are discussing a potential strategic relationship or a key customer relationship or in the context of a merger or other reorganization.  Whatever may be the reason, you  must strike a balance between being judicious about what you concede, in order to move the deal forward and standing firm on points that are non-negotiable (such as protecting your trade secrets).  Therefore, having the broader end goal in sight and the above list of questions handy will lead to a more meaningful discussion with your counterparty.