12 Practical Tips for Reviewing Non-Disclosure or Confidentiality Agreements
As your business grows, you will likely be asked to sign Non-Disclosure or Confidentiality Agreements (for purposes of this blog, “NDAs”). Here are 12 practical tips to help you review and negotiate NDAs. This blog post assumes that you have been presented with another party’s form of NDA for review and is specific to NDAs between two business parties—it does not address employer-employee NDAs.
1. Determine if you are dealing with a one-way or mutual NDA. NDAs generally take one of two forms: (i) “one-way” NDAs that only protect the confidential information provided by one party to the transaction; or (ii) “mutual” NDAs that protect the confidential information shared by both parties to the transaction. The first step in reviewing an NDA should be to determine if you are dealing with a one-way or mutual NDA. Mutual NDAs are commonly titled as such, while one-way NDAs rarely state that they are one-way. You may need to read the language of the NDA carefully to determine if it is only protecting one party’s confidential information.
2. If you’ve been provided with a one-way NDA, consider asking for a mutual NDA. If you have been provided with a one-way NDA, consider if a mutual NDA would be more appropriate. If you will be sharing confidential, sensitive, or proprietary information with the other party, it is appropriate to ask the other party to provide a mutual NDA. This will be much more cost effective than asking your attorney to revise the one-way NDA into a mutual NDA. If the other party doesn’t have a form of mutual NDA they can provide, consider asking if they are willing to use your mutual NDA form.
3. The correct party to the NDA is your company. When completing the NDA, your company is the correct party to the NDA, and not you personally. The NDA should be signed by you in your official capacity for the company or by someone else who is authorized to sign on behalf of the company. Avoid signing the NDA in your individual capacity. Liability to the other party for breaches of the NDA by your company or its representatives should fall on the company, not you personally.
4. The reason for the exchange of confidential information should be described. The NDA should generally describe the reason why the parties are agreeing to exchange confidential information. For example, “the parties are agreeing to exchange information to facilitate a potential transaction whereby party X will sell widgets to party Y.” This statement will then often be defined as the “Purpose” or the “Proposed Transaction.” This is important for tip # 5.
5. Restrictions should be reasonable. Although the labels “Nondisclosure Agreement” and “Confidentiality Agreement” are often used interchangeably, the correct premise of a NDA is really nondisclosure and nonuse. The NDA should provide that a party is agreeing not to (i) disclose the other party’s confidential information except to your representatives (see tip # 6) or (ii) use the other party’s confidential information for any reason other than the Purpose or the evaluation and implementation of the Proposed Transaction. Beware of language that provides that you will keep the other party’s information “strictly confidential” as this is unnecessarily restrictive and may be impossible to comply with. Agreeing to protect the other party’s confidential information with reasonable care, or the same degree of care as you protect your own confidential information, would be a reasonable compromise.
6. The NDA should allow for disclosures to representatives. Because your company is the correct party to the NDA, it is necessary that your company, as the party receiving the other party’s confidential information, be able to disclose confidential information to its representatives who need to know such information for the Purpose or evaluating and implementing the Proposed Transaction. It is common for the NDA to provide that the company be liable for any breaches of the NDA by its representatives, and that is acceptable. However, avoid impractical requirements regarding your representatives, such as a requirement that your representatives agree in writing to be bound by the NDA.
7. Ensure customary carveouts are present. The following information should be specifically excluded from the definition of confidential information of the other party: (i) information that at the time of disclosure or thereafter is generally available to the public (other than as a result of its disclosure by your or company or its representatives in breach of the NDA); (ii) information that was available to your company or its representatives on a non-confidential basis prior to disclosure by the other party; or (iii) information that was, is, or becomes available to your company or its representatives on a non-confidential basis from a person who is not bound by a confidentiality agreement with the other party, or is not otherwise prohibited from transmitting the information. The exact language may vary.
8. Disclosures required by law. The NDA should provide that you can disclose the other party’s information as required by law, judicial or governmental order, discovery request, or similar process with notice to the other party. Do not agree to obtain a written opinion of counsel that the information must be disclosed; rather, agree only that you will disclose information that, in the opinion of counsel, you are legally required to disclose and that you will use “reasonable efforts” to assure that such information will be accorded confidential treatment. If the other party wants to challenge the disclosure of its information in a legal proceeding, the NDA should provide that that any such challenge must be at the other party’s expense and not yours.
9. Beware of inappropriate restrictions. It is rarely appropriate for an NDA to contain the following types of restrictions: (i) that you will not compete with the other party; (ii) that you will not solicit the other party’s customers or employees; (iii) that you will not circumvent the other party with respect to the Purpose or the Proposed Transaction; or (iv) that you will assign intellectual property you create to the other party. It should be sufficient that you agree not to disclose or use the other party’s confidential information for any reason other than the Purpose or your evaluation or implementation of the Proposed Transaction.
10. Term of the NDA. The NDA should contain a provision describing when the obligations under the NDA will terminate. Your obligations under the NDA should not survive indefinitely. A reasonable term for your obligations under the NDA would be between one and three years from the date the NDA is executed or the date that confidential information is last exchanged under the NDA. If the NDA is mutual, you will want to consider the term in light of how long you want your information to be protected also. It is becoming common to provide that nondisclosure obligations with respect to a party’s “trade secret” information survive the expiration of the NDA term. This is likely acceptable; however, this language should specifically provide that this obligation only survives for as long as such information is entitled to trade secret protection under applicable law.
11. The NDA is not a binding obligation to do business together. The NDA should contain a provision stating that the NDA does not create a binding commitment for the parties to do business together, and that no such commitment shall exist until the parties enter into a definitive agreement with respect to the Purpose or Proposed Transaction.
12. Governing law and venue. It is typical for the NDA to provide which state’s law will govern the NDA. This state is typically dictated by the party with the strongest bargaining power, though it may be preferable to push for the law of the state that has the closest nexus to the transaction between the parties. It is less typical, though not uncommon, for the NDA to also mandate which venue (state and city or county) any legal action arising out of the NDA must be brought in. Beware of a provision like this as it could result in you being called into court in another state or having to go to another state to enforce your rights under the NDA. If possible, push for venue in your hometown or for the NDA to be silent on venue for litigation – as this will give you the flexibility to enforce your rights under the NDA in your hometown, even if another state’s law will be applied in interpreting the NDA.
A well written NDA will be consistent with the tips outlined in 3 through 12 above. If you find that an NDA you’ve received is poorly written or seems to be way out of line, you may want to propose that the parties use your form of NDA. Consider engaging an attorney to prepare NDA forms for your company and to be available to review NDAs when you don’t feel comfortable doing so. If you have questions about NDAs, please feel free to contact us here and we will be happy to help.
