Nondisclosure Agreements (NDAs) are making headlines daily—from President Donald Trump requiring his senior staff to sign them, to adult film star Stormy Daniels claiming she was coerced into signing one. Aside from these political and perhaps personal uses of NDAs, they are most commonly used in business and can be critical to a business’ success. However, NDAs are often given short shrift. Ordinarily, the parties entering into an NDA are in a good relationship when the NDA is negotiated and signed. But, relationships sour—and a poorly drafted or performed NDA can wreak havoc on a business. It is, therefore, important that NDAs are drafted and performed with care. Some common errors include:
- Being unable to locate the other party’s “confidential” documents or identify persons who received them when the other party asks you to return or destroy them;
- Failing to draft the NDA to prevent your competitor from accessing your trade secrets by acquiring the other party;
- Failing to recognize that, although you have the leverage to impose onerous requirements on the other party to protect your confidential information, the other party may, in turn, try to impose the same requirements on you with regard to their information;
- Forgetting to advise your employees of the NDA, resulting in them using or disclosing the other party’s “confidential” information in violation of the NDA;
- Failing to draft the NDA so you can share the other party’s information with your advisers (e.g., financial; legal); and
- Inadvertently granting the other party ownership of your confidential information by agreeing to a procedure whereby, if the other party sends you a document stamped confidential, the information in it is deemed that party’s confidential information.
NDAs require careful drafting and follow-through in their execution. We offer below some general “best practices” for consideration.
- High Level Considerations
Consider which party has leverage in the negotiations. If you have the leverage, use it to reject the other party’s onerous requirements and to impose important requirements on the other party. If you don’t have the leverage, pick your battles.
Consider whether “confidential” information will be flowing in both directions and, thus, whether the obligations are mutual. If information will be flowing in both directions, remember that advocating for requirements to protect your information can also place harsh burdens on your business to protect the other party’s “confidential” information. Therefore, consider the costs and benefits of provisions before proposing or accepting them.
- Defining the Parties and Their Relationship
If the parties are exploring the possibility of an alliance, the NDA should make clear that neither party is agreeing to the relationship under consideration and, rather, the NDA simply allows the parties to explore the possibility of the alliance—by preventing misuse of confidential information exchanged during their exploration of the alliance.
Be very careful with provisions that allow the other side to assign the NDA to others or to disclose your confidential information to the other party’s affiliates. Consider the possibility that a competitor may acquire the other party or otherwise become its affiliate after you sign the NDA. If that is a concern, attempt to require the other party to obtain your consent before it can assign the NDA or disclose your information to any of its affiliates.
- Scope of Confidential Information
Do not agree to provisions that may require you to protect the other party’s non-confidential information. Not only is it burdensome and expensive to protect information, but it may unnecessarily increase the scope of misappropriation or breach of contract claims that may be asserted against you.
Consider including a provision addressing what is excluded from confidential information that can be protected under the NDA. For instance, consider excluding information that is available from other sources, that is in the public domain, or that is independently developed.
Consider making clear that the NDA does not restrict a party’s use of its own confidential information.
Do not agree to any proposed procedures that arguably may transfer to the other party ownership of your proprietary information (e.g., a provision that a party will own the information in a document that they designate “confidential” and send to the other party). Unless the intent is otherwise, ownership of information should remain with whichever party originally disclosed it. But, it is important to consider that the parties may exchange new ideas derived from the other’s disclosed information. Careful thought should be given to who will own information developed in the course of the relationship (even if the relationship is exploratory).
- Protection Measures
Often, parties will agree that they must use reasonable efforts to protect the other’s information. But, keep in mind that “reasonable efforts” is not the same for all businesses. Consider that what would be “reasonable” for the other party (e.g., if it is small and unsophisticated) may not be adequate, in your view, to protect your information. If that is a concern, consider expressly stating in the NDA what the protection measures must include.
Consider providing for audit rights (e.g., a right to inspect the other party’s business records to determine how your information is being used, disclosed, and protected). That way, if you suspect there is a problem, you have a means to address your concerns before having to commence formal legal proceedings. Audits may also provide you with evidence on which to base legal proceedings.
- Scope of the Restrictions and Their Duration
Define clearly how the information you disclose to the other party may be used and to whom it may be disclosed. Consider in advance to whom outside your company you may need to disclose the other party’s information (e.g., financial and legal advisers in addition to your “need to know” employees). Attempt to negotiate a provision which is consistent with those needs.
Confidentiality obligations may continue after the parties terminate their relationship. The duration of such obligations depends largely on the nature of the information being disclosed (e.g., it is expected to be stale after one year versus it is expected to remain a trade secret indefinitely). Since unnecessarily protecting information can be expensive and burdensome (and increase the risk of misappropriation claims), careful thought should be given to the length of confidentiality obligations.
- Avoiding Misappropriation Claims and/or Preparing to Defend Against Them if Made
It is important to keeping appropriate records. Be sure to maintain:
- A copy of the NDA and all communications related thereto; and
- Documentation of the information that was designated as confidential under the NDA, by whom it was designated, to whom it was disclosed, how it was used, and where it is located within your systems. Consider what method(s) of record-keeping are best under your particular circumstances (e.g., a restricted share-site that requires an electronic sign-in each time there is access; a secure room that may require a swipe card access).
Educate your employees who will have access to the other party’s confidential information about the NDA and its requirements.
If possible, ensure that employees who are involved with your other projects that potentially overlap with the subject matter of other party’s confidential information memorialize how they arrived at their conclusions. That way, if it becomes necessary, you can show that the other party’s information was not relied upon. In an ideal world, it is best to wall off those other projects from those employees who have access to the other party’s confidential information. But, that frequently is not realistic. Thus, the ability to demonstrate that the other party’s information was not misused in your other projects is all the more important.
Upon termination, there should be no further use of or access to the other party’s confidential information, except to comply with termination obligations (e.g., to return or destroy documents). Cut off access for those who will not be involved in complying with termination obligations.
Takes steps to ensure that you will be ready to return or destroy the other party’s confidential documents when you need to (e.g., upon termination or demand by the other party). Without careful advance planning, collecting all the documents can be a time-consuming process.
- Addressing Integration Provisions
An integration clause declares that the written contract (here, the NDA) is a complete and final agreement between the parties and supersedes all prior negotiations. It is generally a good idea to include one in your NDA, but be careful that it does not inadvertently nullify existing agreements between the parties (e.g., an existing NDA relating to a similar project).
NDAs are routinely used in business but are not often thought out, resulting in a loss of confidential information, undue burden and expense, and misappropriation claims. Hopefully, this article provides you with some ideas to address such concerns.
Rebecca Edelson is a partner in Sheppard Mullins’ intellectual property and litigation practice groups in Century City in Los Angeles and leads the firm’s trade secret practice. She is a co-editor and an author of the treatise, Trade Secret Litigation and Protection in California, as well as its recent supplement on the Defend Trade Secrets Act. She is a forme
Chidera Anyanwu is an associate in the firm’s intellectual property practice group in Washington, D.C.