A Lawyer's Thinking On Non-Disclosure Agreements

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The reasons for entering into a non-disclosure agreement are many – hiring a new employee or consultant, discussions regarding a business transaction, forming a joint-venture for the manufacture of a new product, etc. Regardless of the reason for entering into a non-disclosure agreement, the issues to consider when reviewing and/or drafting such an agreement are many. I have included below a discussion on what I consider to be some of the most important items to consider during the reviewing and/or drafting process.

Scope:

The lens from which one should consider the question of “scope” is informed by how the engagement is structured and dependent upon what side of the table you sit. For instance, if you are the disclosing party, you will want a broad definition of “confidential information,” as a broader definition provides you (and your information) with more protection. Conversely, if you are the non-disclosing party, you will want to attempt to limit the scope of what constitutes “confidential information,” as this will allow you to use the information more freely and also lessen your potential for liability should an accidental disclosure occur. The market generally considers the following four categories of information to be outside the “scope” of confidential information:  

  1. Information already in the public arena
  2. Information the other party already knows
  3. Information provided to the non-disclosing party by a third-party (assuming such third-party did not breach any confidentiality obligations while disclosing such information)
  4. Information that the non-disclosing party independently develops

Use:

Parties should make clear that, unless the intent be to the contrary, any confidential information disclosed pursuant to the non-disclosure agreement may only be used by the non-disclosing party in the course of its performance under the agreement. It is imperative that each party know how the other will be using (and not using) the confidential information provided. 

Ownership:

Often, non-disclosure agreements allow access or use of intellectual property and other sensitive materials. It is critical that each party make clear that no rights of ownership or licenses are being transferred via the non-disclosure agreement (unless otherwise agreed). Additionally, depending upon the nature of the transaction, the parties should make clear what party will “own” any information or materials created through the use of the confidential information exchanged.

Protection:

It is prudent to make clear in any non-disclosure agreement what steps each party must take to protect the confidential information it has been provided. Generally, non-disclosure agreements insert some variation of a “reasonable care” standard that each party must adhere to when protecting the disclosing party’s information.

Third-Party Rights:

Although a non-disclosure agreement may only be between two entities (or individuals), the parties should consider who else they may need or want to disclose the confidential information to (such as attorneys, accountants, engineers, financial advisors, etc.). It is important to specify in the non-disclosure agreement who those third-parties are to ensure that any passage of confidential information to them is does not violate the confidentiality provisions of the agreement.   

Period and Termination:

Like any agreement, a non-disclosure agreement should clearly specify (i) how long it remains in effect, and (ii) what event(s) will cause its termination. Related to this, the parties should specify what the requirements are related to returning or destroying any confidential information in their possession at the time or expiration or termination.