Non-Disclosure Agreements or NDAs (also referred to as Confidentiality Agreements) are a common tool used by companies prior to commencing certain business transactions or starting negotiations on a deal, or to otherwise protect their confidential or proprietary information.  However, while many NDAs share overarching principles, there is no such thing as a “standard” NDA and a party should carefully read and understand the terms of an NDA before signing.  This article provides some of the key issues to think about when an NDA comes up in your business.

Goals—Unilateral vs Mutual NDAs

NDAs are not typically a goal unto themselves—rather they help to facilitate some ultimate objective of the parties, such as an acquisition or merger, or some other transaction the parties view as important enough to merit a Non-Disclosure Agreement.  Understanding this objective colors the analysis of the NDA to determine whether it helps to achieve the objective.  Sometimes, only one party anticipates disclosing its confidential information to the other party, or one party has significantly more leverage over the other, and the NDA is drafted accordingly to give protections (on the one hand) only to the disclosing party and the obligations to maintain confidentiality (on the other hand) only to the receiving party.  However, many companies are not impressed when their potential business partner offers them one of these “unilateral” NDAs as it signals that the receiving party’s interests are not as highly valued and may set the tone for future negotiations.

Offering your potential business partner a mutual or two-way NDA is often a better tack.  Mutual NDAs protect the confidentiality of both parties’ information and require each party to preserve the confidentiality of the other party’s information.  Even in circumstances where one party expects to disclose more information than the other party, this mutuality is beneficial since while the disclosing party will have fewer obligations, it demonstrates respect for the importance of the other party’s information as well.

Scope

The parties should clearly define what constitutes “Confidential Information” under the NDA.  Sometimes, the scope of confidential information is narrowly tailored to the specific information the parties are concerned about—for example, information relating to a particular patent or other intellectual property right, or a party’s financial condition.  More frequently, though, confidential information is expansively defined to include any confidential or proprietary information disclosed by one party to the other.  A disclosing party should be wary of any requirement that disclosed information be labeled “confidential” or “proprietary” or some related term, as even the innocent failure to properly label could mean the information is not covered under the NDA.  The parties should also consider the manner in which information is shared and should expressly include information disclosed in writing, verbally, electronically or via any other method, if that is their intent.

Often, the disclosing party wants to make it clear that the disclosure of confidential information does not constitute a transfer of ownership of the information to the receiving party, or any license to use the information except for purposes of evaluating the proposed transaction between the parties.  A disclosing party may also want to disclaim any representation or warranty that the information disclosed is true, accurate or complete and that the receiving party is wholly responsible for evaluating and using the information.

Exclusions; Exceptions to Disclosure

NDAs often include carve-outs or exclusions from the confidentiality obligations for information that would otherwise constitute confidential information under the agreement.  Examples of these carve-outs include information that becomes generally known to the public (other than as the result of a breach of the NDA by the receiving party), information the receiving party receives from a third party on a non-confidential basis, or information that the receiving party already had in its possession or that it develops on its own without the use of any disclosed information.  In the latter case, some agreements require the receiving party to provide evidence of its independent development of the information, which can be difficult or require the receiving party to disclose information about its internal processes.

While many parties focus on the affirmative obligation to maintain the confidentiality of disclosed information, they should ensure that the NDA gives parties the ability to share information with their own employees, officers, directors and representatives who have a need to know the information in order to evaluate the proposed business transaction.  Many NDAs also expressly authorize the parties to disclose information to their legal and tax counsel and their accountants, again to the extent such persons need to know the information to assist the receiving party.  The parties should be cognizant of any requirement that these recipients of information enter into further non-disclosure agreements, as this type of requirement can be administratively burdensome.  Sometimes, the agreement makes the receiving party responsible for any subsequent unauthorized disclosure of information by the receiving party’s representatives.

NDAs should also permit receiving parties to disclose information pursuant to a governmental order or other legal requirement.  Often, such permission is tied to an obligation to notify the disclosing party in advance and to cooperate with the disclosing party to prevent or limit disclosure of information as the disclosing party deems appropriate.  Keep in mind that such a notice obligation should be subject to other legal requirements, so the receiving party should not be considered in breach of the NDA if it is legally prevented from notifying the disclosing party about a governmental order.

Survival; Return of Information

Because NDAs are typically ancillary to a more substantive transaction between parties, they often terminate automatically when the parties enter into a definitive agreement(s).  In other cases, such as where the parties are unable to agree to a definite agreement, the NDA will terminate after a specified period of time, often six months or a year.  Due to the nature of NDAs, however, and the value of the disclosed information, the parties’ obligations to maintain confidentiality often survive for anywhere between one to three years (sometimes even longer, depending on the type of information disclosed).  It is often recommended that NDAs include language that the parties are not required to enter into any definitive agreement as a result of the disclosure of any confidential information.

Upon termination, many NDAs require the receiving party to return all disclosed information, including any copies, analyses, notes or other derivatives of the disclosed information, to the disclosing party.  In lieu of returning the information, some NDAs provide the option to destroy all disclosed information in the receiving party’s possession and to certify that destruction to the disclosing party.  If applicable, the agreement should provide exceptions for confidential information that was used by the receiving party’s board of directors (or other governing body) for purposes of evaluating the proposed transaction and any information that is electronically stored or archived in the receiving party’s computer files, with the caveat that such retained information remains subject to ongoing confidentiality obligations.