Non-Disclosure Agreements (NDAs) are very common in today’s business environment. Depending on the type of business you own, you may be asked (or may be asking others) to sign an NDA numerous times. But, while they are common, don’t take them lightly. These agreements have important terms and conditions which you should understand clearly.
NDAs are used in order to protect the confidential nature of certain information that one party is sharing with another party. If you are the party sharing confidential information, you should have a standard NDA already prepared to send to the other party. Generally speaking, it is likely that a business that is hiring your business will insist on you signing their NDA. But, when you are the customer, you should try to leverage that bargaining position to insist on the other party signing your standard NDA.
Many times, you will be presented with a unilateral NDA; that is, an NDA that protects only that party’s information. Out of fairness and to cut down on unnecessary delay, NDAs should usually be mutual, thereby protecting both parties’ information. It is highly likely that both parties to a business deal will exchange confidential information, so the same terms, conditions, protections and restrictions on the use of the information should govern both parties. You may be tempted to think that only one party will be sharing confidential information, but if the business relationship continues past one or two meetings, that it likely not the case. It is simply easier to have a mutual NDA signed up front than to try to remember that it wasn’t and go back later and fix it.
While the entire document contains important provisions, here are three of the key provisions you should understand well:
1. What is the definition of “Confidential Information”. Some definitions are very broad, while some definitions are drafted very narrowly. Which is better? Well, it depends on which side of the table you are sitting. If it’s your confidential information that needs to be protected, you want a very broad, sweeping definition. On the hand, if you’re the one who has the obligation to protect someone else’s confidential information, then you want a very narrowly tailored definition. Keep in mind that the broader the definition, the more difficult it might be to manage and monitor the flow and dissemination of all of that information.
2. Be careful about agreeing to language in an NDA that requires all of your confidential information given to the other company to be marked “Confidential” and/or for verbal communications that are to be considered “Confidential” to be confirmed as such as in writing after the verbal disclosure. That can be a royal pain and a legal trap. You might inadvertently share a document with the other side that isn’t marked “Confidential” and therefore, it would lose its confidential nature. Additionally, do you really want to monitor everything you say in conversations with the other party, and remember afterwards to send a letter or an email reiterating what in the conversation is to be deemed “Confidential”? Most likely not.
3. NDAs permit disclosure to certain parties (e.g. officers, directors, employees with a need to know) and prohibit disclosure to others (other third parties). It is important to know to whom you can and can’t disclose the other party’s “Confidential Information”. Often in the course of providing services to your client, you will need to communicate at least some of that information to vendors or suppliers. Having to go obtain prior written permission from your client for each one of those disclosures is ineffective and potentially very inefficient. Make sure you have the right permissions up front.
The NDA is not simply a document that you should stick in a file somewhere. Violating an NDA could result in severe and costly monetary penalties for your business. Make sure you that you know how to manage and control another party’s “Confidential Information” (e.g., keeping it in a locked file cabinet, restricting disclosure to only permitted parties, marking “Confidential”, etc.). Your business reputation and financial stability depend on it.
