Non-disclosure agreements (NDAs) – written agreements containing confidentiality undertakings designed to create a safe environment for the disclosure of confidential information - are a part of modern business life.
At first glance most NDAs appear broadly similar and many people treat them as standard, generic documents which are not worthy of much thought or analysis. This can be a mistake. Not all NDAs are the same.
Here are 7 things to think about, the next time you are thinking of using, or being asked to sign, an NDA:
1. Do you need one/will the other party sign? For most deal negotiations, agreeing a mutual NDA at the outset will not be contentious. But in certain scenarios, for example the pitching of an early stage business idea to an investor or established business partner, the recipient may (quite legitimately) refuse to sign an NDA.
Such refusal will often be on the basis that the potential partner (who may be subject to a multitude of such approaches) will not want to be restricted in its own development or investment activities, or to find itself subject to multiple spurious breach of confidence or breach of contract claims at a later point.
Also, presenting/negotiating an NDA at a very early stage can occasionally be seen as overly paranoid, and detrimental to a nascent business relationship.
Where the use of an NDA appears not to be an option, there are a number of steps which can be taken to protect the discloser’s position. For example:
- marking key documents and disclosures as confidential;
- making clear (verbally) that the information which is likely to be disclosed is confidential; and
- limiting the amount of information provided.
Contemporaneous minutes should be taken of any meetings where confidential information is disclosed. Such evidence can be crucial to support any later claim for breach of confidence.
[The one “special case” in which written confidentiality undertakings (in the form of an NDA or the like) should be sought as a matter of course is in relation to disclosures around potentially patentable inventions and technologies, to avoid the loss of patent rights.]
2. One way or mutual? The parties must consider whether or not the non-disclosure undertakings are mutual, orapplicable to only one of them. What is appropriate will depend on who is disclosing confidential information in the given case.
3. Defining confidential information. The benefit of a written NDA is that it allows the parties to be clear as to what information is subject to the non-disclosure undertakings. Our approach would normally be to recommend some form of non-exhaustive listing of any key items/categories of information (for example: “the secret recipe for the production of X”) with a reasonably exhaustive catch all (“any other information disclosed by the disclosing party during the course of the discussions of a private, confidential or commercially sensitive nature.”). As an alternative, some NDAs categorise “any” information disclosed as confidential, subject to the usual caveats and carve outs (see 6 below).
4. The restrictions: limit disclosure and “use”. The non-disclosure restrictions should typically restrict not only disclosure of the confidential information by the recipient, but also the recipient’s “use” of the information. Use should be limited to a specified “permitted purpose” (for example “informing our discussions”). Quite often we see NDAs which do not cover this “usage” point.
5. Duration. Modern practice, driven mainly by large industrial companies in the technology and pharmaceutical sectors, is to limit the duration of any non-disclosure obligations to a finite period, for example 3 or 5 years. A party disclosing confidential information will need to consider whether or not this is appropriate.
Where acting for the discloser of confidential information, we typically recommend that any confidentiality undertakings should apply “for as long as the [relevant confidential information] is maintained as confidential by the disclosing party”. If a long-held “secret family recipe”, say, is to be disclosed under an NDA, why should the recipient have the right to treat that recipe as non-confidential after 3 or 5 years?
6. Carve-outs. NDAs typically contain a list of carve-outs which seek to serve two principal purposes: (1) to ensure that the non-disclosure undertakings do not bite on information which is genuinely not confidential (for example, it is in the public domain) or which is legitimately developed or held by the recipient independent of the other party’s disclosure; and (2) to allow the disclosure of information to third parties where there is a legitimate legal need to do so (either to allow for the seeking of professional advice, or to comply with a requirement of a court or regulator).
The wording of such carve-outs should be scrutinised carefully by recipients to ensure that they are not cast too widely and that the confidentiality restrictions travel with the relevant information, to the extent possible.
7. IP Rights and “Residuals”. Tied to the usage point referred to at 4 above, best practice would be for NDAs to be clear as to what IP licences are granted (if any) in relation to the information or materials disclosed. Typically all IP rights should be reserved to the disclosing party, save perhaps in respect of limited use for the "permitted purpose" (see point 4 above).
Disclosers of confidential information should be wary of signing NDAs which include a so-called “Residuals” clause. Please see our earlier blog piece on this.
If you require further information on anything covered in this briefing please contact David Copping (firstname.lastname@example.org; 020 3375 7485) or your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2016