Why Generic Non-Disclosure Agreements Don't Work
|Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: January 2002
Executing a confidentiality agreement, commonly referred to as a non disclosure agreement (NDA) is often the first step in any business negotiation. Yet, despite the potentially disastrous consequences of a mistake, the parties often execute these NDAs with little thought, or counsel. Often, the first and most critical mistake is the belief that "one size fits all." Unfortunately, many of these problematic confidentiality and nondisclosure agreements: (1) list everything but the kitchen sink as confidential, and (2) fail to provide any procedures for identifying and handling the confidential information. The primary purpose of a NDA is to protect the disclosing company's valuable trade secrets and ideas, arguably a company's most valuable resource. When a generic "one size fits all" nondisclosure agreement is used, may later not only severely affect the value of a company's intellectual property rights, but may also prevent a court from enforcing the non-disclosure agreement. Trade secrets are only protected under state law to the extent that the information remains not generally known (i.e., secret). Similarly, one cannot obtain a patent if the invention was described or disclosed in a printed publication more than 1 year prior to the filing of a US patent application. If an inventor were to circulate a written description of his or her invention, this could likely be considered a printed publication and may ultimately prevent patenting. To ensure that trade secrets and potentially patentable ideas remain protected one must extract a promise to keep the secret confidential prior to disclosure.
The enforceability of trade secret rights is contingent upon a company adopting reasonable efforts, policies, and practices to keep its trade secrets and patentable ideas "secret." Requiring employees, independent contractors, investors, manufacturers, etc… to execute a NDA before you disclosure valuable trade secrets, or patentable ideas, is a good start, but is only one of the many routine practices a business should implement to protect its confidential information. When considering the creation of a NDA, companies must carefully analyze what information they want or need to protect (the definition of Confidential Information), how they can practically protect it (restrictions on use and standards of care), who will need to know that information, and the remedies in the event of a breach. Every situation will be different.
Mutual or Unilateral.
The first issue a company, or individual, must address is the type of business relationship being contemplated as that will affect the type of NDA to be used. NDAs can be mutual agreements, where both parties are obligated to maintain secrecy, or they can be unilateral agreements, where only the receiving party becomes obligated to maintain secrecy. A mutual NDA is useful when both parties will be conveying confidential information, as may occur if the aprties are contemplating a synergistic relationship, or the joint development of work. A unilateral NDA is useful when only one party is turning over confidential information, perhaps to a potential investor, developer, manufacturer or an employee.
Confidential Information Defined.
This section of the Agreement deals with defining what is confidential. Is it any information? Probably not. Typically, the definition of "confidential information" in any NDA should include information consisting of trade secrets, undisclosed inventions, and business details such as financial and marketing plans, product roadmaps, and the like. If the NDA describes various categories of information to be kept confidential, should that information be limited? Maybe. What about limiting confidential information to that information marked "confidential." While this may work in theory, it is wrought with risk because often times parties neglect to abide by these requirements. This is not to say that marking requirements should not be used, only that their use should be carefully considered. What about oral communications? The disclosing party often wants this definition to be as broad as possible, so as to ensure the receiving party doesn't find a loophole from which it can then use your valuable secrets. The recipient on the other hand, has a legitimate desire to ensure that the information he is required to keep confidential is clearly identified. Let the negotiations begin.
All NDAs should define what permissible uses, or copying, the receiving party can make with the confidential information. Restrictions may include disclosing the confidential information only to the receiving party's employees on a need-to-know basis, or it may require "strict confidentiality" to named individuals. If it is contemplated that the receiving party's independent contractors will have access or copies of the confidential information, the NDA may require that such contractors acknowledge and agree to be bound by the terms of the NDA BEFORE the receiving party divulges any information to its independent contractors. If the disclosed confidential information is (or may be) subject to U.S. export restrictions, or contains classified information, the parties should also consider adding a clause prohibiting the disclosure of the confidential information to certain countries. If the disclosed confidential information includes software or code, then the NDA should include a clause prohibiting reverse engineering. If may also be useful to include a clause that states that the receiving party shall not have any right in or to the disclosed confidential information other than in furthering its business relationship with the disclosing party, not even the right to enter into a deal with you.
Conversely, the NDA should expressly permit certain types of disclosures— such as to the receiving party's attorneys and accountants (with appropriate safeguards).
Careful consideration should also be paid to time limits. Sometimes a party will insist that the non-disclosure obligations only survive for a limited period of time, such as from three to five years. Beware, a fixed period may be inappropriate for confidential information that has an indefinite life (e.g., the secret formula for Coke). In such circumstances, confidentiality provisions should require non-disclosure for as long as the covered information remains confidential. The NDA should state that, even after the negotiations between the parties terminate, the non-disclosure obligations continue to be binding. However, in some instances involving technology, a few years may be acceptable, since the technology may change so fast so as to render the confidentially disclosed information worthless. If this is likely the case, focus your energies on what is a reasonable time period.
Return of the Confidential Information.
Another often overlooked clause is the duties of the receiving party upon termination. Most NDAs should require that upon termination, the receiving party deliver all originals and copies of the disclosed confidential information to the disclosing party and/or certify to the disclosing party that all such copies have been destroyed. In cases where the receiving party desires to retain a copy of the disclosed confidential information with its legal department, careful drafting is a must.
Other Often Misplaced Terms.
Some NDAs include non-compete restrictions, limiting the other party's ability to enter into a certain line of business during the term of the NDA, and for a period of time following expiration of the NDA (usually no more than six months). Other NDAs include provisions limiting the receiving party's ability to solicit employees, suppliers, contractors and/or customers of the disclosing party. If possible, and where appropriate, these issues should be handled under separate agreements.
To encourage compliance, all NDAs should provide that the successful party shall be entitled to reasonable attorney's fees and costs if it has to enforce a breach of the NDA. In addition, all NDAs should include a provision allowing for equitable remedies and injunctive relief, as quantifying actual damages can be difficult.
NDAs has become commonplace. Nevertheless, it is often difficult to get another party to sign and agree to the terms of a NDA because the party agreeing to be bound is faced with potential liability where no liability existed previously. If faced with this dilemma, carefully consider forging ahead. You may be better off seeking out an alternative with someone willing to execute a reasonably drafted NDA.
If you have any questions, or would like the assistance of business law attorney, Melissa C. Marsh, please call 818.849.5206 or Email: Melissa C. Marsh.
California business lawyer, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals and businesses throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
© 2002 Melissa C. Marsh. All Rights Reserved.