By Melissa K. Hinote, CP

Nearly every legal professional confronts a nondisclosure agreement (NDA) at some point in his or her career, either as a party to the agreement, or in drafting the agreement for the parties. Law firms and attorneys tend to use NDAs to restrict information sharing by nonattorney employees. An NDA is an agreement between two or more parties outlining confidential information and restricting disclosure of the information. The agreement can be unilateral or bilateral. The parties can be as varied as two businesses partnering and sharing information or an employer sharing confidential information with its employees.

Why an NDA?

When a company intends to share information with another business or individuals, and it wants to restrict the distribution of that information, a nondisclosure agreement becomes necessary. Sometimes, an individual may bring information to a business through his or her employment or through some other partnership—an NDA can be used in that situation as well. NDAs are often used to protect technical or commercial information from dissemination. For example, a company like Coca-Cola™ might require all employees privy to its secret formula to sign an NDA prohibiting disclosure of that secret information to anyone outside of the company or a specific department of the company. An NDA may also be necessary when a company wants to avoid forfeiture of its patent rights in countries like the U.S. where public disclosure of an invention can be deemed such forfeiture.

Provisions

First, the parties must define which information is considered confidential. This can be a very negotiation-intensive activity, or—as is the case with many employer/employee agreements—the confidential information could be unilaterally and broadly defined. When negotiations are necessary, the disclosing party usually wants the definition of confidential information to be as broad as possible, while the recipient party wants the definition to be as narrowly tailored as possible. Next, the agreement must describe how the confidential information is to be handled by the parties in receipt of the information. A typical provision might detail specific purposes for using or disclosing the information, specific entities entitled to receive the information, and specific processes for permissible disclosure of the information. Further, the agreement must state the consequences for disclosing or otherwise using the information in a way prohibited or not explicitly authorized by the agreement.

Next, the agreement should contain a section outlining exceptions. For instance, confidential information which has been made public either by the company or through some other entity may be deemed an exception. Information disclosed pursuant to a court order may also be an exception. Other examples of exceptions include information the recipient possessed prior to signing the agreement, information created by the recipient, and information disclosed to the recipient by a third party. While none of these exceptions are required, these and more may be considered for use in an NDA.

The agreement may also have an ownership clause, which specifies who owns the information described in the agreement and which explains that disclosure of that information to the recipient party does not grant any ownership, right, title, etc., of the information to the recipient party. This section may also require any physical portrayals of the information, such as drawings or prototypes in possession of the recipient party, to be returned to the disclosing party at a specific time or upon a specific event. Of course, if any rights are to be granted to the recipient party, then such rights may be described in this section.

Another very important provision is the term section. In this section, the parties include both the period of time during which the confidential information will be disclosed to the recipient party and the time period during which the information remains confidential. These periods can be quite specific, such as three years. Or, they could rely on events or actions, such as the information being made public by act of the owner party.

As with all agreements, the parties tend to include a clause regarding governing law, dispute resolution, and the assignment of rights and obligations during the term of the agreement.

Consequences of Breach

When a recipient party breaches the terms of the NDA, it becomes subject to any consequences outlined in the agreement, including equitable relief or monetary damages. However, it is often expensive and time-consuming to enforce an NDA, and even more expensive to prove monetary damages. When an injunction is sought, it may already be too late to contain the information that has been impermissibly disclosed. For this reason, many businesses prefer to avoid disclosing information, even with an NDA in place, without feeling sure that the recipient party is trustworthy.

Conclusion

An NDA is a common and quite useful agreement for the purposes of keeping information disclosed between parties private and confidential. Like most other agreements, an NDA should clearly define the parties, the subject matter being covered, expectations of the parties, the length of the agreement, and consequences for any breach of the agreement.”

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