At the time of negotiation, companies have a mutual interest in protecting the information they exchange, as well as in keeping relevant aspects of a business negotiation hidden from third parties. Likewise, in the event of termination of a legal relationship, it is important that the other contracting party cannot go to the competition or potential investors and take advantage of confidential information.
This is where non-disclosure or confidentiality agreements come in. Below, we tell you everything you need to know about NDAs.
What Is a Non-Disclosure Agreement (NDA)?
A non-disclosure agreement (NDA), confidential disclosure agreement or confidentiality agreement is a legally binding contract that defines the conditions upon which individuals and businesses agree to share confidential material, knowledge, or information with each other, and protect it from disclosure to others. For example, an NDA may be used at the start of a business relationship in order to protect each parties sensitive information.
Definition of Confidential Information
A definition of confidential information must be included in every NDA. It outlines the scope of the agreement made in the legal contract. Disclosing parties will typically want it to be as broad as possible in order to have the most comprehensive protection, while receiving parties will seek to have a definition as narrow as possible in order to limit their responsibilities and potential liabilities.
The best advice is to tailor the definition to the nature of the information that is disclosed, defining both what type of information is included in the definition and what is excluded.
How to Protect Your Company’s Confidential Information and Intellectual Property?
To protect your company's sensitive information, we recommend the following:
- Keep it secret
Don’t disclose it to others. Technically, this is called a trade secret and is protected by laws.
- If you must disclose the information, control the manner of access
Require the party seeking access to the information to review the information only within the confines of your system —and restrict recording.
- When sharing information, seek to limit its distribution
Require the receiving party to return or destroy the information upon completing the purpose of the disclosure. If the receiving party disregards the terms of the contract, a legal action can be pursued.
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What makes an NDA unacceptably risky?
- Too broad a scope
- Too long a term
- Too many burdens (strict standard of care)
- Too many restrictions (non-solicitation, indemnities)
Types of NDAs
There are three types of NDAs: unilateral, bilateral and multilateral. Next, we will explain what each one consists of.
Unilateral NDAs
In this type of agreement, also known as one-way NDAs, only the disclosing party enjoys protection over confidential information.
When is it convenient to use this type of agreement? When the promulgating party (e.g. the inventor) shares confidential information about the development of a new product with the receiving party (usually an investor —or potential investors), who is obliged not to disclose it to third parties.
Bilateral NDAs
A bilateral confidentiality agreement (also known as mutual NDA or two-way NDAs) is a legal document that protects two parties that have to exchange private and specific information about each other to work in a joint venture, or to execute a project whose result will be used by both parties.
When is a bilateral NDA necessary? It’s frequently used in company mergers. Also, there are cases in which a unilateral NDA is presented and one of the parties requests a bilateral agreement, even though only one of them is the one who discloses confidential information.
Multilateral NDAs
A multilateral NDA involves three or more parties, at least one of which has to disclose confidential information.
When is a multilateral NDA necessary? This type of agreement is very useful to eliminate the need for multiple unilateral or bilateral agreements between few parties.
For example, instead of a company entering into three or four unilateral confidentiality agreements for a single project, it can enter into a single multilateral NDA. However, it should be taken into consideration that “simplifying” this process using a single multilateral agreement may generate more extensive and complex negotiations to reach a consensus among so many parties.
Key Terms
Term of the Agreement
The term of the agreement should be based on the nature and sensitivity of the information. For general business information, a one-to-two-year time frame is generally adequate. For highly sensitive information, a longer term or an open-ended term continuing until return or destruction may be appropriate. Here are a few examples:
⦿ Fixed term___________ (for example, 2 years) or
❍ until the information is returned (or destroyed) or
❍ until a superseding agreement
Note: in the following sections, the arrows indicate favorability to the discloser or the receiver, whereas the character “--” indicates neutrality.
- << highly favorable to discloser
- < favorable to discloser
- -- neutral
- > favorable to receiver
- >> highly favorable to receiver
Most confidentiality agreements have a fixed term of two years or less. However, the term should be selected based on the degree of sensitivity of the information.
Scope of Confidential Information
The scope of Confidential Information defines the nature of the information that is protected by the NDA and enhances the enforceability of the agreement. In general, disclosing parties seek to have a broad definition in order to protect as much of their information as possible, while receiving parties seek to narrow the scope of the information in order to limit their responsibilities and exposure.
- What’s included? Choose one of the following:
< Broad definition (all information disclosed)
Specific Information
-- Financial
-- Employment
-- Technical
Narrowly defined information
> Written
>> Marked
> Dated
- What’s excluded? Select one or more of the following:
-- Publicly known information
-- Information that is already known
-- Information received from a third-party source
-- Independently developed information
> Information released from confidentiality obligations by the disclosing party
> Older information
The broader the definition of confidential information, the greater the protection to the disclosing party and the more burden on the receiving party. In general, the definition should be narrowly defined as needed to cover the purpose of the exchange. The more the exclusions, the narrower the scope: less protection to the discloser, the less the burden on the receiver.
Nature of The Obligations (One Way or Mutual)
- What must the receiving party do?
-- Use information solely for purpose of disclosure
-- Keep information confidential; not disclose it to others
< Protect information from unauthorized access (specify the standard of care)
<< Notify disclosing party in the event of unauthorized disclosure
- What can’t the receiving party do?
< Reverse engineer the information
<< Solicit staff (can’t hire disclosing party employees)
<< Solicit other opportunities (if the information is disclosed in the context of a possible sale, can’t seek other potential buyers)
- What can the receiving party do?
> Disclose information to employees (and consultants)
-- Disclose information if required by court order
All confidentiality agreements include an obligation to keep the information confidential.
- 40% include an obligation to protect the information
- 35% include an obligation to inform the disclosing party in the event of any inadvertent disclosure
In summary, confidentiality agreements are vital in case you want to keep information about your new product or company protected. There are different types of NDAs, so try to proceed with the one that meets the needs of your project and your vision; and always remember that your agreement should be as detailed as possible, to prevent third parties from taking advantage of it.
Having a solid NDA will also help that, in case there is a breach of contract, your company can initiate a proper claim.
If you are interested in simplifying the process of creating, executing, and analyzing contracts, you can get our demo. At Akorda, we work with artificial intelligence to streamline contracts and reduce risks.
Kingsley Martin
Kingsley is a founder of Akorda. He holds law degrees from Oxford University (First Class Honours) and Harvard Law School, and has 30 years of experience in the practice of law, software design and development, strategy, and management. Kingsley pioneered the new discipline called contract analysis. He is a founder of KMStandards and has developed software capable of automatically analyzing legal agreements and creating contract standards.
