Few things are more dangerous in business than amateurs handling non-disclosure agreements.
NDAs are intended to allow two parties to safely share highly sensitive information in order to engage in discussions regarding a potential transaction or commercial relationship – often defined as the “Business Purpose.”
In a proper NDA, each party agrees to the following basic confidentiality protections and use restrictions:
- protect the other party’s “Confidential Information” as rigorously as it would protect its own,
- do not share or disclose such information except as necessary for the Business Purpose, and
- do not use such information in any way other than for the Business Purpose.
A CEO’s casual “I’ve got this” with an NDA can be followed shortly by a third party lawfully using the company’s intellectual property to compete against it.
While this may seem like an extreme and rare outcome, there are multiple types of NDA mistakes that can lead to catastrophic intellectual property consequences for a company or entrepreneur.
Far too many businesspeople are simply too naïve about NDAs and the willingness of others to opportunistically exploit NDA gaps or mistakes. NDAs are short and they all seem to have similar legalese, but it is foolish to assume that NDAs require less care or sophistication than more complex agreements.
Here are nine tips for staying out of trouble with NDAs
Tip One – Never Overshare – Even Under an NDA
NDAs are not self-enforcing and no, you can’t just call the police to report a perceived unfairness.
Always assume and understand that you will spend hundreds of thousands of dollars and months or years of litigation to stop someone from misusing your company’s IP, even if you feel they are violating your signed NDA.
And it will be difficult to even know when violations are happening.
So just share what you need to and nothing more.
Tip Two – Do Not Sign Unilateral NDAs
Never sign an NDA that only protects the other party. In such an NDA, only the other party will be defined as the “Disclosing Party,” and thus that will be the only party entitled to the agreement’s use restrictions and confidentiality protections.
Large companies with substantial negotiating power frequently impose unilateral NDAs, as well as one-way confidentiality protections in other types of commercial agreements. When faced with a unilateral NDA or other one-way confidentiality protections, always assume the other company intends to take advantage of your interest in partnering with them in order to steal your intellectual property.
If you sign a unilateral NDA, do not share any confidential information under it. If you do, the other party will be able to do anything it wants with your information. Making this mistake is much worse than having no NDA, as it implicitly undercuts any state or federal trade secret protections you might have had.
Additionally, sharing any trade secret without confidentiality protections invalidates its trade secret status, as both state and federal trade secret laws generally define trade secrets as information that (i) is secret, (ii) that has commercial value because it is secret, and (iii) that is subject to reasonable protections to maintain its secrecy. Many cases alleging theft of trade secrets have been lost due to evidence of lax NDA practices and other confidentiality weaknesses.
In signing any unilateral NDA or one-way confidentiality clause, you are effectively agreeing that no information you share is protected from disclosure or misuse, including use in direct competition against you. That is how any judge, jury, or arbitrator will read the document and apply basic contract law. If you meant for your information to be protected, the document would have said so.
There is no rule of “implied fairness,” “good faith,” or any other fluffy rule of equity that kicks in to protect companies from their NDA mistakes.
Tip Three – Reject Narrow Definitions of Confidential Information
Cross out any language in a proposed NDA that says (i) documents must be marked “confidential” or “proprietary” in order to be covered by the NDA and/or (ii) that information shared orally must be followed up by any kind of written memorandum or other document describing the information to be protected under the NDA.
The definition of what constitutes “Confidential Information” should be detailed and appropriately expansive, preferably culminating in a catchall clause along the lines of “as well as all other information that a reasonable person would consider to be confidential information under the circumstances.”
If you permit a confidential information marking requirement to remain in an NDA, anything shared without the required markings will not be protected. You have given that information to the other party. If you allow a requirement for a written memorandum describing orally shared information, anything shared orally without a follow-up memo will not be protected.
Because businesspeople are likely to fall short in correctly marking documents as confidential or writing legally sufficient memos detailing oral communications about confidential information, you should strike all such barriers to protection.
Tip Four – Understand Agreement Duration Versus Protection Duration
Almost every NDA identifies two time frames – one is the term or duration of the NDA, and the other is the term during which shared confidential information must be protected from improper use and disclosure.
Always be very focused on each of these two timeframes. A typical NDA might have a one or two year “term,” meaning that confidential information can be shared under it during that timeframe.
Most NDAs will then also say that its non-disclosure and misuse protections will continue for a specific number of years beyond the NDA’s termination date.
This latter clause essentially means that, after the stated time frame, each party can do what it wants with whatever confidential information was shared under the NDA, including to compete against the party that shared the information.
If your company will be sharing important information, this time frame should be sufficiently protective – perhaps as long as five years.
Time limits for protection of confidential information are another good reason for limiting disclosures to those that are absolutely necessary in support of the stated Business Purpose.
Tip Five – Protect Trade Secrets with Specific Language
In any NDA that has a time limit after which any shared confidential information will no longer be protected from sharing or from uses beyond the stated Business purpose, include language along these lines immediately following language describing that timeframe:
“Notwithstanding anything else herein to the contrary, the Parties agree that, as to Confidential Information that constitutes a Trade Secret, as defined by applicable state or federal law, the confidentiality and use prohibitions and restrictions herein shall continue for so long as such Confidential Information remains a Trade Secret.”
As noted earlier, a clause like this is required because confidentiality protections for trade secrets cannot be allowed to expire after an arbitrary date.
Tip Six – Carry Over Similar Confidentiality and Use Requirements to Subsequent Commercial Agreements
It is important to realize that if the parties go forward with a commercial or transaction agreement of any kind, that agreement is highly likely to explicitly supersede and replace the NDA. This almost always occurs by operation of a clause in virtually every commercial or transaction agreement called a “Merger Clause,” or “Entire Agreement Clause.”
Those clauses usually say that the new agreement supersedes and replaces any prior agreement or understanding between the parties regarding anything covered in the new agreement. If the new agreement has a “Confidentiality” or “Confidential Information” clause, any existing NDA absolutely will not apply to information shared after the new agreement is signed.
So it is important to include comprehensive confidential information protections in any commercial or transaction agreement and not to mistakenly rely on a previously signed NDA to protect subsequently shared confidential information.
Tip Seven – Strike All “Residuals” Language
If you see a clause captioned “Residuals,” know that the other party is definitely trying to steal your intellectual property. These clauses only appear in about one in every fifty NDAs you are likely to see, but the essence of a Residuals clause is that the other party can do whatever it wants with anything you share that they can simply remember.
Here’s a classic “Residuals” clause:
Use of Residuals. Notwithstanding anything herein to the contrary, either Party may use Residuals for any purpose, including without limitation use in development, manufacture, promotion, sale and maintenance of its products and services; provided that this right to Residuals does not represent a license under any valid patents, copyrights or other intellectual property rights of the disclosing party. The term “Residuals” means any information retained in the unaided memories of the Receiving Party’s employees who have had access to the Disclosing Party’s information pursuant to the terms of this Agreement. An employee’s memory is unaided if the employee has not intentionally memorized the Information for the purpose of retaining and subsequently using or disclosing it.
Residuals clauses come in many forms and often have distracting language designed to lull the unsophisticated reader into believing that the other party’s concerns are legitimate. No, they are simply trying to steal your information.
Here’s another example:
Residuals. Neither party is required to restrict work assignments of Representatives who have had access to Confidential Information. Neither party can control the incoming information the other will disclose in the course of working together, or what its Representatives will remember, even without notes or other aids. Use of Confidential Information in such Representatives’ unaided memories in the development or deployment of each Party’s respective products or services does not create liability under this Agreement or trade secret law.
Tip Eight – Have Trusted Counsel Review Every NDA.
You don’t “got this.” Have a trusted, competent lawyer review every NDA.
This article has touched on some key points, but there are other important clauses and issues to look for in NDAs that the layperson is unlikely to catch.
In-house counsel should be able to review third-party NDAs within 24 hours, and the time billed by outside counsel to review an NDA probably shouldn’t exceed twenty minutes. If your lawyers can’t hit these numbers, consider new counsel.
Signing a weak NDA can cause intellectual property issues that are both highly embarrassing and “career-limiting” – an old-school euphemism for getting fired, demoted, or not promoted. Having competent counsel review and sign off on NDAs greatly lowers both company risks and personal risks.
Tip Nine – Impose NDA Signing Rules
Companies should adopt several best practices for signing NDAs. First, only a select few individuals should be able to sign NDAs – possibly only the CEO, CFO, and the General Counsel – and then only after careful legal review.
Second, NDA signors should be required to ensure that every NDA is signed in the complete, correct legal name of each party. Each party’s legal name generally appears in two places in NDAs and in most other agreements – in the first paragraph and in the signature line.
Don’t assume that close is good enough. Binding a legal entity requires correctly naming the legal entity. Agreements signed in any name other than the entity’s correct legal name, including DBAs, may well be unenforceable, depending on the jurisdiction, judge, or jury.
In an egregious example of this type of issue, an unsophisticated executive signed an NDA in his own personal name and then proceeded to share all of his company’s core trade secrets with a direct competitor. When challenged about launching competitive products incorporating the trade secrets, the competitor simply said, “Too bad, we do not have an NDA with your company.” We took that losing case to court and lost on summary judgment.
Third, NDA signors should be required to ensure that they receive and archive fully executed versions of all NDAs they sign.
It is surprisingly common for people who sign contracts to not bother to follow up and ensure that they receive the fully executed agreement. Unfortunately, half-signed NDAs or other contracts are not “almost as good” as fully executed agreements – they have no legal value. Arguably, in fact, a half-signed agreement is evidence that the other party had no interest in signing it.
Hope that was helpful!
-Paul S.