Using Non-disclosure Agreements to Protect your Company’s Confidential Information

Every business, whether it is a startup or an established business, has valuable confidential information that it wants to protect.  This confidential information could be a potential patent, new software, marketing strategies, customer lists, pricing information, or product development plans. When a business wishes to share confidential information with an outside party, such as a consultant, investor, or potential strategic partner, it will use a nondisclosure agreement, or NDA, to protect the information it discloses. This blog post will discuss the importance of NDA’s and key issues to consider when using one.

Why Use an NDA?

An NDA is an important tool in protecting a company’s (or an individual’s) confidential information. Among other things, a good NDA will describe the purpose for which the party or parties are disclosing information, the kind of information covered by the agreement, who may have access to the information, how the information may be used by the receiving party and how the receiving party must protect the confidentiality of the information. Without a good NDA, a party disclosing confidential information may lose control of a valuable asset, may lose the ability to obtain a patent, or, if the other party is dishonest or unscrupulous, find that other party using or selling valuable information to others.

Key Elements of an NDA

Purpose: the NDA should define the purpose the parties are disclosing confidential information, such as “evaluation of marketing strategies” or “testing of commercial potential”, etc.  That way, if the receiving party is found to be using the confidential information for some other purpose, it is easier to prove a violation.

Definition of Confidential Information: the NDA should define what is considered confidential information. The definition of confidential information should be broad enough to include all of the information that may be disclosed. The definition can include a list of specific items (for example: business plans, strategies, financial projections, customer lists, technical or engineering research or methods, devices, blueprints, schematics, trade secrets, software development tools, pricing information, etc.)  Depending on the purpose of the NDA, the definition might also include the fact that the parties are considering a relationship, which they may not want others to learn of.

Exclusions from definition: NDAs commonly state that certain information is excluded from the definition. The exclusions include: if it is already publicly known or becomes public but not through a breach by the receiving party; was already available to the receiving party on a non-confidential basis or developed by it independently; or received from some third party that is not bound by a confidentiality obligation.

Security requirements: an NDA should require the party receiving the confidential information to adopt reasonable measures to safeguard it. The measures adopted should be tailored to the type of information disclosed, such as whether it is in electronic or paper form, or a physical object of some kind. Often the NDA will state that the measures should be at least as effective as those the receiving party uses to protect its own information, but that risks assuming the receiving party does use effective measures to protect its own information.

Return or destruction of information:  the NDA should give the disclosing party the right to require the other party to return the confidential information on request (or when the NDA terminates). Often the receiving party will want the option to destroy or delete the information, especially if it may combine its own confidential information with the other party’s.  This is usually acceptable, but the NDA should require a written certification that the information was in fact destroyed or deleted.

These are a few of the key provisions that every NDA should include.  Depending on the nature of the relationship and the purpose of the NDA, there may be other provisions included, such as use of information learned from reviewing the confidential information.  Those issues are beyond the scope of this overview article.

Risks of an NDA

Of course, any NDA is only as good as the willingness of the parties to comply with it.  If a party receiving confidential information discloses that information in violation of the agreement, the risks are:

• Information that has been disclosed cannot be “un-seen”; once out in public it is impossible to hide it again
• If you believe the other party violated the agreement by disclosing the information publicly, money damages may not make you whole for the disclosure
• If you believe that the receiving party used the information improperly, this can be difficult and to prove

Even with these risks, it is still to your company’s advantage to use a written NDA to protect your confidential information. As part of the process, you should evaluate the parties you are considering disclosing information to, to make sure they are reputable and trustworthy.

This post has highlighted a few of the issues involving the use of nondisclosure agreements. If you have questions about NDA’s, please contact Mark Spitz at mark@spitzlegalcounsel.com or 720-575-0440.