A friend of mine and I were talking about Rodney Dangerfield last night. You know what else often gets no respect? Nondisclosure agreements (“NDAs”). Small business owners may plunge into negotiations, revealing confidential information with no agreement in place. Well, like any contract, the NDA can provide vital protection, but should be drafted with care. Here are some tips to consider.
1. NATURE OF THE OBLIGATION. Naturally, the heart of the NDA is language prohibiting one party from wrongfully using or disclosing certain information received from the other. The NDA should require the recipient to use at least the same degree of care that it would use to protect its own confidential information.
2. MUTUAL vs. UNILATERAL. Your lawyer needs to know the types of information to be disclosed by each party. Obviously, the disclosing party wants stronger protection; the receiving party wants fewer restrictions. Nonetheless, in almost every case each party will disclose some sensitive information, so it almost always makes sense to include mutual confidentiality obligations.
3. PROTECTED MATERIAL. To protect confidential information, one must first define it. Often the NDA gives examples, such as “technical, financial, and business information” and states that it may be in oral, written, physical, or electronic form. It may be defined as anything that should “reasonably be deemed confidential” or may grant protection only if the information is marked as confidential.
4. MARKING REQUIREMENT. The receiving party may insist upon a marking requirement, but the disclosing party may reject such a requirement, as some employees or agents may fail to mark before disclosing and some information cannot easily be marked. As a compromise, you can state that confidential information must be marked as such, or identified as confidential in a subsequent writing.
5. EXCEPTIONS. The exact wording may vary, but it’s only fair that certain types of sensitive information are excluded, such as information available to the general public, or previously known, independently developed, or rightfully received by the recipient through legal means.
6. PERMITTED USE. The NDA should state that confidential information may be used only for a particular purpose, such as exploring the possibility of a business relationship between the two parties, and no other purpose. Of course, the terms of that relationship will be laid out in a separate agreement.
7. PERMITTED DISCLOSURE. NDAs typically contain an exception, permitting disclosure by the recipient to its lawyers, accountants, or employees who have a legitimate need to know or in response to a court order. You should make sure the legitimate "need to know" requirement is explicit. You can also insist that prior notice is required before any disclosure and any third-party recipients must agree to confidentiality obligations at least as strict as those stated in the NDA.
8. DURATION. It’s probably best to state two terms in the NDA. First, state a term for the entire NDA, because a contract with no stated term is often found to be terminable at will. Then, the confidentiality obligation may be described as lasting, “For the term of this Agreement and XX years thereafter.”
9. NO WARRANTIES. While it has nothing to do with confidentiality, it may be prudent to state in the NDA that all information is disclosed “as is” and without warranties. Such language may not ward off legitimate claims for fraud or concealment, but may give some protection against unmerited claims.
10. REMEDY FOR BREACH. The NDA should state that in the event of a breach, money damages would be insufficient and the parties agree injunctive relief is proper.
If you are a small business owner and have questions or would like help with a nondisclosure agreement, give us a call at 253.858.5434 to see how we can help. We proudly represent clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.