Non-disclosure agreements or “NDAs” are often the first contract entered into by parties desiring to do business together, but it is important not to rush to sign a form NDA just to get the conversation started.
The following key provisions and potential pitfalls should be considered when negotiating NDAs:
Are both parties disclosing confidential information? If not, a unilateral NDA should be used.
- Requirements to Label Confidential Information
NDAs often contain language requiring confidential documents shared between the parties to be labeled “confidential.” In the case of confidential information shared through verbal communication at discussions or meetings, NDAs may also require that the disclosing party provide written notification to the receiving party indicating that the information shared verbally should be treated as confidential pursuant to the NDA.
While it may seem easy enough to label all communications as confidential, potential pitfalls can occur if the parties do not actually implement procedures to comply with the confidentiality requirements of the NDA in effect. Since the first disclosures of confidential information between parties after an NDA is signed are often made verbally at a meeting or in a discussion, a party could disclose confidential information it believes is covered by the NDA, but if not documented properly, the disclosing party could inadvertently lose the protection for which it negotiated.
- Restrictions on Use and Disclosure
NDAs always contain restrictions on the ability of a party to disclose confidential information, but they should also include specific restrictions on the receiving party’s ability to use the confidential information.
- Definition and Standard Exclusions
An NDA should define what constitutes confidential information, should include any prior disclosures of information exchanged by the parties if done without the protections of the NDA (if applicable), and should contain the following standard exclusions outlining what does not constitute confidential information:
- Information received from a third party with the right to disclose the confidential information
- Information independently developed without the use of or reference to the confidential information
- Information known to the receiving party at the time of disclosure
- Information that is publicly available without breach of agreement by the receiving party
- Consent by the disclosing party for recipient to disclose confidential information
- Information required by law to be disclosed by the receiving party (if included, this should be subject to prior notice and review—and the opportunity to redact certain confidential information from such disclosure—by the disclosing party)
- Residuals Clause
Residuals clauses are clauses that make an exception to the definition of “confidential information” for information “retained in a person’s memory.” This is an aggressive position for the receiving party that should be viewed with scrutiny by the disclosing party and, if agreed to, it should be appropriately tailored (e.g., by limiting the exception to unaided memory and requiring the destruction of all notes and summaries made by the receiving party.)
- Disclaimer of Consequential Damages
Parties often propose language disclaiming consequential damages for breaches of an NDA. Such a disclaimer is not acceptable for a disclosing party, since the damages likely in connection with the breach of an NDA would be consequential damages, and therefore leave the disclosing party with no remedy for breach of the NDA.
- Term (and a note on trade secrets)
Careful consideration should be given to the term of an NDA, and what length of time makes sense in relation to the restrictions on use and/or disclosure of the applicable confidential information. If any confidential information being disclosed constitutes trade secrets, language should be added to clarify that any expiration of the obligations with respect to confidentiality does not apply to trade secrets.
All of the points above should be considered when drafting and negotiating NDAs, but don’t forget one of the most practical ways to limit risk—only disclose confidential information that is absolutely necessary to be disclosed!
This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our previous Contract Corner posts on the Sourcing@MorganLewis blog for more on contracts, and be on the lookout for future posts in the series.