12 Considerations for Non-Disclosure Agreements

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As the year quickly comes to a close, I recently engaged in some file cleanup.  During this cleanup, it struck me that the most common type of agreement – by far – I worked on for my clients in the past year was the Non-Disclosure Agreement (NDA).  While NDAs are no doubt considered “routine” or “standard” by practitioners and business clients alike, I suggest that each time you engage in the drafting and negotiating of one in the New Year, you actually question the forms you normally use by considering the following:

1. Parties.  Who is the contracting party?  That is, does the Non-Disclosure Agreement (“NDA” or Confidentiality Agreement) specify a parent, affiliate or subsidiary company?  Does the NDA allow the party receiving your client’s confidential information to share it with a parent, affiliate or subsidiary?

2. Personnel.   Does the NDA need to specifically list the employees and other personnel of the receiving party who can rightfully access the confidential information?

3. Direction.  Does the NDA contemplate a mutual (i.e., “two-way”) exchange of confidential information or just a “one-way” exchange?

4. Subject Matter.  Does the NDA accurately describe the subject matter and form of the confidential information (e.g., documents, discussions, visual presentations, etc.) being disclosed?  Is the existence of the NDA itself also considered confidential information?

5. Term and Length of Obligation.  How long does the NDA stay effective (i.e., when is it effective and when does it terminate)?  Also, how long does the confidentiality obligation lasts?  One year?  Two years?  Three years?  As long as the discloser maintains the confidentiality of the information?

6. Use.  What are the allowable uses of the confidential information (i.e., for deciding whether to enter into a business transaction, for testing purposes, etc.)?

7. Labeling.  Does the NDA require confidential information to carry a designation (e.g., markings, stamps, etc. on documents)?  May confidential information be disclosed orally?  If so, does the NDA require a follow-up letter confirming the confidentiality of such oral disclosures?

8. Obligations.  Does disclosure or receipt of the confidential information create any obligations (e.g., the obligation to enter into a definitive, substantive agreement or some specific relationship with the other party)?

9. Independence.  Does the NDA specifically allow the receiving party to independently develop products or services that compete with the confidential information they receive, or independently pursue similar opportunities?

10. Residuals.  Does the NDA contain a “residuals” clause that allows the receiving party to freely use any confidential information mentally retained by their personnel who rightfully have had access to such confidential information?

11. Intellectual Property.  Does the NDA contain any intellectual property (IP) licenses – explicit or implied?  Does the NDA need any IP ownership provisions?  For example, will there be meetings between the parties that turn into joint “brainstorming” sessions where new IP may be created?  Or, does the NDA contemplate the receiving party will assist the disclosing party in product development activities (e.g., manufacturing, fabrication, design, coding, etc.), and thus need to address the improvement of existing IP or the ownership of newly-developed IP?

12. Assignment.  Can the parties assign or transfer the NDA (e.g., in the case of a merger or the sale of the business) or certain rights/obligations under the NDA?

In sum, every NDA must answer the “what if this happens” questions raised by the parties’ contemplated relationship (e.g., prospective vendor, joint venturer, partner, etc.).  While no NDA can practically answer all the “what ifs,” a properly-drafted one will anticipate those that are most probable.  Thus, the provision of quality legal services demands that practitioners tailor each NDA to their client’s specific (and oft unique) situation.  In other words: avoid slavishly using, and always question, the forms!

This post originally appeared on IPWatchdog.com and reflects my current personal views and should not necessarily be attributed to my current or former employers, or their respective clients or customers.

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