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One of the most common requests our clients make is for us to help them review and negotiate nondisclosure agreements, also known as NDAs, MNDAs or confidentiality agreements. These agreements are typically fairly short and, let’s face it, advice from a lawyer is expensive, so we have written this article to provide background that might help companies streamline the process.
Why are NDAs important?
If your company has valuable intellectual property (IP), then you probably need to use NDAs to protect your IP. There are different bodies of law to protect specific types of IP – patents for useful inventions (such as the touch screen technologies used on our phones and computers), copyrights for creative expression (such as books, songs and films). For IP that does not fall into one of those specialized categories, the body of law that can protect your brilliant ideas is trade secret law. Most states have adopted a version of the Uniform Trade Secrets Act, which defines a trade secret as “information … that (i) derives independent economic value … from not being generally known to … other persons, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Any company that shares its valuable IP with other parties without getting those other parties to contractually agree that they will keep it secret probably cannot rely on trade secret protection. That is the primary purpose of an NDA: to demonstrate reasonable steps to protect confidential information or trade secrets when sharing with third parties.
Is it illegal to violate an NDA?
Maybe, but you should assume it would not be prosecuted as a crime. The Economic Espionage Act makes it a crime to steal trade secrets, but prosecutions are relatively rare and tend to be limited to cases with national security implications. As a result, you should probably think of an NDA as a necessary step to protect your rights if someone misuses your trade secrets, but then you will have to be prepared to bring a civil case against the perpetrator.
If I have an NDA in place, is it OK to disclose: ____ [my source code, the formula for my new drug, the steps in my manufacturing process, …]?
Well, remember that having an NDA in place only meets the minimum standard necessary to be protected, but it might not be enough. Companies that have had all their employees sign NDAs have lost trade secret protection cases where they did not take reasonable security measures to restrict access to those with a need to know. Also remember that, even if the NDA and other security measures are reasonable, trade secret law really just opens the door to taking the perpetrator to court, and that is expensive! Even with an NDA in place, you should consider limiting what you disclose to what is truly necessary under the circumstances. And, even if it is necessary to disclose your “secret sauce,” make sure you have enough experience with the information recipient to be confident you probably will not be seeing them in court later.
Should I visibly mark any confidential disclosures if I have an NDA in place?
Absolutely. Some NDAs have specific marking requirements that must be satisfied in order for the NDA’s protections to apply, such as “Confidential and Proprietary Information of ____,” but it is smart to mark any sensitive disclosures even if it is not required by the NDA. This simple step can help avoid a courtroom debate about whether your sensitive information was actually covered by the protection of the NDA.
Which is better: a Mutual NDA or a “One-Way” NDA?
It really depends on whether both parties are making disclosures of confidential information (use a Mutual NDA) or if the confidential information is only going in one direction (use a simple NDA that only protects the disclosing party). Some companies will use a mutual NDA even if only one party is making disclosures, but we believe that approach unnecessarily puts a contractual compliance burden on the party that is only receiving — and not disclosing — confidential information.
Advanced topics:
We hope this article gets you thinking about the purposes and protections of NDAs and when and how to use them effectively. Even though NDAs are typically very simple contracts, there are further nuances to consider. Email us if you want our thoughts on deeper NDA topics, such as (i) which employees/contractors should be authorized to access information protected by an NDA, (ii) 3-way NDAs, (iii) the “residuals” clause, (iv) exceptions to the requirement of confidential treatment, and (v) how long NDAs should last.
Chris has spent most of his career as a strategic legal advisor to company founders, board members, executives, and investors, primarily for companies in the information technology and life sciences industries. His deep experience with companies in those industries helps him bring a practical business perspective to his legal work. Chris often serves as outside general counsel for these companies, and his practice includes a high volume of seed and venture capital financings, private placements, and mergers & acquisitions for his clients. You can email him at clynch@wyrick.com.
The purpose of this article is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.
