Many transactions begin with each party handing the other a nondisclosure agreement (NDA), and each party battling over whose “form” controls. However, it’s common for both parties to overlook the fact that there is no “one-size-fits all” form NDA. Before entering into an NDA, each party should examine the terms to ensure that the agreement makes sense for the party’s business. Each party should ensure that the agreement adequately protects its own information, while not going so far as to subject the party to confidentiality procedures that can create issues down the road.
Issues to consider when you are entering into an NDA include:
- Nature of the disclosure: Are you more likely to be the discloser or the receipient of confidential information? If you will be a discloser, then a strong agreement may benefit you. If you will only be the recipient, then you might seek a less stringent agreement.
- Duration of the confidentiality obligation: Some NDAs require information to be kept confidential forever. Others have a more limited term, such as 2 to 3 years. A long term is valuable if the disclosure involves trade secret manufacturing processes, chemical compositions, or similar information. However, if you are disclosing information that will become publicly known anyway — such as design details for a soon-to-be-sold product, or information that will be published in a patent application — then a term greater than 2 or 3 years may only benefit the other party.
- Consistency with corporate procedures: Review the terms to ensure that they don’t impose obligations with which you cannot comply. For example, if you need to disclose the information to contractors who aren’t employees, be sure that the agreement permits that. I’ve also seen NDAs stating that all individuals who will have access to the information must sign a confidentiality agreement that specifically refers to the NDA. If you are faced with that type of obligation, consider whether or not you are prepared to comply.
- Purpose / Non-use clause: It’s standard for an NDA to state that the recipient cannot disclose the information. However, does it also restrict the recipient from internally using the information for its own benefit? Does it clearly limit the purpose for which the recipient can use the information? “Purpose” clauses are often filled in after all other terms are negotiated — but parties should take care so that they are as carefully drafted as any other clause.
These are just a few areas that should be considered when drafting confidentiality agreements. Rather than simply signing an ‘off the shelf” form, each party should carefully review the agreement with its attorneys to ensure that it fits the business need.