Nondisclosure Agreements: Not just a standard form

Many business transactions start with a nondisclosure agreement (NDA). Often, one of the first deal points to be negotiated is whose “form” NDA will control. 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 will want the agreement to 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 entering into an NDA include:

1. Nature of the disclosure: Are you more likely to disclose confidential information or receive it?  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.
2. Duration of the confidentiality obligation:  Some NDAs have a nondisclosure obligation that lasts forever. Others have a more limited term, such as 2 to 3 years.  A long term is valuable if the disclosure involves proprietary 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
3. Consistency with corporate procedures:  Review the terms of the agreement to ensure that it does not impose obligations with which you cannot comply.  For example, if you need to disclose information to contractors or affiliated companies, be sure that the agreement permits that. Sometimes, an NDA will require that all individuals who receive the information sign a confidentiality agreement that specifically refers to the NDA. When faced with this type of obligation, consider whether or not you are prepared to comply.
4. Purpose / Non-use clause: It’s standard for an NDA to prohibit the recipient from disclosing 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. Take care so that the purpose clause is as carefully drafted as any other clause.

These are just a few areas that parties should consider before signing a confidentiality agreement. Rather than simply signing an “off the shelf” form, each party should carefully review the agreement with its attorneys to ensure that the document fits the business need.