By Christopher Matteodo | While non-disclosure agreements (NDAs) can be a powerful tool to help create a confidential relationship between parties, and an important first step in negotiations between parties, they are not bulletproof. Having employees, independent contractors, or potential acquirers sign NDAs should be done at the onset of any potential transaction. However, this is not enough. In order to ensure vital confidential information is protected, the language of the NDA must be specifically tailored to the relationship between the parties.
An NDA, also sometimes referred to as a confidentiality agreement, is a legal contract between at least two parties that outlines confidential material, knowledge or information that the parties wish to share with each other. The purposes for these agreements are numerous, and are often used as a first step in preparation of joint venture agreements, acquisitions, or services agreements.
Many NDAs are either too broad or narrow in scope. They either incorrectly provide a broad laundry list of information designated as confidential or fail to provide any procedures whatsoever for handling or identifying what is actually confidential.
Having a broad definition of “confidential information” in an NDA from a disclosing party’s perspective is obviously favorable, but may lead to over-disclosure. However, a broad definition is not enough. The sections of an NDA discussing permissible uses, permissible disclosures, ownership rights, timing, carve-outs, the return of confidential information, and a term limit on protection requirements are equally important in determining if a receiving party is in compliance with the terms of the agreement. Under these circumstances, a disclosing party may disclose too much to a receiving party, only to later find that a potential competitor has obtained highly sensitive information.
In an instance where a domestic company hurriedly entered into an NDA with a foreign business, firm attorneys subsequently found a provision in the NDA that granted ownership of confidential information disclosed by the domestic company to the overseas entity under foreign law.
Sometimes, the harm may be irreparable, and the only solution may be costly and lengthy litigation. To encourage compliance, an NDA should include provisions providing that a successful litigant is entitled to legal fees and costs, as well as providing for equitable remedies and injunctive relief. Even with an NDA in place, a disclosing party should clearly mark information it deems confidential, and should only disclose that information necessary to facilitate the interaction between the parties. For a recipient, there should be a clear policy regarding identifying, returning and the permissible use and disclosure of any confidential information received to avoid any potential claims later on.
Results of imprecise drafting can be devastating. For example, in 2012 the Delaware Chancery Court held that a company had violated the terms of the nondisclosure agreements by using confidential information in forming its $5 billion hostile exchange offer and by disclosing confidential information, including the fact that the parties were having discussions. As a result, the court granted a four-month injunction against the company’s hostile exchange offer.
Before entering into an NDA, it is advisable to consult with an attorney to ensure that provisions protecting confidential information are properly drafted. To learn more, contact Roger Hood.