Non-Disclosure Agreements: 10 Key Provisions You Need to Know

Key Takeaways 

• Non-disclosure agreements are vital for protecting sensitive data in business transactions and fostering trust and transparency among parties.
• Essential elements such as identifying parties, defining confidential information, and specifying exceptions ensure clarity and legal compliance.
  NDAs include provisions for legal disclosures, remedies for breaches, and delineate the duration of confidentiality obligations.
• Careful selection of governing law and jurisdiction, along with implementing restrictive covenants, help maintain integrity and enforceability of NDAs.

 

At first glance, reviewing a non-disclosure agreement (NDA), often also referred to as a confidentiality agreement, may seem daunting. However, upon close examination, you’ll see that it encompasses a number of provisions that all ultimately work together to protect the disclosure of proprietary or confidential information between 2 or more parties.

In this article, we simplify the NDA and break it down into its most fundamental parts. We also outline the top 10 key provisions that help make up a standard NDA’s foundation.

Why use a Non-Disclosure Agreement in the first place?

NDAs have become a staple in business transactions. This is especially true for joint ventures, mergers and acquisitions, and other partnerships. They allow parties to share confidential information without fear of it being disclosed or misused, as an NDA is designed to safeguard sensitive data. This can encompass a wide array of information including, but not limited to:

• Trade secrets;
• Innovative business strategies; and
• Valuable client contact lists.

NDAs establish clear-cut expectations for all parties involved. They define what constitutes confidential information, outline the receiving party’s responsibilities, and set rules around how this sensitive data should be handled. This prevents inadvertent leaks and builds a culture of trust and transparency within an organization or between business partners.

NDA Provisions You Need to Know

Creating an effective NDA involves careful deliberation. It requires defining the scope of confidential information, specifying its purpose, identifying the parties involved, and including other necessary provisions. With this in mind, here are 10 key provisions you should know when drafting an NDA.

1. Properly Identifying the Parties

In any contract or legally binding document, it’s important to identify the interested parties participating in the transaction clearly. More than that, it’s important to identify those parties’ roles in the negotiation. Therefore, at the outset of any transaction, it must be clear who the parties involved are and who’s committing to the clauses in that document.

The same holds true for NDAs, as they’re legally binding documents. It’s, therefore, important to identify the parties agreeing to the confidentiality obligation contained therein. That said, the first step is to identify what type of NDA the parties consider appropriate for that business deal:

• A unilateral non-disclosure agreement: For this type of NDA, only one party will receive confidential information and comply with the rules of the NDA (the “Receiving Party”). On the other side, the party will share its data and dictate the rules (the “Disclosing Party”).
• A bilateral or mutual non-disclosure agreement: Here, both parties share confidential information with each other, making them both Receiving Parties and Disclosing Parties depending on who’s sharing and who’s receiving confidential information.

After this, each party must be properly identified with their respective full names, addresses, corporate type, jurisdiction, etc. In some cases, the Disclosing Party will not reveal its identity until a confidentiality agreement is signed. This happens for a variety of reasons and is widely accepted. However, as a safeguard, the Receiving Party may include a clause where, after disclosure of the identity of the Disclosing Party, the Receiving Party has a reasonable amount of time to opt out of receiving any confidential information.

2. Definition of Confidential Information

It’s important to determine what type of information is considered confidential and, consequently, what information is protected by the NDA.

Usually, confidential information is broadly defined so that the protections in the NDA cover all of the non-public information disclosed by the Disclosing Party. Still, the parties may narrow the definition of confidential information only to include information that’s specifically marked as such by the Disclosing Party. However, this narrow concept is uncommon since separating information into confidential and non-confidential is time-consuming when information needs to be shared instantaneously.

That said, the definition of confidential information is generally related to the information connected to a particular transaction as discussed between the interested parties, whether oral or written, provided by or on behalf of the Disclosing Party to the Receiving Party, even if it’s not identified as confidential. It’s also important to highlight that, in many cases, documents containing the Receiving Party’s internal analyses, summaries or any other document based on or derived from confidential information (the so-called “Derivative Materials”) may also be considered confidential information.

Trade secrets may also be included in the definition of Confidential Information. In general, trade secrets consist of:

• Business methods;
• Data compilation;
• Organization methods;
• Know-how;
• Business model, etc.,

By virtue of not being public, these trade secrets have a special value to that business.  And because of its sensitive nature, Disclosing Parties usually opt out of sharing trade secrets with Receiving Parties. However, suppose that the information is essential to the evaluation of the potential transaction. In that case, the Parties may choose to add additional clauses to the confidentiality agreements. These clauses would require special protection for trade secrets, and their improper disclosure may bring irreparable consequences to the Disclosing Party.

It’s imperative to emphasize the importance of protecting transaction information. The fact that the parties are discussing an agreement or deal, the transaction value, and the terms therein cannot be widely disclosed by either party and deserve special attention and protection within an NDA. As Christopher S. Harrison points out in his book, Make the Deal: Negotiating Mergers & Acquisitions,

“information about the transaction does not necessarily fall within the concept and protection of confidential information, since it is not necessarily provided from one party to another”.

Therefore, NDAs usually set aside a section dedicated to this subject, with mutual protections for both parties.

3. Carveouts to Confidential Information

Because confidential information is typically broadly defined, NDAs must specify what information will not be considered confidential and, therefore, be excluded from the obligations in the NDA. In most NDAs, the following are considered exceptions to the definition of confidential information:

Information generally available to the public. Crucially, this exception does not apply where the Receiving Party purposely leaks such information to the public.
Information already in the Receiving Party’s possession or available to the Receiving Party. If the Receiving Party already knew the information prior to signing the NDA, such information should not be considered confidential information.
Information received from a proper third party. It’s important to emphasize that the information from the third party must be received legitimately. Quoting again from Harrison’s book, “in these cases, if the party knew that the information was provided in breach of a Confidentiality Agreement, then the Receiving Party will not have the benefit of this exception”.
Information independently developed by the Receiving Party. Information developed by the Receiving Party without relying on confidential information.

4. Representatives

Generally, NDAs prohibit Receiving Parties from disclosing confidential information to any third party. However, a Disclosing Party may agree to share its Confidential Information with the Receiving Party’s Representatives to allow for the thorough evaluation of the potential transaction. The Receiving Party’s Representatives typically include its affiliates, directors, employees, officers, and advisors.

Of course, Receiving Parties, to complete their due diligence, will often request a more expansive definition of Representatives that includes attorneys, consultants, financing sources (equity and/or debt), partners, investors, and even portfolio companies. However, Disclosing Parties, sensitive about the breadth of exposure, may push back on the expansion. They may request prior written consent before disclosing Confidential Information to certain Representatives.

Nevertheless, it’s important to note that Confidential Information may only be shared with the aforementioned Representatives within certain limitations. Disclosing Parties generally require that all Representatives:
(a) have a need to know the information and
(b) are, at the very least, informed of the confidential nature of the confidential information.

Furthermore, some Disclosing Parties go so far as to request that the Receiving Party’s Representatives be bound by the terms of the agreement (via joinder, etc.) or be subject to confidential obligations similar to those outlined in the NDA.

In some circumstances, the Disclosing Party may request that the Receiving Party be held legally responsible for any breach by any Representatives who actually received any of the Confidential Information. Or, they may ask to treat a Representative’s breach the same as a breach by the Receiving Party. In these instances, an exception may exist for certain professionals who have an implied duty of confidentiality in connection with their employment agreements or professions, for example, attorneys. However, if the Receiving Party would like to avoid liability when it comes to the actions of its Representatives, the Receiving Party may request that the Representative in question sign a separate agreement with the Disclosing Party.

5. Legally Required Disclosures

NDAs typically include a provision that allows Receiving Parties to disclose Confidential Information
as required by law;
requested or required by order of a court or other legal process; or
as is necessary to establish the rights or defense of parties during a dispute.

However, some Disclosing Parties will only allow for “required” legal disclosures and not disclosures that are “requested”. Additionally, most Disclosing Parties will seek, to the extent legally permissible, prior written notice for such disclosures by the Receiving Party. Generally, the Receiving Party, in connection with this disclosure, must:
(a) request the confidential treatment of the Confidential Information and/or;
(b) cooperate with the Disclosing Party in obtaining a protective order.

Moreover, if the Disclosing Party (again, where legally permissible) requires a legal opinion or advice regarding the disclosure before it happens, it’s necessary to establish which party should bear the cost of protecting the confidential information. Typically, the Disclosing Party will bear this cost, but it’s not uncommon for the agreement to stay silent on the issue.

6. Return/Destruction of Confidential Information

Disclosing Parties are often particularly concerned with the future of the confidential information in the Receiving Party’s possession at the end of negotiations. To resolve those justifiable concerns, NDAs typically include a provision detailing how that disclosed information would be handled at the termination of the negotiation or after a certain agreed-upon period of time (that usually correlates with the term of the NDA). This provision will outline whether the Disclosing Party wants the information to be returned or destroyed.

In many cases, mastering NDA compliance requires effective contract management practices. The Disclosing Party may request that the Confidential Information, depending on its form, be automatically returned upon the expiration of the NDA. However, the Disclosing Party (and sometimes the Receiving Party) may instead request that the information be destroyed for a multitude of reasons.  A request for the destruction of Confidential Information is usually accompanied by a request that the destruction of the information be confirmed in writing or “certified” by an authorized agent. The Receiving Party will commonly respond to a return or destruction request with language that protects any legal retention requirements to ensure that the Receiving Party remains compliant with applicable legal, compliance or statutory regulations. The duration of confidentiality obligations for legally retained information varies, but it’s typically outlined in each agreement.

7. Remedies for Breach

NDAs usually include language about possible consequences for unauthorized disclosure or a breach of the NDA by a Receiving Party. This covers remedies available to the Disclosing Party in the event of actual or threatened breaches. Typically, the most common remedies available to Disclosing Parties for the breach of an NDA are the equitable reliefs of injunction and specific performance. For example, the Disclosing Party can ask the court:

to compel the Receiving Party to stop sharing its confidential information with unauthorized persons;
to delete transaction information from the Receiving Party’s website; and where the NDA contains a non-solicit; and
to terminate the employment of persons covered by the non-solicit.

In addition to equitable reliefs, some NDAs require the Receiving Party to indemnify the Disclosing Party through compensation for any harm or loss it suffers due to a breach of the NDA. Most Receiving Parties reject indemnification clauses in favor of having the non-prevailing party reimburse the prevailing party for its reasonable and documented legal costs and expenses in case of litigation to enforce the NDA.

8. Term of the NDA

Usually, confidentiality agreements are temporary documents and have a pre-established duration (usually ranging from 2 to 5 years after the signing date). Once this period has expired, the obligations in the NDA are no longer valid, and the Receiving Parties are authorized to disclose information about that transaction. Sometimes, the Disclosing Party sharing the information does not set a specific time limit. Instead, they ask that the rules in the NDA be followed as long as the shared information is still considered “confidential”.

However, in some cases and with respect to certain types of information, the confidentiality obligations under the NDA may extend beyond the period determined for the other confidential information. For example, if a confidentiality agreement foresees the possibility of sharing trade secrets, which are considered by their nature to be more sensitive information (as explained in topic 2), it may be required that such information continue to be kept confidential even after the expiration of the term established for that NDA.

9. Governing Law and Jurisdiction

The choice of jurisdiction and governing law is extremely important in a confidentiality agreement. Although in most NDAs, both concepts are concentrated in the same paragraph, they’re different. Jurisdiction refers to the choice of the place (state or country) in which a possible lawsuit may be filed regarding conflicts related to that NDA, while governing law is the law that will be applicable in the event of litigation regarding that NDA. It’s also important to mention that although most confidentiality agreements choose the same jurisdiction and governing law, this is not a rule and can be different.

As mentioned, the choice of governing law and jurisdiction needs to be made carefully by the parties. This is because, in case of any conflict between them, the law and the place of its application will impact the possible resolution of disputes. Depending on the country and even the state of jurisdiction, the law and its application are completely different and may substantially favor or harm the parties. Therefore, this choice must be made intelligently and carefully so that the interests of both parties are duly protected.

10. Restrictive Covenants

Restrictive covenants in NDAs typically seek to restrict, limit, or prevent the Receiving Party from doing certain things, such as soliciting employees of the Disclosing Party or contacting customers, suppliers, employees, or officers of the Disclosing Party regarding the transaction.

Employee non-solicitation clauses are the most common restrictive covenants in NDAs. These clauses typically prevent the Receiving Party from soliciting or hiring all or certain employees of the Disclosing Party for a certain period. This is because the loss of certain key employees may negatively affect the value of the Disclosing Party and jeopardize the transaction. While the Disclosing Party will usually want this clause to be as broad as possible, the Receiving Party will try to limit its scope with carveouts that allow soliciting and hiring through general non-targeted advertisements, independent approaches by the covered employees, and following the termination of such person’s employment.

Some NDAs also contain no-contact clauses restricting the Receiving Party from contacting certain parties regarding the transaction and the disclosed confidential information. Other restrictive covenants include non-competes, non-disparagement and non-interference with the Disclosing Party’s business/relationships; however, the Receiving Party usually rejects these as they’re considered inappropriate in NDAs.

Final Thoughts

The complexities of NDAs might appear intimidating at first glance. However, as this article has highlighted, these agreements are instrumental in preserving confidential data in business transactions. They meticulously define the parties and lay out key provisions, making it a task that requires careful thought and precision.

In a business world where mergers, acquisitions, joint ventures, and other forms of partnerships are commonplace, NDAs are invaluable assets. They create a secure environment for exchanging sensitive information, which can range from proprietary trade secrets to inventive business tactics and prized client contact lists. By setting clear expectations, these agreements deter accidental leaks and cultivate an atmosphere of trust and openness between involved parties.

However, NDAs can also include other provisions, for example, standstills, non-circumvention clauses, financing lockups, etc., depending on the type of transaction being contemplated. Additionally, it’s important to note that where a company with publicly traded securities is involved in the transaction, language specifically protecting that company’s material non-public information (a company’s non-public information that can affect its share price) is also included in the NDA.

If you still have any questions about a new or existing NDA, reach out or download our Legal Outsourcing Brochure to learn more about our unique approach to contracts management.

Frequently Asked Questions

When Do You Need an NDA?

NDAs are vital in business scenarios where sensitive information is shared. You may need an NDA when hiring employees, licensing a product, negotiating with partners or investors, or during mergers and acquisitions. NDAs secure confidential data, protect intellectual property, and foster trust, ensuring business integrity and competitiveness.

How Long Does an NDA Last?

An NDA is typically defined within the terms of the contract. Often, NDAs offer protection for a time-limited period, usually between 1 to 5 years. However, some NDAs may extend indefinitely, such as in the case of trade secrets, though they generally specify when the information ceases to be confidential. The exact length depends on the nature of the information and the agreement between the parties involved.

What Makes an NDA Unenforceable?

An NDA may be deemed unenforceable if it contains overly broad or vague language, fails to define what constitutes confidential information, lacks consideration, or violates legal requirements. Moreover, it’s unenforceable if the NDA demands the signee to engage in illegal activities. Therefore, precision in language and adherence to legal parameters are critical when drafting an NDA.

What Happens If You Break an NDA?

Breaching an NDA can have severe repercussions, including legal and financial penalties, reputational damage, and possible termination of employment or contracts. Legal proceedings may be initiated to enforce the NDA and seek compensation for losses. Moreover, the breach can tarnish one’s reputation, impacting trust and future business prospects. In extreme cases involving sensitive or classified material, criminal charges might be applicable.

Authors:

• Marina Costa
• Gianina Jean-Baptiste

Disclaimer: This article is made available by Sterlington for informational purposes only. It is not intended to provide specific legal advice and should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Using this website does not establish any attorney-client relationship between Sterlington and yourself.