Demystifying the Nondisclosure Agreement

By Richard E. Neff, June 17, 2010: Reprinted and/or reposted with the permission of Daily Journal Corp. (2010).

One of the shortest and simplest legal agreements is the nondisclosure agreement, sometimes called “confidentiality agreement.” A good nondisclosure agreement can be one page in length. It generally exists to cover just two scenarios: (the obvious one is to prevent the disclosure of a party’s confidential information to third parties (and to anyone who does not really need the information); and the less obvious one is to prevent the use by the recipient for anything but the limited purpose for which the disclosure has been made. If the nondisclosure agreement covers both of these scenarios adequately, it probably is a decent agreement. But many nondisclosure agreements do not fully protect the discloser.

The nondisclosure agreement can be mutual, protecting against disclosure and unauthorized use of confidential information by either party as recipient. In other words, a mutual nondisclosure agreement anticipates that there will be a flow of confidential information in both directions between the parties entering into the agreement, so each is subject to obligations that should be parallel or nearly so. A one-way nondisclosure agreement means that it is anticipated that one party will be disclosing confidential information to the other party (the recipient), and so only the recipient is obligated to protect the confidential information from disclosure or from use that is broader than permitted under the nondisclosure agreement.

First, “confidential information” must be defined. In part, that definition might be context-specific. For example, if you are representing the inventor of a watch that also keeps golf scores, the definition might specifically reference “inventions, including without limitation those relating to watches and timepieces.” A good general provision might define confidential information as “any nonpublic information, technical data or know-how, including that relating to research, business processes, inventions, software programs, technical documentation, specifications, designs, drawings, engineering, products, services, customers, markets, or finances of the discloser.” To the extent practical, confidential information should be marked as such.

If it is disclosed orally, this should be confirmed in writing (even by e-mail) within 30 days of oral disclosure.
But the definition of confidential information must acknowledge that there are various exceptions and carve-outs: a piece of confidential information might become public and therefore no longer be confidential information; the recipient might already know or possess the confidential information because it has developed it or has received the information from another source. In the latter case, the recipient should be able to demonstrate this. Finally, the recipient needs the right to be able to disclose confidential information if required to do so by court or administrative order, subject to certain restraints.

Because the nondisclosure agreement is a dual purpose agreement that aims to prevent unauthorized disclosure and unauthorized use, the scope of use/disclosure has to be defined. A good nondisclosure agreement begins with a strong purpose clause. The more specific the purpose clause, the more unauthorized use/disclosure can be prevented. However, often the purpose of the disclosure is to permit the evaluation of a business relationship between the parties, or perhaps an investment in the discloser by the recipient. In such cases, the disclosure should be limited to “those employees (or subcontractors) of the recipient having a need to know the confidential information in order to achieve the purpose and who are subject to written confidentiality agreements that protect the confidential information of discloser as much as this agreement, and the attorneys and accountants of the recipient having a need to know.” It would be dangerous to permit the recipient to share what may be quite a novel concept with any third party. If the recipient wishes to disclose confidential information beyond a narrowly defined circle, the express written authorization of the discloser should be required.

Additional requirements of the good nondisclosure agreement include the following:

  • Survival of the obligations of confidentiality should run from the date of disclosure (or the date of termination of the nondisclosure agreement), depending on the nature of the confidential information disclosed, often for a period of years. Since nondisclosure agreements may have no certain term and my agreements often protect technological disclosures, I prefer a formulation such as “The obligations set forth in this agreement shall survive for five years from the date of disclosure of the confidential information, except for obligations regarding trade secrets, which shall endure for so long as a trade secret is protected as such.” Many nondisclosure agreements have a survival clause of indefinite duration, but when representing a recipient, it is always advisable to avoid contingencies that are unlimited in time.
  • Return of confidential information should be required whenever requested by the discloser, and upon termination of the nondisclosure agreement.
  • Ownership of confidential information remains with the discloser; the recipient is granted no rights beyond the review rights stated in the purpose clause. No rights are granted under any patent, trade secret or copyright of the discloser. The confidential information should be provided “as is” without warrant of any kind.
  • The parties should agree that any unauthorized disclosure or use of the confidential information will be informed to the discloser by the recipient, and that monetary damages may not be sufficient in the event of unauthorized disclosure. Therefore, equitable remedies such as an injunction will be required.

Two other issues merit discussion. First, often the party that you most want to agree to your nondisclosure agreement has no interest in signing it. Take the watch you have invented that keeps golf scores: if Seiko agrees to sign your nondisclosure agreement, it may mean that Seiko, which could have a watch with similar functionality under development, will be inviting a lawsuit from you when it releases its own golf watch. Indeed, Hollywood is quite wary of your brilliant screenplay for the same reason; the studios wish to avoid idea-submission lawsuits when they release a film or launch a series that seems inspired by your screenplay or other media concept. So you may be forced to balance your desire to have a given company review your idea against their unwillingness to sign your nondisclosure agreement.

Finally, there are many companies that try to neuter your nondisclosure agreement by including a “residuals” clause. They try to exclude from the ongoing confidentiality obligations of the recipient/evaluator any information retained in the memory of recipient personnel. These are disturbing provisions if you represent the discloser/content creator in a transaction. At the very least, the provision should state “unaided memory” and should have other qualifiers such as “provided that recipient does not violate any of discloser’s intellectual property rights or otherwise violate this agreement.” It is a matter of your leverage in the transaction as to whether you can eliminate or modify a “residuals” clause.

A good nondisclosure agreement, if you can convince the other party to agree to it, should be your first line of defense in protecting your interest and investment in your invention, concept or content.

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