Whether you are selling your business, bringing on an investor, hiring an outsourcing provider, or making some other commercial arrangement, you must think about protecting your business’ confidential information. One way to do this is with a non-disclosure agreement (NDA). Before you speak with someone outside of your company about a possible business relationship, having them sign an NDA will help prevent them from disclosing or using your information, while also permitting you to speak freely with them.
Ask yourself these questions when using or creating NDAs:
Who is covered?
Make sure that the parties to the NDA are those that you want to be bound by its terms. If you want a party’s affiliates to be covered, then you need to work that concept into the document, because they may not automatically come under its scope. Also, the NDA should make the other party responsible for the actions of its representatives. For example, if the recipient of your information shares it with their professional advisor who then discloses it to your competitor, the recipient should be responsible for the impermissible disclosure by its professional advisor.
What kind of information is covered?
Your typical NDA will use a defined term (such as “Confidential Information” or “Evaluation Materials”) to establish the scope of the information covered by the agreement. This description should be broad enough to protect your information, but narrow enough to be enforceable. For example, in describing the scope you might include a general concept (such as all business information provided by one party to the other party relating to the disclosing party’s business), or a specific list of items (such as all financial statements, business development plans, etc.). But be aware that information already in the public domain is generally not considered to be confidential information under these types of agreements, and therefore would customarily be set out as an exclusion.
How is your information protected?
The purpose of the NDA can vary, but the protection of your information and the prevention of its unauthorized use are its essence. The NDA should specify why confidential information is being disclosed by one party to the other, what the recipient of the confidential information can and cannot do with that information, and to whom the recipient may disclose that information and to whom they may not. Consider also the result of one party violating the restrictions on use or disclosure of the other party’s information, and what type of remedies might be available to the party whose information was improperly handled.
What comes along with your confidential information?
The NDA should carefully address whether you are providing any representations or warranties about the items that are within your confidential information. Also, be careful not to transfer any title or license to your information (other than the limited license to use that information for the defined purpose for which you are disclosing it).
What is the term of the Agreement?
Consider whether you want the term of the Agreement to be a set period of time, the period until a certain triggering event, or a longer period based on the nature of the information remaining confidential. The period you select should be reasonable given the purpose of the disclosure, and the NDA should set out the parties’ expectations for the return of confidential information to the rightful owner. Alternatively, the recipient can be required to destroy the other party’s confidential information.
Are there industry-specific concerns?
If you operate in a regulated industry (such as healthcare or financial services), the NDA may need to reflect terms that are customary for that industry. For instance, your business may receive customer or patient information and those items may carry heightened disclosure limitations and even prohibitions. Also, as a regulated entity, you may be required by law to make certain disclosures to regulators despite the terms of the NDA, so exceptions to the restrictions in the NDA may be appropriate or even necessary.
This article presents only some of the issues you must consider when using an NDA, and even for the issues presented, many other considerations can apply. It is important to work with competent counsel, experienced with NDAs and business arrangements where NDAs are commonplace. Incorporate an NDA into your business practices – it is one of the most important steps you can take to protect your business and its assets.
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