Drafting an Effective Non-Disclosure Agreement

One of the most prevalent documents signed in connection with the negotiation of various business transactions is the Non-Disclosure Agreement or “NDA.” Commonly used at the outset of negotiations of potential joint ventures, technology transfers, executive hiring, and private placement investments, an NDA is any agreement between two or more parties whereby one party agrees not to use or disclose information that the other party believes provides a competitive business advantage or considers to be a secret (referred to as “Confidential Information”), subject to certain agreed exceptions.

However, to avoid ambiguity, disagreement, and potential litigation, an NDA should be drafted carefully, with full consideration of the nature of the business transaction and Confidential Information involved.

The next time you are negotiating a business deal that involves the disclosure of Confidential Information and therefore warrants the execution of an NDA, remember the following basic points:

1. The NDA should be executed as early as possible in the transaction process, preferably at the onset of negotiations and especially before any Confidential Information is disclosed.
2. The NDA should identify with specificity the party disclosing the Confidential Information (the “disclosing party”) and the party receiving the Confidential Information (the “receiving party”), which may also include the receiving party’s directors, officers, members, shareholders, affiliates, etc. The NDA can be mutual and therefore obligate both parties to protect the Confidential Information exchanged.
3. The Confidential Information should be defined in the NDA to avoid ambiguity as to what information is protected. Common carve-outs to the definition of “Confidential Information” include information the receiving party can demonstrate is public knowledge or information the receiving party already has in its possession. Due to the time, expense, and potential errors involved in the “marking” process, a disclosing party should avoid, whenever possible, an obligation to “mark” or label the Confidential Information as confidential.
4. The NDA should restrict both the disclosure of the Confidential Information and limit the use of the Confidential Information to a specific purpose. The receiving party should be restricted from using the Confidential Information for any purpose other than the development and continuation of the subject business transaction with the disclosing party. Typical exceptions to such restrictions include disclosure compelled by law (e., by subpoena) and disclosure by the receiving party to its professional advisors (i.e., lawyers, accountants, engineers, etc.) for the purpose of properly evaluating the business transaction, so long as the receiving party promises to cause such third parties to preserve confidentiality.
5. The NDA should set forth the ramifications of unauthorized disclosure or use of the Confidential Information, including (for example) injunctive relief in favor of the disclosing party with the receiving party’s waiver of a bond and acknowledgement that unauthorized disclosure or use may cause irreparable harm, indemnification by the receiving party for any losses and damages sustained by the disclosing party as a result of the unauthorized disclosure or use, and liquidated damages.
6. Whenever applicable, the NDA should state expressly that the Confidential Information remains the sole and exclusive property of the disclosing party, that the receiving party does not receive any right, title, or interest in the Confidential Information or any license to convey, copy, or develop the Confidential Information, that the receiving party shall promptly return or destroy all copies of the Confidential Information upon request by the disclosing party, that the disclosing party makes no representation or warranty of any kind, and that disclosing party shall not incur any liability due to the disclosure or use of the Confidential Information.

NDAs play a critical role in helping to preserve proprietary business information while encouraging candid and open discussions and negotiations between parties to a prospective business deal. Without a signed NDA, a disclosing party that wants to prevent a receiving party from using Confidential Information will likely need to commence litigation – a costly and time-intensive process with an outcome that can never be certain – to prove to a court that the Confidential Information constitutes a trade secret or is otherwise protected by law. With a signed NDA, parties can agree to protect more information than the law would otherwise protect while adding valuable assurance that the parties’ proprietary business information can be shared and preserved.