Emilie Feil-Fraser
There are numerous situations where a non-disclosure agreement (NDA) is valuable, but it’s an especially important tool when intellectual property rights are at stake.
What is an NDA?
An NDA is typically a contract between two parties specifying certain information will be kept confidential for a given period of time. In the intellectual property context, NDAs are most common when sharing confidential information with potential investors, business partners or collaborators, employees, or contractors. The format of the NDA should be tailored to each of these specific contexts.
Why use an NDA?
Generally speaking, the confidential intellectual property protected by an NDA is trade secrets and inventions under development. A trade secret’s value is in its secrecy, and without properly papering its secrecy, legal protections for breach of trade secrets or misappropriation of confidential information may not be available. Similarly, for inventions under development, public disclosure within certain time frames can sometimes void the patentability of the invention in some countries.
When to use an NDA?
A business should consider using an NDA 1) any time it contemplates disclosing confidential information outside of the organization (e.g. to potential investors or business partners), or 2) with individuals inside the organization creating or coming into contact with confidential information (e.g. employees, contractors, directors, officers, agents). Note that it may not be necessary for certain agents to sign NDAs because they are subject to independent obligations of confidentiality, like lawyers’ obligations of solicitor-client privilege.
How to approach an NDA
It’s important that businesses first identify their confidential intellectual property before entering into an NDA. Sometimes businesses may not recognize their own trade secrets since they could be as simple as a novel method of performing a process or service. Businesses should consider what intangible assets they own that would suffer a depreciation of value if disclosed without permission. That is key intellectual property that should likely be protected with an NDA.
The next task is defining the scope of the NDA. Many businesses mistakenly assume that a broad NDA is the best NDA. However, the scope should be based on the nature of the relationship with the other party.
- For example, a broad NDA may be appropriate for a new employee working on a sensitive R&D project. That NDA is usually “one-way” where the confidential information is being disclosed by the employer to the employee, and the confidentiality obligations are wholly on the employee. In this type of NDA, confidential information is typically defined as anything and everything that might reasonably be considered confidential, whether communicated orally or in writing and whether marked as confidential or not.
- By contrast, it may be preferable to have a narrow, “two-way” NDA when it is in furtherance of a potential business relationship and the exchange of confidential information is reciprocal. For example, if two businesses are exploring a relationship to develop a new invention together but the relationship does not manifest, an overly broad NDA could prevent either party from later developing the same or similar ideas independently once the parties go their separate ways. Similarly, a software developer receiving confidential information from multiple clients may prefer a narrow NDA where only material clearly marked as confidential is subject to the NDA, in order to avoid overly burdensome obligations to monitor all information received from different clients.
If presented with an NDA, it is important to read through all the provisions carefully, since NDAs may also contain additional clauses that don’t necessarily relate to the protection of confidential information. Businesses should be particularly mindful of non-solicitation clauses, non-competition clauses, and intellectual property assignments, all of which regularly appear in NDAs.
Other considerations
NDAs are also too often thought of as standalone agreements. Regularly, the entirety of an NDA will be baked into a larger commercial contract under the heading “Confidentiality”, which can obviate the need for a separate NDA. If parties exploring a business relationship sign a “pre-transaction” NDA, it is important to ensure continuity and consistency of confidentiality obligations once a substantive contract is entered into, since most “pre-transaction” NDAs terminate or are superseded upon the signing of a substantive contract.
If intellectual property is in play, consult a legal professional to help craft the appropriate NDA to ensure your business’ intellectual property rights are adequately protected.