Article #1 of 4: First Step – NDAs – Should I have one and what should it cover?
By Emilie Feil-Fraser and Tania D’Souza Culora
In this four-part article series, we consider the various stages of a commercial transaction for which intellectual property assets are the essence of the transaction.
First, before commencing discussions with any prospective business partners or investors about your potentially valuable ideas, software applications or inventions, it is prudent to secure the ownership in the intellectual property that exists in the assets you wish to sell/develop (if not already done). For example, by: (i) applying for registered IP protection as applicable; (ii) procuring any assignments of IP not already obtained; and (iii) especially with reference to IP rights that exist without registration (e.g. copyright and confidential information), documenting and safely storing related materials such as design drawings, plans and sketches, copies of code, etc.
The next step is to consider whether a non-disclosure agreement (NDA) is called for. Whenever IP is the essence of a transaction, discussions will likely involve the disclosure of at least some confidential information. As such, even the most preliminary discussions typically merit the protection of an NDA.
NDAs essentially prescribe in writing the legal concept of confidential information, whereby it is unlawful for a recipient of confidential information to disclose such information to others where there are conditions in place regarding the handling/preservation of such confidential information. Should an NDA be advisable, here are some key points to consider regarding the NDA:
- The type of NDA used in the preparation for a possible transaction is known as a “business purpose” NDA. It is distinct from the type of NDA employees may enter with their employers.
- A business purpose NDA should specify that the confidential information is in fact confidential and should be treated as such. It should also set out the legal consequences of breach.
- The NDA should:
a) accurately and clearly describe the confidential information being disclosed and the manner of its disclosure. Should a receiving party want a site visit, the disclosing party should determine in advance exactly what information it will share, and take steps to secure/shield sensitive documents, proprietary equipment and prototypes to avoid inadvertent disclosure. Reminding onsite staff of the importance of preserving confidentiality is also a good idea;
b) be reasonable in scope. A disclosing party may want an NDA with a broad definition of confidential information to cover various means of disclosure e.g. site visits, documents, oral discussions, etc., while a receiving party may want to narrow the definition to explicitly marked items to try and guard against possible future breaches, especially if the parties later abandon discussions;
c) articulate the parties’ obligations clearly, ideally striking a balance in those relative obligations. A receiving party may wish to avoid obligations which survive abandonment of discussions, such as non-circumvention and non-solicitation obligations. Conversely, a disclosing party may want such provisions, especially when in transaction discussions with potential competitors. The relative bargaining position of the parties will also play a part in what is ultimately agreed;
d) specify the individuals from the receiving party (and its counsel) who will have access to the information. Such individuals should be chosen strictly on a “need-to-know” basis and be personally subject to confidentiality obligations with the receiving party that are at least as restrictive as in the NDA;
e) specify the term of the agreement. While an NDA typically terminates once a definitive transaction agreement is settled with the transaction agreement prescribing any continuing confidentiality obligations, it is important to provide for a definitive term should discussions be abandoned;
f) prescribe how confidential information is to be retuned to the disclosing party and/or destroyed should the proposed transaction be abandoned. This should include provision for documents, product samples, packaging samples, etc. The disclosing party should obtain written certification from the receiving party that such delivery up or destruction has been completed; - Although an NDA is a legal contract giving rise to legal consequences in the event of a breach, should unauthorised public disclosure of the confidential information occur, the confidential nature of the information will be lost and an action for breach cannot restore it. This could have grave consequences for the disclosing party’s trade secrets or potentially patentable inventions. As such, it is wisest to disclose only what is absolutely necessary, even once an NDA is in place. A disclosing party should, for example, never disclose all aspects of a proprietary trade secret unless and until a definitive transaction agreement is reached.
- Finally, where the receiving party is in another jurisdiction, it is advisable to obtain local legal advice when preparing the NDA.
In our next article in this series, we will explore key considerations when undertaking due diligence enquiries relating to intellectual property assets.