From our prior article (“Standard NDA” – Myth or Reality?), you know that there’s not a silver bullet “standard” NDA that will work for every situation. As a result, non-disclosure agreements (NDAs) are often fine-tuned for each company’s specific needs and negotiated for each particular deal.
With that in mind, two high-level concepts are helpful to keep in mind when you review or negotiate an NDA for a specific transaction:
(1) scope – make sure the agreement appropriately defines what information will be protected (i.e., what’s the secret); and
(2) legal obligations – make sure the agreement appropriately defines the receiving party’s obligations, to ensure that the information is kept secret and its value is protected.
If you’re a disclosing party, you’ll want to be sure that (1) the scope of the NDA is broad enough to cover all the information that you want the receiving party to keep secret, and that (2) the legal obligations created by the NDA are strong enough to protect the value of that information.
On the other hand, if you’re the receiving party, you’ll want to be sure that (1) the scope of the NDA is restricted to information that you (the receiving party) are willing to keep secret at least for a period of time, and that (2) the legal obligations created by the NDA are not unreasonably onerous.
The specific terms that control the scope and legal obligations will vary depending on how the NDA is crafted. But here is a brief summary of a few key provisions that often arise, to give you a flavor of how you might apply these high-level considerations to a specific agreement.
PROVISIONS AFFECTING SCOPE
As you might guess, there are many types of provisions that can affect the scope of an NDA. For example, does the NDA cover information that’s orally disclosed, or only written materials? Does the NDA contain an exclusion for information that’s independently developed by the receiving party? One provision that’s often negotiated is the requirement to mark or summarize the information that’s to be protected under the NDA.
Requirement to Mark or Summarize.
For instance, many NDAs include a provision that requires the disclosing party to (a) mark written materials as “Confidential” or the like, and (b) summarize orally-disclosed information within a certain time after the oral disclosure (e.g., 30 days); otherwise the disclosed information isn’t protected by the NDA.
Marking/summarizing requirements create an administrative burden on the disclosing party, especially when the parties anticipate ongoing discussions. Thus, these requirements are often omitted when both parties agree upfront that the NDA should cover the majority of information exchanged. On the other hand, a marking requirement might be appropriate where it doesn’t create an undue burden, for example, where the disclosing party seeks only to protect a discrete, easily-identifiable subset of the information that they plan to share.
PROVISIONS AFFECTING LEGAL OBLIGATION.
At a minimum, an NDA should require the receiving party to restrict use and limit disclosure of the confidential information. But the specific restrictions and limitations often vary. For example, does the NDA permit the receiving party to disclose the information to their affiliates? If so, under what conditions? Is the receiving party required to provide notice if they receive a court order or other legal requirement to disclose? One provision that’s often negotiated is the duration of the receiving party’s obligations.
Term – Duration of Obligation to Keep Confidential.
A longer term favors the disclosing party by ensuring a longer period of protection under the NDA. The specific term that the parties agree to can vary based on a number of factors, for example, industry standards, how sensitive or valuable the information is, whether the value is likely to change over time, whether the information will become public at some definite point, etc.
As a default, a term of three to five years seems to be fairly typical in some industries, but shorter or longer terms are not unusual. In some cases, the term can extend indefinitely. For example, when highly-sensitive trade secrets are involved, the disclosing party may require that the receiving party’s obligations continue indefinitely, or as long as the information remains a trade secret.
NDAs are often used for initial discussions between business entities that have some future engagement in mind. Thus, it’s not uncommon for one or both of the parties to add other types of provisions into the NDA.
For example, parties anticipating a transaction might want the NDA to specify certain details about services or products that will be provided “if we do the deal.” Or they might want to explicitly state that the NDA doesn’t obligate them to enter any further transaction. One provision that’s often added in technology-related NDAs is a grant-back for improvements to the confidential information.
Grant-Back for Improvements.
A grant-back provision can be important for a technology company, for example, when it plans to disclose its core technical information. Grant-back provisions are commonly seen in service agreements or NDAs with service providers, where the receiving party (e.g., a manufacturer or developer) plans to generate ideas from the disclosing party’s confidential information. In this type of scenario, owning such improvements can be critical for the disclosing party’s business.
In other scenarios, grant-back provisions are sometimes unnecessary. For instance, if the disclosure is limited to business-level information (e.g., financial information, sales strategy, etc.), there’s a much lower chance that the receiving party will develop improvements in the technology. As another example, if both parties are sharing information on related technology under a mutual NDA, they might need to ensure that they retain the rights to their own improvements. For these reasons, many NDAs don’t include a grant-back provision.
Summary. Although the basic goal of an NDA is quite simple, the scope of protection and legal obligations provided by an NDA can vary quite significantly. Thus, when preparing or reviewing an NDA, be sure to think through the details of how it will be used, so that you can ensure the appropriate provisions are included.
Author: Michael Kevin Henry, Ph.D.
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.