There are inevitably times when an enterprise needs to share information on a confidential basis. Expectations, obligations and practices of confidentiality are at play all the time in day to day business. While most entrepreneurs know this when it comes to managing their finances or keeping customer information private, it is not as obvious when they need to be proactive and thoughtful about using non-disclosure agreements (NDA) to advance and protect business interests.
When is a NDA needed?
An NDA is needed any time an entrepreneur has to share or release sensitive business information into someone else’s care, such as employees, service providers, collaborators, clients and investors.
Even when it is apparent that a written undertaking of confidentiality needs to be put into place, entrepreneurs will skip this step not wanting to throw cold water on the embers of a fledging business relationship. All too often, however, small business owners find themselves “burned’ because of disclosing confidential information to others who have then gone off and independently leveraged that information.
No doubt, to get business done and protect your interests, consideration needs to be given to the timing for executing, and language used in a NDA. If you don’t want to use a NDA right away, however, the best strategy is to work with publicly available information about your business and market opportunities to pique interest, articulate your value proposition, and/or define what you are asking for.
Anatomy of a NDA
While it is true that signing a piece of paper in and of itself cannot prevent the inadvertent disclosure or intentional misappropriation of confidential information, a well drafted NDA can make it easier to stop or mitigate the damage that can be done.
Just as confidentiality and privacy are regulated by government in different relational contexts, so should written non-disclosure undertakings be crafted and adapted to fit the circumstances. This is as true for stand-alone non-disclosure agreements as it is for confidentiality provisions embedded in a larger contract.
To begin to appreciate and discern what kind of legal language you might need in a given situation, let’s review the core provisions of a NDA:
- Definition of Confidential Information – Confidential information is information that is not generally known to others and reserved for the benefit of an enterprise. It does not include information which is public or legally accessible from independent third party sources. The definition should ideally list out types of confidential information that are likely to be shared between the parties, including examples of technical, operational, market and financial information.
- Obligations of Confidence and Limited Use – These provisions represent the main undertakings of the parties, setting out how the confidentiality of information is to be preserved and the purposes for which it can and cannot be used. This helps to ensure the objectives of sharing confidential information are realized without breaching the obligations of confidence.
- Control/Ownership of Confidential Information – Knowing who controls what information clarifies the parties’ legitimate expectations of benefit under the agreement. These provisions also address the interface between confidential information and other proprietary rights such as patent rights and copyrights.
- Management of Confidential Information – At a minimum, this entails setting out which obligations and for how long those obligations will survive termination or expiry of the NDA. The return of confidential information to the controlling party, or its destruction is also addressed. For example, trade-secrets are a particular type of confidential information that should be kept secret in perpetuity to maintain their value.
- General Provisions – These provisions, among other things, address the applicable law, interpretation, and enforcement of rights and obligations under the NDA. The selection of the law governing the NDA can have a significant impact on how issues are resolved between the parties with the help of legal advisors, arbitrators or the courts.
While all NDAs typically have the above core provisions, in Part II of this post series, we will look at how a NDA may be structured differently in a few commonly encountered business contexts.
Kyma Professional Corporation