How To Draft Non-Disclosure Agreements (NDA)

Non-Disclosure Agreements (NDA)

Drafting a non-disclosure agreement (NDA) for your company? Whether vetting a potential investor, considering a joint venture, looking to acquire the next unicorn, or simply trying to hire a contractor to help with work flow, if you want your business opportunities to continue growing through strategic partnerships then you are going to need a concrete understanding of what each business considers its confidential proprietary information and what level of access you want to grant those outside of your circle.

At least initially, it does not matter if you are presenting a business idea, trying to sell your company, reviewing third-party vendors (preventing White House staffers from discussing your daily routines) or considering R&D partnerships, the discussions surrounding an NDA should always begin the same questions (set out below).

The confidential information at issue could include almost anything—e.g., financial information, trademarks, designs, IP, patents, client lists, business strategies or concepts for future projects. How you define proprietary information depends on what the providing entity ‘thinks’ is their personal property (whether that it is true or not is another matter). The NDA is simply intended to limit a party’s use of another’s proprietary information without the IP’s owner risking their ownership rights being transferred or limited as a result.

Just making the decision to enter into an NDA is a very important step because you do not always know what sort of relationship will materialize or evolve between parties. By understanding each party’s expectations at the beginning, you can better address changes as they come. Basically, think of an NDA as the initial handshake between two parties who are starting discussions about forming a mutually beneficial relationship.

NDAs can be as different as snowflakes because the IP is individually owned (except in convoluted licensing agreements), the needs and goals of each party will change over time and the way the IP will be transferred and used changes depending on the specifics of your business endeavor.  

Here is what you should ask before you draft an NDA:

1.What “Confidential Information” is at issue and who owns it?

How does the NDA define the IP? How will the parties know what is or isn’t considered IP? Will every page be stamped “privileged and confidential” or will there be a basic understanding that everything shared between the parties is confidential?

If you are the IP owner you will want strict controls and general definitions of what is IP but are you ready for the increased workflow required to maintain control over the IP at all times? If every conversation and every document is considered privileged then you will need clear tracking programs and full-time gate keepers.

2.What do you hope to accomplish by providing or receiving IP from another party?

Does the NDA cover a single project or is this the beginning of a continued partnership? Are you intending for the IP to be returned by a specific date or is this an open-ended project? Is there expected to be a new invention or work product coming out of the NDA? Who will own any inventions or methods that come out of this partnership? Are your goals short-term or long-term?

By figuring out why you need the NDA today you are resolving arguments that are bound to come up tomorrow. Someone will eventually question if their IP is being used correctly and you can only know what a proper use is if you have already agreed to it in advance.

3.What are the IP owner’s expectations towards their IP being kept safe and confidential?

All good NDA’s require one party to treat IP as confidential and take steps to ensure that it stays that way. It’s the “how” that will create confusion and disagreement.

Do you expect the other party to hire a security team to track employees? Install additional firewalls? Or are you simply asking employees to keep documents at the office and not share information with people outside of the company?

Whatever requirements the IP holder decides on, just make sure these controls are contractually extended to the receiving party’s employees, contractors and affiliated non-parties to the NDA. 

4.What happens at the end?

Should the IP be returned? Destroyed? Some combination? Regardless of what is expected, the disclosing party is going to need some assurance that the other party will not continue using the IP after the relationship has come to a close.

What about each party’s obligations to the other after the NDA relationship ends? What if the receiving party learned certain skills or gained new insights as a result of their being in possession of the IP and now wants to use their new found knowledge after returning the IP? Is there a need for continuing obligations, protections or prohibitions?

5.Lastly, what about “what if’s”?

Consider this, what if an IP holder provides a document stamped ‘privileged and confidential’ and the receiving party points out that the exact same document can be found by a simple Google search? What if one party provides mechanical drawings that depict the way they manufacture widgets and the receiving party can prove that they already manufacture their widgets in almost the exact same way but with a different tool?

Again, the goal is to consider and address potential disagreements you will have in the future while heads are cool before any party has assumed additional risks associated with letting IP out of their immediate control. NDA’s should address what happens if and when a disagreement arises—i.e., you need a dispute resolution mechanism for resolving disagreements and an understanding of what potential remedies exist.

Where do you go if you have a concern about how the other party is using your information? Court? Arbitration? Mediation? Will a party have to file suit to seek a restraining order if there is a misuse of IP or do the parties want to agree in advance what happens when an allegation is raised?

It’s almost impossible to know for sure what a party’s actual damages are for a breached NDA and I can guarantee you that each party will have a different opinion or calculation. “Liquidated Damages Clauses” allow the parties to agree to an acceptable result before the NDA breach of contract claim gets filed.

As mentioned at the beginning of this article, the NDA is just the initial handshake. Depending on how the IP is received and utilized the project’s goals and methods are likely to shift. If you are working on a new product or service, each party’s expectations will likely change as you get closer to a viable product. When new revenue is on the horizon, everyone will want to know where it’s going. Hopefully at that point your NDA will start morphing into licensing agreements, collaboration projects, partnership agreements, etc.

The NDA is an opportunity for parties to lay the ground work for a successful and mutually beneficial relationship. Spend the time coming to an agreement now so you don’t spend even more time fighting later.

By John T. Van Geffen, Esq.
Partner
Avialex Law Group, LLP
San Francisco, CA
www.avialex.com

John T. Van Geffen is a partner at the Avialex Law Group, LLP specializing in litigation, aircraft and commercial transactions and regulatory compliance matters.

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