When a business wants to grow it usually starts to look at strategic partnerships to bring in outside expertise, whether in the form of contractors, third-party vendors or R&D partnerships.
Once such discussions begin, it is extremely important to have a plan in place for protecting each business’s confidential proprietary information. This information can include almost anything—e.g., IP, patents, trademarks, financial information, designs, client lists, business strategies or concepts for future projects.
The decision to grow a business beyond its core competencies usually materializes first in the form of a Non-Disclosure Agreement or NDA. Because the parties to an NDA do not yet know exactly how the ultimate affiliation will function or what form it will take, the NDA allows limited usage of proprietary information without the risk of transferring or limiting the company’s ownership rights in such data. In other words, the NDA sets the stage for later formal agreements after the companies have decided how they can best help one another.
While each NDA is going to be different depending on the needs of the parties and the information being exchanged, below is a list of those issues or elements that every standard NDA should address.
I have tried to speak in terms of “parties” and not just “disclosing v. non-disclosing party” because a good NDA will be mutually binding and not a one sided contract.
- What is the “Confidential Information” at issue?
How will the parties define what is being protected? Will the NDA require each party go through the trouble of marking documents “proprietary and confidential” or will the NDA be more comprehensive and define “confidential” as any and every bit of information shared between the parties? Your answer to this question will affect workflow and, possibly, the extent of litigation if the parties have a falling out.
- Why is the NDA needed—i.e., what is the purpose for exchanging proprietary information?
Is the NDA for a single specific project? Are the parties working together to create a new product? Are there short-term goals or are the parties intending to work together indefinitely moving forward?
Determining why you need the NDA will help you resolve later arguments over whether a non-disclosing party is using proprietary information for something unaffiliated with the purpose of the partnership.
- What is expected of the parties in keeping disclosed proprietary information protected?
The NDA needs to create an obligation on the parties to treat disclosed information as confidential and to treat proprietary information with due care. This duty must apply to the parties’ employees, contractors, and other affiliated non-parties to the NDA.
On the same note, how will protected information be treated at the end of the partnership? Whether said information is to be returned or destroyed, the disclosing party will want assurances that the non-disclosing party will not continue to utilize confidential information.
Depending on the situation, it may be helpful to discuss whether the parties can continue working apart from each other. How will the NDA address each party’s entering into similar projects with third parties and what protections will be put in place regarding independent research and development
- What exceptions apply to the NDA?
For example, what if one party marks a document as confidential even though the document can easily be found by doing a simple Google search? Or, what if one company provides a process it created when the non-disclosing party already had the same or similar process in place?
Lastly, here come the lawyers! In case something goes wrong, you want to make sure the NDA has provided for two things:
First, a dispute resolution mechanism.
Where and how do aggrieved parties go to make or file a claim under the NDA?—e.g., mediation, arbitration or full blown litigation. 90% of the time, the aggrieved party will want an injunction, restraining order, or some form of protection long before they could manage to get on a court’s hearing calendar.
Second, what remedies, other than a restraining order, can an aggrieved party seek?
It is often hard, if not impossible, to know what actual damage resulted from a party’s disclosure of confidential information in breach of the NDA. A liquidated damages clause ensures both parties know what the result ($$$) of a breach of the NDA entails.
Of course, once the aim of the project shifts or R&D has nearly resulted in a viable product, the language in the NDA will likely be insufficient and the parties will need to develop a more formal agreement—e.g., collaboration, licensing, services, etc. Even so, if you make sure to address the above issues, the parties will hopefully have laid groundwork for a valuable business relationship.