by Jack B. Harrison
Often businesses begin serious negotiations or discussions without a nondisclosure agreement in place, even while revealing confidential information in the context of the negotiations or discussions. This can be a dangerous practice, since confidential and proprietary information and data may be the most valuable asset a business owns. As with any contract, the nondisclosure agreement can provide vital protection, but should be drafted with care. Here are some tips to consider in drafting a nondisclosure agreement, as there really is no one size fits all agreement.
- Nature of the Obligation. At the core of any nondisclosure agreement is language that prohibits one party from wrongfully using or disclosing certain information received from the other. The agreement should require the recipient of the information to exercise the same degree of care that it would use to protect its own confidential information, but, at a minimum, the recipient of the information should be required to exercise a reasonable degree of care.
- Mutual v. Unilateral. Because, in almost every case, each party will disclose some sensitive information, it almost always makes sense to include mutual confidentiality obligations.
- Protected Material. To protect "Confidential Information," the nondisclosure agreement should define exactly what information is included in that term. The nondisclosure agreement should provide some examples of what information or data is included, such as “technical, financial and business information” and make clear that the information or data may be in oral, written, physical or electronic form.
- Marking Requirement. The nondisclosure agreement should include a mechanism for identifying protected information at or soon after the time of disclosure. As a compromise, the agreement may state that confidential information must be marked as such or identified as confidential in a subsequent writing.
- Permitted Use. The nondisclosure agreement should state that confidential information may be used only for a particular purpose, such as exploring the possibility of a business relationship between the two parties, and no other purpose. Of course, the terms of that business relationship will be laid out in a separate agreement.
- Permitted Disclosure. Nondisclosure agreements typically contain an exception, permitting disclosure by the recipient to its attorneys, accountants, or employees who have a legitimate need to know or in response to a court order, or the like. The agreement should be clear that the legitimate need to know requirement is explicit. The agreement may also require that prior notice be given before any disclosure and that any third-party recipients must agree to confidentiality obligations at least as strict as those stated in the nondisclosure agreement.
- Duration of Obligation. The nondisclosure agreement should state a term for the entire agreement, because a contract with no stated term is often found to be terminable at will. Then, the confidentiality obligation may be described as lasting, “For the Term of this Agreement and __ years thereafter.”
- Remedy for Breach. The nondisclosure agreement should state that, in the event of a breach, monetary damages would not be sufficient and that the parties agree injunctive relief is proper.
- Mechanism for enforcement. The nondisclosure agreement should set out a mechanism for its enforcement and for resolving any dispute over the damage caused by a breach of the agreement. This may be through a lawsuit filed in a court of competent jurisdiction or some type of alternative arbitration forum.
- Jurisdiction and Choice of Law. Tied to the mechanism for enforcement, the nondisclosure agreement should specifically state what state’s law will be applied to the enforcement of the agreement and what court will have jurisdiction over an enforcement action. These clauses become particularly important when a business is involved in negotiations with an out of state or international business.
- Indemnification. The nondisclosure agreement should state that, in the event a breach is proven to have occurred, the breaching party agrees to indemnify the non-breaching party for any attorneys’ fees or expenses that are necessary to enforce the terms of the agreement.
Before entering into any discussions or negotiations where confidential or proprietary information will be disclosed, a prudent business should meet with counsel, review the nature of the information that may be disclosed, and ensure that an appropriate nondisclosure agreement is in place before any information is exchanged.