THE NON-DISCLOSURE AGREEMENT

IVAN HOFFMAN, B.A., J.D.



        If you are or have plans to be an entrepreneur, then sooner or later you are going to have to disclose your ideas to someone if you intend to exploit them.  And in so disclosing the ideas, without adequate legal protection, you run the risk of having those ideas freely taken from you and exploited by others. (There are certain exceptions to this situation such as in attorney-client or other forms of privileged relationships but I will not deal with those exceptions in this article, which is limited to an arms-length commercial relationship.)

       Thus, you will need to know the workings of the non-disclosure agreement, often referred to as a confidentiality agreement or an NDA.

        Quite evidently, the agreement must be submitted to and signed by the party to whom you intend to make disclosure (the recipient) before you make that disclosure.  This seems self-evident but I am often amazed at how often parties try to close the barn door after the idea has left.

        One final point: this article is written from the point of view of the discloser of the information for that discloser should have the greatest protection negotiable.  If, on the other hand, the agreement is prepared by counsel for the recipient, most often you will find that that agreement is far less detailed and less protective of the discloser’s rights.  In such an instance, free market capitalism and entrepreneurial sense should tell the potential discloser to get an attorney to review the agreement before making any disclosures.

Some Key Provisions

        Clearly the first provision should be to define what constitutes the confidential information.   This is important not only because it forms the basis of what may be the subject of the dispute, but additionally the agreement should state how that information is to be determined and disclosed.  For instance, the agreement can state that the defined information is only confidential if it is in writing, or only if it is disclosed in writing, if it is marked “Confidential” by the owner, if it treated by the owner as confidential and so on.

        Additionally, and perhaps of equal importance, the agreement can define what is not confidential.  Generally, information that was known to the recipient before it was so disclosed would not be confidential.  However, and this is a big however, the agreement should establish certain parameters for what constitutes “knowing” beforehand.  For example, if the information was in writing before the date of the disclosure or if it was used in the recipient’s business before the date of disclosure, this can be used to define “known.”

        The agreement should also recite that the act of disclosing does not serve to transfer any rights of any kind in or to the confidential information from the discloser and that all rights are reserved to the discloser.  In a related provision, the agreement should also state that no license to use the confidential material is granted by the act of disclosing because that should be the subject matter of a separate agreement in which there is a royalty etc. etc.

        Of course the meat of the agreement should cover the scope of limitations on use that the recipient will be subject to.  Is it to be limited to preventing disclosure only by the recipient or is the recipient also responsible for preventing disclosure by any third parties?  It should state how and in what manner the recipient may use the confidential information and whether or not copies may be made and if so, what happens to the copies when the agreement ends.  Additionally, these agreements often contain provisions prohibiting the recipient from hiring away any of the discloser’s employees, at least for some stated period of time.  The rationale of course is that by disclosing this information, the discloser is vulnerable and should not be victimized by the act of disclosing.

        The agreement should go on to provide that the discloser is not making any representations or warranties about the information but is disclosing the same on an “as is” basis.

        There should also be a term for the agreement, one that is commensurate with whatever the transaction may call for in the circumstances.  The more complex the transaction, the longer the term of the agreement would be.  However, and this is very important, the recipient must be bound to hold in confidence the information provided even after the term ends.

        Moreover, there should be provisions setting forth the remedies available to the parties, mostly the discloser, in the event of a breach or threatened breach on the part of the recipient.  These remedies should of course include injunctive relief.  There should also be appropriate provisions dealing with venue, where the action may be brought.

        Finally, there should be some mechanism established for the actual process of disclosing the information.  If this is to be done on a one-time basis, then the information should be marked clearly as confidential.  If it is to be one on a regular basis over some period of time, then appropriate procedures should be set up to establish that when disclosed, the information shall be deemed covered by this agreement.

        One last word: often, non-disclosure agreements are combined with employment agreements and the same provisions should apply in those instances.  However, when dealing with employment agreements there are many other provisions that should go into those agreements relating to the employee’s work status, rights to the employee’s work and so on and these may have implications in terms of the definition of confidentiality.

Conclusion

        The within article is not intended to be exhaustive of the many issues that may arise in such a relationship and clauses that should be included in the agreement to cover those situations.  It is sufficient to say that when faced with a need to disclose an idea, a party should recognize the potentially disastrous consequences of disclosing without an appropriate agreement.

        Quite evidently, this agreement should be prepared by an attorney and it should be tailored to fit your circumstances.  Trying to “save” a few dollars by cutting and pasting from a form or a friend may turn out to be a very expensive “savings” if the agreement is not adequate to protect your idea.  If you are or have visions of being an entrepreneur then you should know the difference between getting value for your money as opposed to focusing solely on absolute costs, which often disregards value.

© 1999 Ivan Hoffman

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This article is not intended as legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.
 
 


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