CSO

Following on with our discussion of best contracting practices, this week we discuss the essential elements of non-disclosure agreements (NDAs). NDAs are used in several situations. Most notably, NDAs are used at the inception of a relationship to ensure confidential information disclosed in anticipation of a potential business relationship is adequately protected. If the parties decide to enter into a final contract, say a professional services agreement, following their initial discussions, the NDA would be replaced by the confidentiality provisions of the final agreement. In the foregoing example, an NDA is used as an interim agreement to ensure initial discussions are protected by written confidentiality obligations, but the NDA is not intended or designed to be used on an ongoing basis. Rather, the parties contemplate the NDA will "sunset" when they ultimately sign a final agreement to govern their relationship (e.g., a master license agreement, ASP agreement, professional services agreement, etc.).

NDAs may also be used on an ongoing basis for employees, contractors, and others who may not require anything more substantial in the way of contractual documentation to govern their relationship with the business, but this is generally not the case.

There are two basic types of NDAs: one-way and two-way. One-way NDAs protect only the information of one of the parties. These are generally used when information will be flowing in only one direction. Two-way NDAs are designed to protect the confidential information of both parties.

So what are the key points for NDAs? Several points for your consideration:

•  In general, avoid requirements that you must mark information as "confidential" or risk losing protection. While such a requirement may be workable in very limited engagements, this requirement is frequently unrealistic and unlikely to be followed.
• Ensure intellectual property disclosed by a party is adequately protection (e.g., by the granting of a limited license to use the intellectual property solely in connection with exploring the proposed business relationship). Remember that not all intellectual property is necessarily "confidential information". An NDA drafted to protect only "confidential information" may not adequately protect your intellectual property.
• Except in limited circumstances, NDAs should not be used as a final, ongoing agreement. Rather, most NDAs should be used as transitional documents in anticipation of the negotiation of a final, fully-fleshed out agreement containing its own confidentiality clause.
• While most NDAs have defined terms (e.g., 3 – 5 years), ensure that trade secrets, personally identifiable consumer information, and other highly sensitive information remain protected on an ongoing basis. In particular, some courts have found that trade secrets disclosed under an NDA that has a defined term will lose their trade secret status forever at the end of that term.
• Ensure the scope of the NDA is not overbroad, but includes all desired purposes for which the information is disclosed.
• Most NDAs impose an obligation to return or destroy confidential information disclosed by the other party at the end of the term or on termination. While this is not an objectionable requirement, the language should be revised to ensure the receiving party may retain such documentation as is necessary to satisfy any document retention obligations imposed on them by law and to ensure the receiving party is not compelled to remove or delete information when it is commercially impracticable to do so (e.g., removing e-mail containing confidential information from old backup tapes).

Next time, we will commence our discussion of specific contract provisions common to most types of technology agreements.