Ultimate Practical Guide to review Confidentiality Agreement and Non-Disclosure Agreement(NDA)

This Ultimate Practical Guide is designed to navigate you through the critical process of reviewing Confidentiality Agreements and NDAs. Whether you are a business owner, a legal professional, or an individual seeking to understand the intricacies of these documents, this guide provides comprehensive insights into each clause and its implications.

Types of NDAs and Their Legal Implications

1. One-Sided NDAs (Unilateral NDAs)

  • Nature: In a unilateral NDA, only one party discloses confidential information to the other, who agrees to keep it secret.
  • Common Use: This is typical in employer-employee relationships, where the employee is privy to company secrets but is not in a position to share any confidential information of their own.
  • Legal Implications: The legal burden of confidentiality predominantly falls on the receiving party. Any breach of this agreement can lead to legal consequences, primarily against the party who received the confidential information.

2. Mutual NDAs (Bilateral or Multilateral NDAs)

  • Nature: These NDAs involve two or more parties, where each party shares confidential information and agrees to protect the other's information.
  • Common Use: Used in scenarios like joint ventures or partnerships where each party has valuable information to protect.
  • Legal Implications: The legal obligation is reciprocal; each party is both a discloser and a recipient of confidential information. Breaches can lead to legal actions against any party that violates the confidentiality terms.

3. Merger and Acquisition (M&A) NDAs

  • Nature: These are specific NDAs negotiated during M&A processes, aimed at preventing the unauthorized disclosure of confidential information related to the transaction.
  • Common Use: Essential in the early stages of M&A discussions to ensure that sensitive financial, strategic, or operational data is not leaked.
  • Legal Implications: Often mutual in nature, these NDAs bind all involved parties, and breaches can significantly impact the transaction's success, leading to potential legal and financial ramifications.

4. Employer-Employee NDAs

  • Nature: Employers require employees to sign these NDAs to protect company-owned confidential information.
  • Common Use: This is a standard practice across industries to safeguard trade secrets, client data, and proprietary processes.
  • Legal Implications: Typically unilateral, the legal obligation rests on the employee. Breaches can lead to employment termination and legal action for damages.

Both unilateral and mutual NDAs are fundamentally similar in enforcement and consequences of a breach. However, the context of their use significantly influences their structure and the nature of obligations imposed on the parties involved.

Step-by-Step Guide to Review a Non-Disclosure Agreement (NDA)

Step 1: Identification of Parties

  • Confirm the full legal names, entity types, addresses, and jurisdictions of all parties involved.

Step 2: Start Date of the Agreement

  • Verify that the start date of the NDA is on or before the commencement of information exchange.

Step 3: Purpose and Context

  • The purpose and context of the NDA must be explicitly stated. This provides a clear framework for what the agreement covers and under what circumstances. A well-defined purpose helps in limiting the scope of what is considered confidential. For example, if the NDA's purpose is to explore a joint venture, then confidential information should be relevant to this specific venture.

Step 4: Definition of Confidential Information

  • A comprehensive definition of confidential information, including trade secrets and any necessary exceptions or carveouts, is essential. This precision ensures that all parties have a mutual understanding of what information is protected. For instance, defining whether customer lists or manufacturing processes are included can prevent future conflicts.
👉 **A Standard "Confidential Information Term" Example (Pro-Discloser)** "**Confidential Information**". Confidential Information" means all non-public, confidential, or proprietary information disclosed before, on, or after the Effective Date, by the Disclosing Party to the Recipient or its affiliates, or to any of such Recipient's or its affiliates' employees, officers, directors, partners, shareholders, agents, attorneys, accountants, or advisors (collectively, "**Representatives**"), whether disclosed orally or disclosed or accessed in written, electronic, or other form or media, and whether or not marked, designated, or otherwise identified as "confidential," including, without limitation: (a) information concerning the Disclosing Party's and its affiliates', and their customers', suppliers', and other third parties' past, present, and future business affairs including, without limitation, finances, customer information, supplier information, products, services, organizational structure and internal practices, forecasts, sales and other financial results, records and budgets, and business, marketing, development, sales, and other commercial strategies; (b) unpatented inventions, ideas, methods, and discoveries, trade secrets, know-how, unpublished patent applications, and other confidential intellectual property; (c) designs, specifications, documentation, components, source code, object code, images, icons, audiovisual components, and objects, schematics, drawings, protocols, processes, and other visual depictions, in whole or in part, of any of the foregoing; (d) third-party confidential information (including, without limitation, any Personal Information as defined in Section 5 below) included with, or incorporated in, any information provided by the Disclosing Party to the Recipient or its Representatives; (e) other information that would reasonably be considered non-public, confidential, or proprietary given the nature of the information and the Parties' businesses; and (f) notes, analyses, compilations, reports, forecasts, studies, samples, data, statistics, summaries, interpretations, and other materials (the "Notes") prepared by or for the Recipient or its Representatives that contain, are based on, or otherwise reflect or are derived, in whole or in part, from any of the foregoing."

Step 5: Procedures for Marking Confidential Information

  • Detail how information will be marked as confidential. This includes guidelines for verbal information, such as follow-up emails or letters summarizing the verbal communication and marking it as confidential.

Step 6: Exceptions to Confidential Information

  • Clearly exclude publicly available information, information already in possession, independently obtained information, and legally required disclosures. This protects the recipient from unreasonable constraints, such as being barred from using information they already knew or could obtain from other sources. Failing to include these exclusions could render an NDA unenforceable for being overly restrictive or unreasonable.
👉 **A Standard "Exclusion from Confidential Information Term" Example (Pro-Discloser)** "Exclusions from Confidential Information. Except as required by applicable federal, state, or local law or regulation, the term "Confidential Information" as used in this Agreement shall not include information that: (i) at the time of disclosure is, or thereafter becomes, generally available to and known by the public other than as a result of any material breach of this Agreement by the Recipient or any of its Representatives; (ii) at the time of disclosure is, or thereafter becomes, available to the Recipient or its Representatives on a non-confidential basis from a third-party source, provided that, to the Recipient's knowledge, such third party is not and was not prohibited from disclosing such Confidential Information to the Recipient by any contractual obligation; (iii) was known by or in the possession of the Recipient or its Representatives prior to being disclosed by or on behalf of the Disclosing Party pursuant to this Agreement; or (iv) was or is independently developed by the Recipient or its Representatives without reference to or use of any of the Disclosing Party's Confidential Information."

Step 7: Restrictions on Use and Disclosure

  • Explicitly prohibit unauthorized use and disclosure of confidential information, in line with the NDA’s purpose. This limitation ensures that the confidential information is used only for the intended purposes. For example, if the purpose is product development collaboration, the NDA should restrict using the information for competitive practices. Without these restrictions, the disclosing party may face a loss of competitive advantage, and the breaching party could face legal actions for unauthorized use or disclosure.

Step 8: Need-to-Know Restriction

  • Access Control: Limit access to confidential information to personnel who require it for designated purposes.

Step 9: Confidentiality Term

  • The term for maintaining confidentiality within an NDA should be carefully tailored to suit the specific nature and sensitivity of the information involved. You need to pay special attention to continued Obligations Post-Termination. It's crucial to specify that certain obligations under the NDA continue even after the termination of the agreement. For instance, if the NDA expires after five years, the parties might agree that some types of confidential information, especially trade secrets, remain protected indefinitely.

Step 10: Termination Provisions

  • Review and understand termination clauses and their impact on ongoing confidentiality obligations.
👉 **A Standard "Term and Termination Clause" Example (Pro-Recipient)** "Term; Termination. The term of this Agreement shall commence on the Effective Date and shall expire [] years from the Effective Date, provided that either Party may terminate this Agreement at any time by providing written notice to the other Party. Notwithstanding anything to the contrary herein, each Party's rights and obligations under this Agreement shall survive the expiration or termination of this Agreement for a period of [] years from the date of such expiration or termination, even after the return or destruction of Confidential Information by the Recipient."

Step 11: Breach Provisions

  • Outline the actions and remedies in the event of a breach of the NDA.
👉 **Common Remedies for Breach includes:

Injunctive Relief**: One of the primary responses to a breach of an NDA is seeking an injunction from a court. This legal action aims to immediately halt any further unauthorized disclosure or use of the confidential information. For example, if a former employee starts sharing trade secrets with a competitor, an injunction can prevent any further dissemination of that information.

Monetary Damages: The party that suffered from the breach may seek financial compensation for any losses incurred due to the unauthorized disclosure or use of confidential information. This could include lost profits, the cost of mitigating the breach, and any unfair advantage gained by the breaching party.

Liquidated Damages: In some NDAs, the parties agree in advance to a specific amount of damages (known as liquidated damages) in the event of a breach. This can simplify the process of resolving disputes and avoid the need to prove the extent of the actual harm suffered.

Step 12: Return or Destruction of Information

  • Post-Termination Handling: Specify the protocol for handling confidential information after the termination of the NDA, including retention for legal reasons.

Step 13: Intellectual Property Rights

  • Ownership and Use: Confirm that the NDA respects the ownership of IP rights and addresses derivative works and reverse engineering.

Step 14: Limitation of Liability

  • Review clauses related to warranties, disclaimers, and limitations of liability. Pay close attention to clauses regarding indirect damages, such as lost profits or reputational harm. Limitations on such damages should be fair, ensuring that neither party is exposed to disproportionate risk.
👉 **You should:

Avoiding Excessive Liability:** Ensure that your own potential liability under the NDA is not disproportionately heavy. For instance, if the NDA imposes steep financial penalties for breaches that far exceed the actual harm caused, this could result in an undue burden.

Preventing Excessive Leniency: Conversely, verify that the agreement does not overly limit the other party's liability in a way that could leave you inadequately protected. For example, a clause that absolves the other party of all liability even in cases of gross negligence or willful misconduct would be unfairly lenient.

Step 15: Applicable Law

  • When it comes to selecting the applicable law for an NDA, it's advantageous to choose a legal system that you are familiar with. By choosing a legal system you are familiar with, you can better anticipate legal nuances, potential challenges, and the implications of specific clauses within the NDA.

Step 16: Dispute Resolution

  • Cost, Confidentiality, and Efficiency: The method of dispute resolution should be chosen based on a balance of several factors:
    • Cost: Litigation can be expensive, and this factor should be weighed against the potential benefits. Arbitration, while also incurring costs, can sometimes be a more cost-effective solution.
    • Confidentiality: Since most NDA related disputes involve confidential information, arbitration is often the preferred choice. Unlike court proceedings, which are typically public, arbitration can be conducted in private, safeguarding sensitive information.
    • Efficiency in Obtaining Injunctions: The ability to quickly obtain temporary restraining orders or preliminary injunctions can be crucial in cases of breach. The chosen jurisdiction should offer efficient mechanisms for such remedies.
    • Enforceability: Consider the strength and ease of enforcing the agreement and any judgment or arbitration award. This is particularly important when dealing with parties in different countries.
  • Arbitration vs. Court Proceedings:
    • Arbitration: This is a viable option for many NDAs, especially when dealing with international parties or when confidentiality is a key concern. Arbitration allows for a more flexible process and can be tailored to the specific needs of the parties.
    • Court Proceedings: Court litigation can be more appropriate in certain scenarios, especially where local laws provide specific protections or remedies that are more favorable and cannot be replicated in arbitration.
    • International Considerations: When one party is based in another country, arbitration can be a more neutral and effective choice since unlike arbitration, cross-border enforcement of foreign judgement can be different.

Step 17 Other Clauses

  • Entire Agreement: Ensure this clause accurately reflects the full agreement between parties.
  • Notifications: Define acceptable methods of notification.
  • Severability: Confirm the agreement’s validity even with partial invalidity.
  • Survival: Identify clauses that remain effective after expiration.
  • No Partnership: State that the NDA does not create a partnership or joint venture.