There are a number of legal caveats related to non disclosure agreements (NDA’s) or what is termed confidentiality agreements that you need to be aware of, this article summarizes these issues.

 

1. WHAT THE NDA TRIES TO DO
When you use a NDA you are attempting to contractually protect a fragile proprietary information asset commonly known as a trade secret, which is your idea, product, process, information, or the like that you have created but have not publicly disclosed.  Typically, the trade secret is an inventor’s idea prior to filing a patent application, or could be any other information that has been kept secret and that has value, which can also include but is not limited to financial information, customer lists, competitor information, an in house manufacturing process, or other information that will usually not have a patent application filed on it, remaining secret, i.e. never publicly disclosed. 

   

2. RISKS OF BOILERPLATE NDA’S
Many people take a cavalier attitude towards NDA’s by using any old boilerplate NDA agreement they can find in an inventors self help book or elsewhere, which at best gives inadequate protection and at worst can cause the loss of trade secret status by putting your idea into the public domain prior to the patent application being filed or for non patentable subject matter essentially giving away to the public your hard earned secrets.  If the information being protected is worth so little so as to use a weak agreement, then is it worth protecting at all is really the question. 

 

Problems with boilerplate NDA’s are as follows;

 

a. As governing trade secret law is state specific law, it can vary state to state, thus a book not specifically written for any particular state could have illegal clauses or be missing clauses that it should have.  In addition, as the NDA is a contract, state law also governs the interpretation of the contract by a court.    

 

b. The boilerplate NDA in a book can be drafted with information that is 3 or more years old and it may not comply with recent changes in the law and recent trends in litigation relating to how the various NDA clauses are interpreted and enforced in court.  

 

c. The strength of an NDA in court is based a large part on how specific the NDA is between the parties concerning what information is exchanged, what use is and is not allowed of the information by the parties, is the agreement one way or two way, what tasks are the parties to perform, what are the parties legal status, what is the compensation for the tasks, and the like.  Boilerplate NDA’s by their nature are close to an adhesion contract, wherein the parties just sign the agreement and that’s all, and it is much easier for a party to say they signed something they did not understand when its boilerplate as opposed to a custom tailored agreement that went through some negotiation, deliberation, and revision between the parties, wherein it would be much more difficult to claim that a party did not know what they were signing.     

 

The following are typical clauses that are included in the NDA, however, this list is by no means exhaustive of everything that should be in a particular NDA, as NDA’s are best custom drafted to the particular parties requirements, however, this list includes the most important issues to consider defining in NDA’s. 

 

3. DEFINITION OF PARTIES
Parties names, legal entities, addresses, effective date, and the like. 

 

4. RECITALS
Type of business of each party, business purpose of the agreement, the ability and desire to engage in the business purpose, and the capability to execute the business purpose for both parties. 

 

5. CONFIDENTIAL INFORMATION DEFINITION
Caution must be exercised here as just about anything under the sun can be a trade secret, thus a limiting definition in the NDA may work to your disadvantage, as a trade secret can be a compilation of items in the public domain much the same as copyright. 

 

Thus NDA clauses like, any information exchanged that is in the public domain isn’t a trade secret can be used against you.  Remember, two parties can posses the same trade secret that was independently created, which as opposed to patent law two parties cannot posses the same invention. 

 

Also, your trade secrets can easily later enter the public domain in the form of a patent application publication or of a patent application issuing, and in this case you do not want the receiving party to be free to use your prior trade secret as they choose.  

 

Thus, this also points to the risk of making an exception for the definition of confidential information wherein if the receiving party already knows the confidential information, this could be used against your claim of information confidentiality to the supposed known confidential information of the other party.    

 

6. CONFIDENTIAL INFORMATION MARKING
Do not require that the confidential information that you disclose be marked as such, this can be dangerously limiting to what is considered the trade secret as people make mistakes, and if you or someone within your business entity slips up and fails to mark a document for instance “confidential” you will risk that the receiving party may claim that the unmarked disclosure by you is public domain information thus risking that you will lose you trade secret status of that information.   

 

Also, as is often the case confidential information can be disclosed orally, wherein of course the oral information is not marked “confidential”  thus another reason for not requiring the marking as defined above, as you would not want to lose the trade secret status of your confidential information because it was orally disclosed, however, it is a good practice to later memorialize the oral disclosure for documentation purposes, but if you require the memorialization in the NDA, then you could be trapping yourself into losing the trade secret that is disclosed orally, unless of course you absolutely follow the memorialization requirements in the NDA.   

  

7. USE OF THE CONFIDENTIAL INFORMATION
Tightly confine the use of the confidential information by the receiving party and require written authorization by you for other uses.  

 

8. WHO SEES THE CONFIDENTIAL INFORMATION
This must also be tightly controlled, especially where the receiving party is a larger entity with many employees, only those employees “with a need to know” should be authorized to see the confidential information.  Another consideration is 3rd parties that may be outside of the receiving parties business entity that may “need to know” the confidential information, also needs to require your written authorization and to know whether this 3rd party is under an appropriate obligation of confidentiality, remember you always need to know who is seeing your confidential information and what there are doing with it.     

   

9. DISPOSITON OF THE CONFIDENTIAL INFORMATION
You always have to own and control all of the confidential information you disclose to the other party, whether orally, in documents, electronically, and any other medium, wherein at the completion of the business purpose, all of the confidential information must be returned to you, with no unauthorized copying or duplication by the receiving party in which case you will lose control over the confidential information you disclose, never leave anything open ended.  

 

10. INTEGRATION CLAUSE
Do not have the clause “this written agreement is the sole and exclusive agreement between the parties” can again limit you in arguments that you can make in litigation, wherein oral side agreements, or the course of dealing between the parties can be used to help you should a dispute come up.  Remember that purely technical people, such as engineers are not necessarily sensitive to, know, or care about all the requirements needed to keep the trade secret status of information, such as the case of multitudes of information being exchanged over time, the parties may become lax in specifically identifying confidential information and the like, requiring an argument that the parties silently understood the information to be confidential, i.e. allowing court arguments outside of the literal agreement, which can be in your favor, keeping flexibility in the NDA is important.     

 

11. COVENANTS NOT TO COMPLETE
Care must be exercised here as this also is state specific law, and this type of clause in a boilerplate generic NDA may be illegal and not enforceable in your state.  Typically these covenants are limited in time and geographic scope with the clause drafted to comply with the applicable state law.   However, do not confuse covenants not to compete with trade secrets, as trade secrets have an indefinite life i.e. kept secret forever and even though the receiving party has returned all of your confidential information and completed the business purpose for you, they still have the knowledge in their head and could prove harmful to your business interests by disclosing it.    

 

12. INDEPENDENT CONTRACTOR
Clearly state the legal business relationship between the parties, usually it is preferred that the receiving party be an independent contractor so that their liabilities do not transfer to you, if the receiving party is an employee of yours a different agreement is required. 

 

13. CONSIDERATION
Payment arrangements must be specified in the NDA for the services of the receiving party making it a clear “arms length” transaction so that the receiving party remains an independent contractor and that their services are fully compensated, wherein the receiving party acquires no ownership rights in your confidential information or in any intellectual content that the receiving party creates during the course of their work for you.  

 

14. OWNERSHIP OF CONFIDENTIAL INFORMATION AND CREATIONS
In accordance with “consideration” as the receiving party is compensated for their services to you, the receiving party acquires no ownership rights in either your disclosed confidential information or in any intellectual content that the receiving party creates during their services.  

 

15. DOCUMENTATION OF CREATIONS
As the receiving party can have the opportunity to add trade secret content to your confidential information by virtue of their services, the receiving party must properly document “by inventors notebook” for future court evidence their activities they perform for you, noting that this documentation is owned by you and must be given to you at the end of the receiving party’s services.  

 

16. WARRANTIES
Both parties should warrant that to the best of their knowledge that the confidential information they respectively provide and / or the creative content that is respectively generated is free from defects in the form of patent, trademark, or copyright infringement or misappropriation of trade secret or any other defect in ownership.   

 

17. RIGHT TO INSPECT
It is in your interest that you have a right to inspect the receiving party’s facility, processes, materials, documentation, and the like for compliance to the NDA and any other issues deemed important to the sufficient completion of the receiving party’s work for your needs. 

 

18. REMEDIES
Your remedy should the receiving party breach the NDA would be through injunctive relief (to stop the receiving party’s activities) by having a clause that unequivocally states that the improper use or disclosure of the confidential information will cause irreparable harm to the disclosing party.     

 

19. TERM
Keep in mind that although there is a time window for the exchange of confidential information and for the business purpose of using the information, plus possible covenants to not compete, there is no time window for the keeping of a trade secret confidential, being forever. 

 

20. POWER TO BIND
Especially when contracting with large entities ensure that the individual you are contracting with in the NDA has legal authority to enter into the NDA and legally bind their company for the obligations relevant to and surrounding the NDA. 

 

21. CONTACT POINTS
As a matter of efficiency and proper bookkeeping, all confidential information disclosed should be transmitted through specific identified individuals both on the disclosing and receiving end.   

 

22. APPLICABLE LAW AND VENUE
It is always to your advantage to specify the applicable law to interpret the NDA and surrounding issues and where if any litigation is to take place.

 

23. ASSIGNMENT
As usually the NDA is a personal service of the party receiving the confidential information, you will probably want to restrict the ability to assign the NDA by the receiving party by requiring your written approval. 

 

24. TERMINATION
In going with the restriction in assignment clause above, as the NDA usually being a personal service of the party receiving the confidential information, in the event of death or disability of the receiving party, the NDA will be terminated, however, the obligation of confidentiality of the trade secrets will continue indefinitely.  

 

25. ATTORNEY’S FEES
As a discouragement against the other party instituting weak or petty litigation relating to the NDA against you, a clause can be added to have the losing party pay the winning party’s attorney’s fees from the court decision.   

 

26. FINAL CAVEAT

The whole point of a strong NDA that protects your information is that it must be custom drafted to the particular parties’ requirements, complying with the applicable state law, and be compliant with the latest changes in the law and trends in litigation for the interpretation of trade secret contracts in the applicable state.  Don’t grab a boilerplate NDA to use because it’s easy, substitute real thinking for what the NDA requires in this specific instance i.e. who the parties are, what the parties are to do, what confidential information is exchanged, and what the use is of the confidential information.

 

If you can, it is safest to have a patent application containing the confidential information filed prior to disclosure of the confidential information to another party if this is possible, note that even if you have the patent application filed you must still use the NDA as the patent application itself is confidential until the application either publishes or issues to the public domain, and if you decide to keep the confidential information a trade secret the patent application can be abandoned with a non publication request, thus the confidential information will remain secret.    

 

Also, if the confidential information is such that a disclosure must be made prior to the filing of a patent application, such as the case wherein the confidential information is not complete enough to warrant a patent application, then prior to your disclosing the confidential information you should document all of your prior activities per the “inventors lab notebook” rules prior to disclosure, this is especially important if the receiving party possibly has a trade secret similar to yours, as you may not know this.  In addition, think carefully about disclosing a patent opinion (patentability, infringement, or validity) even with an NDA in place, as disclosure may waive or give up your attorney client privilege related to the patent opinion, forcing you to produce (disclose) the patent opinion in court, which may not be in your best interest.