Almost every entrepreneur will wrestle early-on with a non-disclosure agreement. Sometimes, it is the entrepreneur herself or himself wielding the NDA; sometimes, it will be a potential business partner or supplier. New entrepreneurs just making their first foray into business sometimes seize on NDAs as the attainment of something desirable – as though having an NDA validates their business idea or product, showing that the entrepreneur actually has something to protect. This idea may miss the mark. Instead, the entrepreneur should determine what he or she has that not only is non-public, but that has true economic value. The entrepreneur should understand the reason she or he will be disclosing confidential information, what benefits arise from disclosure, and how the receiving party intends to use it. Finally, the entrepreneur must understand the sensitivity of the information disclosed and how to best protect it in the hands of the receiving party.
To get a couple of things out of the way, let’s look at a few things around which there seems to be much confusion. First, ideas by themselves are virtually worthless. All of us have thousands of ideas each day. Ideas are not protectible as such. Truly, most ideas are not unique. What is unique is the ability to take an idea and realize it in the form of an invention, product, service or sustainable business. Second, you cannot protect something with an NDA that is already public, whether in a protected way (such as, under patent or copyright) or as part of the public domain. New entrepreneurs sometimes fail to look at the marketplace to determine if what they are doing is truly new and, more importantly, non-public. A quick look at the database of issued patents can provide insight as to the novelty of a new invention, for example, or a survey of similar businesses’ products and services can give perspective on whether a product or service is actually new.
If the information you are trying to protect with an NDA contains subject matter on which you intend to seek patent protection, disclosing the information under an NDA may not be the best strategy. You may want to file a patent application first, whether on a regular or provisional basis, before disclosing the information to third parties. The patent filing will help to prevent misappropriation or misuse of your valuable information and to forestall competing claims of inventorship from a receiving party. If your company has come up with a fantastic new brand for your company, product or service, it may be safer and more efficient to purchase the top-level domain or file a trademark application than to disclose the unprotected information under an NDA.
There is one truth always to keep in mind about secrets: Once revealed, a secret cannot be untold. The recipient’s memory cannot be erased. The risks of disclosure should always be weighed before the disclosure is made. NDAs are not always water-tight, and poorly-drafted NDAs are legion.
When evaluating an NDA, whether you find it on the internet, get it from the proposed recipient of your information, or have it prepared by your lawyer, you need to look at three basic things:
a. Look at the kind of information the NDA covers. Be sure the description is broad enough to include all of the information you intend to disclose. For example, if you will disclose computer code and the NDA does not cover source and object code, software, or the like, you have a problem. If you are exploring a business deal and want all inquiries and negotiations to remain secret, your NDA needs to include that category of information.
b. Determine if the NDA will cover a mutual exchange of information or only a disclosure from one party to the other. If your company is the disclosing party and you do not anticipate receiving confidential information from the other party, there is no need to commit to two-way confidentiality obligations.
c. Be sure the NDA prohibits both the disclosure and use of the confidential information.
a. Identify the period during which confidential information may be disclosed or exchanged under the NDA. Are you anticipating a one-time disclosure of information or a period of exchange? The duration of the NDA should reflect the expected disclosure activity.
b. Determine how long the confidentiality obligation will last after the disclosure or exchange period has ended. If you are disclosing information that has rapid turnover/obsolescence, the confidentiality obligation can be fairly limited. If, however, you are disclosing trade secret information, you may want the confidentiality obligation to continue indefinitely.
3. Standard of Confidentiality
You will want to determine what standard applies to the receiving party’s handling of confidential information. Some NDAs provide for strict confidentiality, some provide that the information be held in circumstances comparable to those under which the recipient keeps its own confidential information, and sometimes agreements contain no standard at all. The more sensitive your information, the more you need to pay attention to these terms.
Evaluate every NDA using the above criteria.
There are other terms of note in most NDAs, but the above criteria are critically important. If you have existing NDAs, go back and ensure that all major areas are clearly covered. If they are not, your NDA may fail you if you ever need to enforce it.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.