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Non-disclosure Agreements: Do I Need One?

Non-disclosure agreements (“NDAs”) are written agreements among two or more parties in which one or both sides agree to not disclose confidential information obtained from the other(s).  If a person believes that he or she is about to reveal something unique, sensitive, or proprietary, then it is best to have the receiving party sign a non-disclosure agreement.  A creative person may have a great new product to market song lyrics, and once it is disclosed to any third party, it is no longer confidential.  It is best to have a standard agreement easily modifiable based upon the applicable factual scenario that can help deter consequence-free dissemination of information meant to be held in strict confidence.  It is strongly recommended that a person not piecemeal together a document from various forms on the Internet as it may not meet the legal needs of the well-intentioned but a little-too-frugal entrepreneur.

            A basic consideration is if the NDA is designed to protect one party or all parties.  Are both parties revealing information or only one person?  If the creator of the song lyric marketing tool is disclosing information to a potential investor, then it would be a unilateral (or one-sided) agreement.  If the potential investor also plans to reveal certain financial statements, then the parties will want a mutual or bi-lateral agreement.  The NDA can be in the form of a single agreement among the parties (typically when such disclosures are infrequent.)  If each party is planning to frequently disclose information in their separate quests to obtain financing or to find an investment, each party should have its own written agreement, preferably prepared by a qualified attorney.  Each party then can present his own NDA to the other party.

            The disclosing party will want to carefully identify what constitutes “confidential information” for purposes of the NDA.  Oftentimes, the confidential information also includes information provided to the discloser from a third party that the disclosing party is required to keep confidential.  If the creative person/disclosing party hired a software developer to create an app through which the song lyrics will be marketed, the app or the software in development should be included as “confidential information.”  Once the information or the product has been revealed absent a written NDA, there is no protection, and it could become public domain.  Generally, a person will want to protect all trade secrets or other information that is not generally available to the public, and then identify categories of disclosures such as technology, software, business plans, client/customer lists, financial information, or similar categories.

            There is a reason a person wants to disclose information, but the use of the confidential information should be identified.  Sometimes, it can be as simple as, “I need money and here’s my product.”  On the other hand, the disclosure may require the receiving party to act upon the information such as “Here’s my idea and business plan, and I want you to find investors for me because you’re a savvy finance person and I am not.”  The receiving party then would necessarily have to disclose the confidential information to his moneyed contacts who may be interested in investing in the start-up.  This type of further disclosure should be addressed in the NDA.  If the confidential information includes intellectual property such as copyrighted software, a trademark, or a trade secret, the agreement should be clear as to who owns the intellectual property, and that the IP includes the product, design, or other materials provided to the recipient. 

            What happens when the deal falls through, the time period in the NDA expires, or the receiving party discusses confidential information with third parties in violation of the NDA?  NDAs should have a provision requiring the return or destruction of the information when the confidential information is no longer needed for the purposes specified in the NDA.  The destruction alternative should have a form certification under oath, stating that the party has destroyed the confidential information.  Such a certification form can be attached as an exhibit to the NDA.  The deadline to return or certify destruction must be specific, whether it is a date certain or it is within a specific time period after the occurrence of an event, such as the expiration of the NDA or until the information becomes public (by design, not breach of the NDA).  Of course, trade secrets remain confidential for as long as they are trade secrets, so one does not want to inadvertently let the trade secret expire with a poorly written NDA.

            If someone discloses confidential information, typically monetary damages are inadequate.  Once the genie is out of the bottle, the bottle’s value may become worthless, but the genie may be reaping huge benefits for the loose-lipped recipient.  For example, confidential information could include personal information about the disclosing party that the discloser does not want publicly revealed as it could impact her standing in the relevant business community.  Damage to a person’s reputation can have an incalculable impact on her business that no amount of money can repair.   Thus, a written specific performance provision with an unequivocal statement of the parties’ obligation and that monetary damages are inadequate must be set forth in the NDA.  It is best to include language that says that the disclosing party does not have to prove actual damages and that the specific performance provision is reasonable. This cautionary language removes certain defenses that could be raised by the person who breached the agreement in sharing confidential information.            

NDAs are great tools for protecting information and preserving good business relationships.  Poorly drafted NDA can create a host of unintended consequences, including when the scrivener not properly identify that which is supposed to be confidential.  Once a person has a solid, well-crafted NDA, it can be adapted to different scenarios; however, it is best to have at least an annual review of the NDA by an attorney.  As a business grows and changes, the NDA that once fit well may spring some leaks through which information can be lost to the public domain

Ramona P. DeSalvo