Non-disclosure agreements (NDA) have become so commonplace that they are now referred to as the “Silicon Valley Handshake.” Indeed, it would seem that every third party transaction commences with the presentation of one or more NDAs. Often forgotten in the shuffle of these papers across café or boardroom tables is the critical role these agreements play in shaping the parties’ obligations to one another. This article serves as a reminder that properly crafted NDAs are essential to a business’s comprehensive program for safeguarding its most valuable assets.
What is an NDA?
An NDA is a contract that memorializes a promise one party makes to not take or disclose the other party’s confidential information that it becomes privy to in the course of a business transaction. An NDA both defines and formalizes confidentiality in a commercial transaction: it implements the delivering party’s duty to protect its key confidential information and it provides notice to the receiving party of its obligation to keep that information confidential.
NDAs are most critical in the protection of trade secrets. A trade secret is any information that derives actual or potential economic value purely from the fact that the information is not generally known to others. Accordingly, the protection afforded this confidential information is only as good as the efforts undertaken to maintain its confidentiality.
This framework provides for an inherent tension. On the one hand, disclosing confidential information to a commercial partner is often a key component in a business collaboration or employment relationship. On the other hand, the unqualified disclosure of that information will cause the loss of its trade secret status and the law’s protections. NDAs attempt to resolve this tension by allowing companies to make limited disclosures of trade secrets and other confidential data without giving up the confidential nature of the information.
How did we get here?
The real value of an NDA arises most often in litigation after an actual or potential business partner has acquired a company’s confidential information. A signed NDA becomes critical evidence that the plaintiff took reasonable steps to protect its confidential information. The converse is equally true: the absence of a signed NDA, while not conclusive, is evidence that the plaintiff failed to take reasonable steps to protect its confidential information. Given their high evidentiary value and relatively low cost, NDAs have become best practices for businesses that disclose confidential information to their employees and third parties.
So, what’s the problem?
NDAs should be a fundamental component of any business’s data security plan. Yet, their often boilerplate content can undermine the NDA’s intended purpose of effectively implementing reasonable efforts to maintain the confidentiality of disclosed information. In particular, boilerplate language often fails to adequately describe the confidential information that will be disclosed as part of a transaction. The NDA’s purpose is to notify the receiving party that the information is confidential. Most transactions, of course, involve the disclosure of both confidential and non-confidential information. A generic assertion of confidentiality that effectively covers all information disclosed during the engagement therefore almost certainly fails to provide adequate notice to the receiving party. If the disclosing party cannot identify what’s confidential or a trade secret, how can the party receiving that information be expected to? An effective NDA should, consequently, describe with reasonable particularity the information the company believes is a trade secret or otherwise confidential.
While all businesses must be mindful of the risks posed by the ineffectively circumscribed disclosure of its trade secrets and confidential information, start ups and emerging companies are particularly susceptible to this danger. For early stage companies, usually their most important asset is a unique idea—a trade secret. That idea may eventually qualify for some other form of intellectual property protection (e.g., a patent). However, business goals may require sharing trade secrets and other confidential information with potential partners, consultants, employees, and sources of funding long before the issuance of a patent, and not all trade secrets and confidential information are patentable in any event. While such companies may understand the role of an NDA, faced with the press of business and limited budgets, senior management may turn to on-line sources or other templates to draft a generalized NDA rather than hire an attorney or other experienced advisor to craft a properly focused and effective NDA. Unfortunately, rather than protecting its intellectual property, a business’s use of a boiler-plate NDA may instead waive important legal protections.
Without question, every business wrestles with how to allocate scarce financial and human resources. Particularly for emerging companies, any extra cost and time demand can be difficult to absorb. Nonetheless, recognizing that a company’s intellectual property is usually its core asset and the law demands that a business take reasonable steps to protect those assets, sound corporate practice compels investment in a well-drafted NDA. NDAs should therefore be a fundamental part of a business plan to protect intellectual property and confidential information. A properly drafted NDA will help deter third parties from misappropriating that information and it will serve as critical courtroom evidence of your company’s due diligence in maintaining the confidentiality of its inventions, trade secrets and other confidential information.
Other best practices for the protection of a company’s intellectual property and confidential data will include limiting access through steps such as password protection and encryption. A well-crafted NDA, however, is essential when a company needs to make sure that its hard work and imagination remain secure.