Imagine you’re discussing a business relationship with a third party. It could be related to anything: a prospective joint development, a reseller relationship, an acquisition, a new supplier, a new consultant, a licensing arrangement, or anything else. And further suppose that while you’re discussing this business relationship, someone mentions the need for a non-disclosure agreement, or an NDA. What should you do? Should you sign one?
Well, I propose this approach: never sign an NDA unless you need to. In other words, default to saying, “No, I’m not signing one.” Let’s take a few minutes to discuss why.
A non-disclosure agreement is a contract that governs how parties will handle each other’s confidential information disclosed under the agreement. An NDA is intended to protect confidential disclosures between parties. In other words, an NDA creates a legal barrier to prevent the recipient from using or disclosing confidential information outside of the terms of the NDA. Importantly, an NDA doesn’t create an obligation to disclose information; it simply protects information that has been disclosed.
An NDA is important because it helps maintain the secrecy of trade secrets and other confidential information that provide a company with a competitive advantage in the marketplace. Once a secret is lost, it can never regain its secret status; worse yet, a competitor can gain free access to the secret.
Keep in mind, building business secrets requires research and development, trial and error, years on the road in front of prospects and clients. In other words, the creation of assets worthy of keeping secret requires a massive investment of time and money. Companies have been destroyed by the loss of their secrets. And because of that, it’s important to be diligent in protecting secrets. Therefore, an NDA should be used with every disclosure of confidential information; the two should be joined together in an unbreakable bond.
Yes, it’s important to have the right NDA in place before you disclose any confidential information. But, regardless of the non-disclosure agreement in place, you should never disclose confidential information unless you absolutely must do so to achieve your business objectives. Simply, your default should be to not to disclose. Remember, the Achilles heel of secrets is other people. Every time you add another person to the chain of secret bearers, the survival rate of that secret goes exponentially down. It’s an undeniable fact, a law of nature: the more people that know a secret, the greater the chances of it being spread. For this reason, every disclosure of secrets should cause you to pause. Even the perfect NDA does not prevent unlawful disclosures; it simply deters unlawful disclosures. If you enter into an NDA and the other party unlawfully discloses your confidential information, you can sue that other party, but you cannot put your secret back in the bottle. Regardless of the outcome of your lawsuit, your secret, along with any competitive advantages that went hand-in-hand with that secret, will be forever lost.
When deciding whether to sign an NDA, you need to look at the contract’s terms. Remember that an NDA has a limited life, a very specific purpose, and is typically not transferable to other projects. So, make sure that signing the document in front of you will provide the protection you need based on your goals.
For example, does the NDA protect your disclosures, the other party’s disclosures, or both? A one-way NDA only protects the disclosures of one party to the agreement. In other words, it either protects my disclosures to you or your disclosures to me, but not both. A two-way NDA protects all confidential disclosures that each party makes to the other under the agreement. There’s also something called a 1 ½-way NDA, which is more of a concept than an actual 50% disclosure from one party. With a 1 ½-way NDA, all the confidential disclosures of one party made under the agreement are protected by the NDA, but only some of the disclosures of the other party made under the agreement are protected.
Also, be sure you know the date that the agreement begins, the date that it ends, and the date that confidentiality obligations under the agreement end. If a disclosure is made under the terms of the agreement between the date the agreement begins and the date that it ends, then that disclosure would be covered by the agreement. The date that confidentiality obligations end will determine how long one party must maintain the other party’s confidential information in a confidential manner. So, be sure the confidentiality period in your NDA matches the useful life of the confidential information you disclose under the NDA. For example, if you’re disclosing trade secrets, be sure that the confidentiality period does not end until your trade secret is no longer enforceable for other reasons.
Finally, be sure that your NDA includes the recipient of your confidential material as a party to the agreement. And be sure you understand any requirements about marking disclosures, how to handle oral disclosures, and whether any disclosed information needs to be returned or destroyed later.
Never simply sign an NDA sent by the other party. If they won’t use your NDA, be sure to have theirs reviewed by counsel before you sign it. Similarly, never casually agree to changes the other party makes to your NDA.
Now, I understand that you want to move the deal along, and the last thing you want is to get delayed by an NDA. So, when they return your NDA with a few small changes, your instinct might be to sign it and move on. But, you need to pause. They reviewed your NDA and felt the need to make a change. Since everyone with any experience knows that every change translates into delays, no one makes meaningless changes to a contract. If they felt their change was important enough to justify breaking the momentum, you should too. Review it with counsel to be safe.
Now, in terms of using their NDA, yes, the other party’s NDA might be perfectly acceptable. But, just the same, it could have terms that protect them and not you. For example, it might be a one-way NDA that only protects their disclosures to you and leaves your disclosures completely unprotected. It might have a confidentiality period that will expire too soon to appropriately protect your trade secrets. It might be poorly drafted.
So, until you’ve carefully read the agreement – and, ideally, until your legal counsel has approved the agreement – don’t sign it.
Again, your default position should be to not disclose confidential information unless doing so is absolutely necessary. At the same time, though, you should default to not receiving confidential information from another party under an NDA unless that is absolutely necessary.
Why should you avoid receiving confidential information of the other party if you do not need it? Because an NDA legally binds you and potentially exposes you to a lawsuit for breaching that NDA. Even if you never actually violate the NDA, you could still be sued. Here’s what I mean. Suppose you’re discussing a relationship with a company that is in your industry, and you already have the information they plan to disclose to you as their confidential information under an NDA. Yes, an NDA will typically have language that excludes information developed independently by the parties or lawfully obtained from other sources. But, once you’ve signed the NDA, you subject yourself to being forced to endure the time and expense of proving that in court.
With this in mind, when I’m asked to sign an NDA, I think about two things; do I need to disclose anything confidential to them and do I need them to disclose anything confidential to me? If both answers are no, I don’t sign. If they protest, I simply explain to them that at this point, there’s no need for confidential disclosures, so they should not make any. Later, if there comes a time when confidential disclosures are necessary, we can execute an NDA then.
If they insist on having an NDA, and they refuse move forward without an NDA in place, then avoid an overly-broad NDA. Create the narrowest possible parameters for the material to be disclosed and protected under the NDA. This narrow-NDA approach can substantially reduce misunderstandings about who had what information first and who gave what to whom. Equally, this approach will reduce your risk of fighting about it in court.
Lastly, let’s talk about signatures. Consider two things before signing any contract. First, do you have the authority to sign? If not, don’t sign it. But even if you do have the authority, do you want your signature on that document? Remember, if you’re the person who signs the contract, if there turns out to be a problem, the only accountable person is you. Take your signature seriously. Pause. Read the NDA again. Be sure it protects you in all the right ways before you imprint your reputation on that line.
A non-disclosure agreement is a valuable tool for protecting confidential information that you need to disclose. Even so, no NDA is without risk. Never disclose confidential information unless you have to – even with just the right NDA in place – or you could risk losing valuable business secrets forever. And never agree to receive anyone else’s business secrets under an NDA unless you have to, or you could risk finding yourself mired in expensive, time-consuming litigation, even if you haven’t breached your obligations under the NDA. So, to ensure maximum protection for your secrets, your company, and yourself, never sign an NDA without first getting approval from legal counsel.
Thomas J. Colson, Esq.