Non-disclosure agreements (NDAs) are, by nature, transitionary agreements. A date before the relationship. A starter before the main meal.
The business goal is to leverage the NDA to get to know the other party well enough that you can decide whether you want to work together.
But I often see contracts professionals over-thinking NDAs to the point that they end up killing any potential for a business deal. My advice is for both the contract drafter and the contract reviewer to stick to the core of the agreement.
In this article, I outline eight essential provisions of NDAs that negotiating parties should focus on. These points will ensure that both parties are sufficiently protected without sweating the small stuff or putting the larger deal at risk.
1. The Parties
This provision defines the parties to the agreement. In some cases, these will include affiliates to the parties. Typically, the party having information to disclose is called the “Discloser” or the “Disclosing Party.” On the other hand, the party receiving the confidential information is called the “Recipient” or the “Receiving Party.” It is important to understand what type of party you are within the NDA as this assists you in negotiating a position that protects your confidential information.
2. Definition of Confidential Information
This provision spells out what information or intellectual property will be considered “confidential information” under the terms of the agreement. Parties disclosing information tend to want this definition to be broad so that it includes as much information as possible. Parties receiving information prefer this definition to be narrowly drafted to reduce their risk of breaching the agreement.
Another important aspect to consider is whether Confidential Information will include personal data, such as individual names, addresses, financial information, health information, etc. If so, then you’ll need to include this in the definition and analyze it with respect to the applicable data privacy laws. Where needed, include a separate Data Processing Addendum.
3. Exclusions to Confidential Information
This provision provides typical and valid exceptions to the definition of Confidential Information. The party sharing information will want a limited number of exceptions or exclusions, with evidentiary requirements. The party receiving the information may prefer to include more in order to again narrow the bucket of what’s considered Confidential Information.
Some examples of standard exceptions are:
- Confidential Information that becomes part of the public domain through no fault of the Receiving Party;
- Confidential Information that is already in the possession of the Receiving Party; and
- Confidential Information that the Disclosing Party agrees in writing to be treated as non-confidential.
4. Intellectual Property License
This is a common provision in NDAs that clarifies that the Confidential Information shared has not been outrightly given to the Receiving Party but is only on “loan.” It should outline the duties (if any) of the Receiving Party as the temporary custodian of the Confidential Information.
It may include clauses stating that:
- All information shared is owned by the Disclosing Party
- The Receiving Party may not automatically assign intellectual property rights if the Receiving Party develops intellectual property based on the confidential information;
- The Receiving Party may not reverse engineer / make copies of the information/invention;
- The Receiving Party may not share information with other parties.
This provision is designed to add clarity and specificity to the obligations of the Receiving Party. Therefore, most of the statements in this provision are duplicative or implied by the other provisions in the NDA. If you would like to further shorten your NDA, the provisions of this section can probably be removed (as long as there are good business reasons for doing so) or limited to expressly stating that no license or other rights to the Confidential Information have been conveyed to the Receiving Party. The Receiving Party, however, should keep an eye out for this clause and ensure that no unreasonable obligations have been placed on it.
5. Duration or Term
This provision sets a definitive timeframe during which the Receiving Party must maintain the secrecy of the information. The Term can be set by dictating the number of years or, it can be set by a future event, such as a patent publication. The standard duration varies across businesses and jurisdictions. In the US, one year is a standard duration.
6. Equitable Relief
There may also be multiple provisions where the parties agree that a breach of the agreement is a situation where the court may use its powers to grant equitable relief (such as a temporary restraining order) to quickly prevent damage to the Disclosing Party.
Some NDAs may include a non-compete or non-solicitation clause because the business is in a niche or highly competitive industry. As the contract reviewer, make sure you keep an eye out for this type of provision because it could have a large impact on your business. Most of the time, these clauses should be reserved for discussion if the parties decide to enter into a business deal.
8. Limitation of Liability
Beware of limitation of liability provisions in NDAs. I prefer to scratch them out or provide a substantial carveout because their enforceability, especially for direct liability, is questionable. Most of the liability that arises out of NDAS is indirect and therefore likely to lead to equitable relief which is already provided for in most NDAs.
Learn More: For more on limitation of liability clauses, check out this article.
This approach should cover most of your concerns within NDAs but just to ensure all bases are covered, here is a list of 10 questions you can use to guide your quick NDA review. Feel free to download this image and save it for later!