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Effective Use of Nondisclosure Agreements to Protect Commercial Interests

Confidentiality or Nondisclosure Agreements (“NDA’s”) have captured public attention due to current events. From stories involving Harvey Weinstein’s use of NDA’s to conceal his decades-long pattern of sexual assault, to USA Gymnastics’ use of NDA’s to quietly settle matters regarding abuse at the hands of team doctor Larry Nassar, NDA’s have been a central feature in recent national headlines. And while much of the public conversation in the #MeToo era has focused on criticizing the use of NDA’s to silence victims of assault and harassment, there are plenty of legitimate (and non-nefarious) reasons to use NDA’s. The reality is that, for many businesses, they are an essential part of participating in the modern economy.

Nearly every business or entrepreneur has valuable confidential information or trade secrets. That confidential information frequently provides a competitive advantage for that business in the marketplace. But invariably, that business will find itself in circumstances where it is necessary or desirable to share confidential information with customers, suppliers, consultants, advisors, or other third parties. Protecting its confidential information in these situations therefore becomes a paramount concern, and NDA’s are the tool used to contractually safeguard against unauthorized use and disclosure

Despite such high stakes, all too often companies fail to utilize properly drafted NDA’s to protect their interests, whether by disclosing confidential information before an NDA is in place or simply using the same generic template in every situation. NDA’s will and should vary in form, structure, and substance depending on the circumstances – an NDA will serve different needs in the context of a proposed corporate merger compared to an IT consulting engagement. Nevertheless, there are certain key issues that businesses should always consider in order to effectively use NDA’s to adequately protect their commercial interests. For example:

  • Timing. Ideally, the parties should sign an NDA at the outset of the relationship before any confidential information is disclosed. Clarifying expectations concerning the handling of confidential information early on can ward off unnecessary headaches– information that is inadvertently disclosed cannot later be made “undisclosed.” Conversely, there may be situations (or even entire industries) where insisting on a NDA too early could jeopardize the chances of the project moving forward at all and it must be introduced strategically.
  • Confidential Information. Precisely defining what constitutes “confidential information” is fundamental to an NDA’s effectiveness. An overly broad definition risks the NDA being deemed unenforceable, while a narrow definition may not adequately protect everything being disclosed.
  • Parties. The parties to the NDA should to be the entities or individuals exchanging confidential information. But in some cases, access to the information should be restricted to certain key employees of the receiving party. It is also important to consider if, and to what extent, a receiving party can share any confidential information with any affiliates or financial and legal representatives. If so, it is worth considering whether those affiliates and representatives should be parties to separate NDA’s themselves.
  • Mutual vs. Unilateral. Depending on the nature of the proposed transaction, only one party may actually be disclosing confidential information. In these cases, the parties may use a unilateral NDA, under which the restrictions on use of confidential information only apply to the receiving party. When both parties are making disclosures, a mutual NDA can bind both parties with obligations being tailored to the respective value of the information being disclosed. There may even be situations where confidential information is not being exchanged in equal measures, however parties elect to use a mutual NDA with equal obligations as a gesture of good faith early in the relationship.
  • Dispute Resolution. State laws differ on the enforceability of certain provisions of NDA’s, so it is important to clearly set out the venue and governing law that will control in the event of a breach and ensure that disputes are resolved in a favorable arena.
  • Plan B. Properly drafted NDA’s can be an extremely useful tool in preventing the disclosure of valuable information, but they cannot offer perfect protection. As a practical consideration, when NDA’s concern sensitive or potentially inflammatory information, it may make sense to contemplate a public relations strategy in anticipation of a breach of an NDA. As recent events have shown, the harm to public reputation can easily outweigh the redress available from the legal system for a breach of an NDA.    

If you would like any additional information about how to protect your business through the use of NDA’s, please contact the attorneys in Parker McCay’s corporate department at any time.

The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.

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