A major chunk of a progressive company’s assets today is in the form of Intellectual property (IP) such as trademarks, patents, copyrights, trade secrets, designs and so on. Sharing of confidential information becomes unavoidable when two entities are transacting business. A non-disclosure agreement (NDA) is also known as a confidentiality agreement and is an agreement where two or more parties agree to keep certain information confidential. In most situations, NDAs serve as the first move towards subsequent business agreements and contracts that include additional provisions covering the complexity of business transactions between the parties. This can either be one-sided (only one party shares confidential information) or mutual (expecting exchange of confidential information from both the parties) but the outcome of it is to protect the information or the businesses’ trade secret.
- Parties
It is very important to list out the party names correctly on an NDA as a relatively minor error such as forgetting to include the word “Limited” can have disastrous consequences. Some companies have different legal names and trade names when they begin their operations. A legal name is the name used by an entity when registering as a business, when signing official legal documents, and when dealing with governmental processes. A business name or a trading name however is the name a company uses for ads and sales and under which it performs its business with the public. A party may have the same legal and trading name, but it is also entirely possible that they may not be the same.
Further, there is no legal protection to halt the use of a trade name by other companies unless the entity trademarks its name. It is therefore important to list both the legal and trade name of the businesses involved when drafting an NDA.
- Define what is deemed to be confidential information
Confidential information should be defined specifically for both parties. The parties involved must be precise when identifying the type of confidential information exchanged and whether it is the same or different for all parties. For example, the type of information to be shared by each party may not be the same in the case of a discussion involving the mutual exchange of confidential information between the two parties. Therefore in such cases, it makes sense to provide an exact definition of confidential information for each party.
Classifying all the information disclosed to a receiving party as confidential can be tempting. However, using catch-all clauses must be avoided and instead, the agreement should only include information that is truly necessary to keep a secret.
For example, in Trailer Leasing Co. v. Associates Commercial Corp, a federal court in Illinois declined to enforce an NDA where the concept of ‘confidential’ was deemed too vague, over and above a lack of specified geographical limitations.
The law treats confidential information differently than trade secrets and hence care must be taken to appropriately label the information as confidential information or a trade secret. A differentiator between the two is that trade secrets are known to last for a longer period of time across generations.
- Term of the agreement
The term of the NDA may or may not be the same as the term of contractual obligations and therefore it requires a specific definition of the term. Perpetual clauses should be avoided unless the same is in the context of the parties’ discussions.
- Clearly define non-disclosure and non-use
The agreement should include separate provisions on non-disclosure and non-use in both types of NDA (mutual and one-sided).
NDA clauses should be drafted so as to not create undesirable delays in discussions and negotiations. The business goal should always be given priority to the lawyers involved in drafting and negotiating NDAs and excessive clauses should be avoided while standard clauses in NDA should be given utmost importance. In the case of any problems, it is often best to adhere to the primary purpose of signing NDA, i.e. confidentiality and limiting the use of sensitive information, whereas additional agreements can be enforced to include relevant provisions (Non-compete, Non-solicited, IP Assignment, IP Licensing, etc.)
By Damini Mohan
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