Law Offices of Vance R. Koven | Latest Blog

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Law Offices of Vance R. Koven | Latest Blog

Don't Sign That NDA...

Friday, April 11, 2014 least not without reading and understanding it. People are presented with non-disclosure or confidentiality agreements all the time in business relationships; they're probably the most common type of bilateral written contract out there. Since in most contexts the subject matter is non-controversial (though in some industries, like publishing and entertainment, there is hostility to them for a variety of good and bad reasons), people often just sign them without reading, as if they were click-through terms on a website, and even when they do, they don't have their lawyers review them.

Bad move.

While nobody seriously would argue that a recipient should be free to disclose the trade secrets or other valuable know-how and business plans of someone else, or use them for any old purpose, there are many things people stick in NDAs (which, remember, are usually signed before the parties have done any business together) that contain non-competition clauses, no-hire clauses, and IP non-contest clauses, that on the one hand have nothing to do with protecting information, and on the other hand impose obligations that should be part of the negotiated terms of a specific business deal. Sometimes the NDA protects information, on occasion forever, that has no value at all. I even saw one recently that prohibited the recipient from verifying disclosed information with the disclosing party's own personnel.

Clients of mine will often see me taking exception to one or more of these sorts of things:

  • a definition of confidential information that includes everything the disclosing party discloses, without any obligation to segregate the wheat from the chaff by designating it as confidential or at least saying that confidentiality should be discerned from the context. This leaves the burden on the recipient to prove in every case that the information wasn't confidential.
  • a degree-of-care provision not grounded on reasonableness and that doesn't permit disclosure to whoever needs to know it to fulfill the purpose for which it was disclosed (subject, of course to back-to-back confidentiality undertakings from the secondary recipient)
  • no stated ability to disclose for purposes of the recipient's internal administration. A restriction on use to carrying out the defined purpose of the NDA, typically the feasibility of a future business transaction, doesn't cover any necessary disclosure to lawyers, accountants, and the people who have to administer the process of keeping things confidential.
  • terms of confidentiality that exceed the reasonable "shelf life" of the information disclosed. Let's face it: a customer list or next year's business plan will go stale within a couple of years. A three-to-five year confidentiality period is usually adequate to protect the value of business information without forcing the recipient to keep all their files under Coca-Cola level security. One exception is computer source code, for which professional standards prescribe processes for protection (like locking in a vault) that most software companies can administer without added burden. It's hard to think of many other things (well, Coke's secret recipe is one) that fall into that "crown jewels" category.
  • "confession of judgment" clauses with respect to the disclosing party's obtaining an injunction for any violation of the agreement. It's fair enough to acquiesce in a disclosing party's seeking an injunction and not interposing a defense that money damages would be adequate, or insisting that the disclosing party post bond on filing suit; but this should only apply to breach of confidentiality and use restrictions, not to every little requirement of the agreement. A party should always retain general defenses available in an equity action, like unclean hands, laches (time limits) and so forth.

An NDA is a contract much like any other. It imposes obligations that must be evaluated, and can result not only in significant litigation and liability but severe loss of reputation if a recipient is tagged with being a violator. They should be reviewed carefully, never signed thoughtlessly, and negotiated as necessary to achieve a fair balance between the interests of the disclosing and receiving party.