Non-Disclosure Agreements – what and why?
The aim of this article is to provide a high level view on non-disclosure agreements (“NDAs”) and items to consider when reviewing an NDA.
An NDA is an agreement that stipulates that certain information shared by two or several parties shall be covered by confidentiality. The NDA could be on-sided meaning that information only shared by one party shall be covered by confidentiality, but it could also be a mutual undertaking meaning that all parties that disclose certain information under the agreement shall be covered by confidentiality.
Make sure that the purpose for the exchange of confidential information is made clear in the agreement. The purpose will set the scope of the permitted use of the confidential information. The purpose could, for instance, be defined as enabling the parties to evaluate the merits and feasibility of entering into a license agreement regarding certain asset.
An NDA shall include both a non-disclosure undertaking and a non-use undertaking. The non-use undertaking is important in order to prevent one of the parties from using information received for internal research or other use in its own operations.
In most instances it should not be a problem to accept a mutual non-disclosure agreement and it will likely facilitate the discussions. The risk that should be considered in this situation is the risk of being contaminated by knowledge of the counterpart, i.e. to be provided with knowledge and information closely related to its asset, preventing the company from developing such know-how internally and then using it without restrictions.
A common concept to mitigate the risk of a so-called “contamination” is to define the respective party’s confidential information such that the undertaking by the receiving party only applies to information relating to a certain area, matter or field, often called the subject matter. Focus shall be on getting a narrow definition of the subject matter of the counterpart. The company should avoid to undertake confidentiality and non-use obligations with respect to information relating to, or close to, its own subject matter. When defining the subject matter of the company, it is important to obtain a subject matter covering all information that is sensitive. If the counterpart does not accept a broad subject matter, it is crucial not to disclose any information not covered by the subject matter, as stipulated in the agreement.
The definition of confidential information should be carefully reviewed. It should comprise the categories of information that the company contemplates to disclose. If materials or samples are to be provided, make sure to include them in the definition of confidential information or include separate provisions governing such supply. If it is proposed that all information disclosed orally should be summarized in writing and provided within certain time in order to be protected, it should be considered if the organization of the company will be able to comply with such condition. Means of disclosure should include oral and written form, electronic and software stored and samples provided.
For the party that shall be the party disclosing the majority of the confidential information, it is often of importance that the exemptions from confidentiality and non-use should be relatively limited.
In the event information is exempted from the confidentiality undertaking if it is received also from a third party, ensure that such exemption applies only to the extent the corresponding information is obtained by the counterpart from a third party without any confidentiality undertaking towards such third party. Further, it should be stipulated that the third party providing the information to the counterpart is entitled to disclose it, i.e. that the third party is not bound by confidentiality.
DISCLOSURE TO EMPLOYEES, DIRECTORS, CONSULTANTS ETC.
Disclosure to employees and other persons should only be permitted to a limited number of categories and to the extent such persons have a need to know the confidential information for the purpose of the NDA.
It is important to consider that there may be a difference between the term of the agreement and the time of survival of the non-disclosure and non-use undertaking.
Information disclosed during the term will be considered confidential information and comprised by the undertakings. Hence, one should have that in mind when determining the term. It may be that the company does not wish to receive information being deemed as confidential information when the negotiations and discussions have ceased.
In most cases the undertakings will survive expiration or termination of the agreement for a certain time. It should be noted that information disclosed after expiration or termination of the agreement will not be protected even if it is within the survival period of the non-confidential and non-use undertaking. Survival of the undertakings may be limited in time or until any of the exemptions are applicable.
As evident from the high-level summary above, many aspects and nuances need to be considered prior to entering an NDA. What appears to be minor details could in the end lead to material consequences if not handled correct. This is why many companies, especially companies working in a public environment, carefully assess the content of an NDA prior to entering such document. Proactivity could in these situations negate future friction and problems, but from a legal and commercial perspective.
/MAQS law firm 2021-09-10