A Non-Disclosure Agreement (“NDA”), sometimes called a confidentiality agreement, is a legally binding contract designed to protect certain information that belongs to or concerns a party to the contract that will be disclosed to or learned by another party. The parties to an NDA typically do so in connection with a relationship or transaction, or discussions about a possible relationship or transaction. In an NDA, the party with information to be protected is often referred to as the “Disclosing Party,” and the party with access to the protected information is commonly called the “Recipient” or “Receiving Party.” The NDA presents the framework by which the Recipient is permitted to use, and required to keep confidential, the Disclosing Party's protected information, and also provides different kinds of remedies if the Recipient breaches the NDA.
Different Types of NDA's
Generally, there are two types of confidentiality agreements: mutual (or reciprocal) NDA's, and unilateral (or “one-way”) NDA's. In a mutual NDA (“MNDA”), each party is both Disclosing Party (sharing information with the other) and Receiving Party (required to protect the information of the other). In a unilateral NDA, only one party is the Disclosing Party whose information is shared with the other party (the Recipient) who must protect that information. There a many situations where either type might be used, but some examples are mentioned in the next section.
Who Needs a Confidentiality Agreement?
An MNDA would be appropriate in a joint venture between or among two or more businesses that will share confidential information to accomplish the purposes of their venture. Two manufacturers may each desire a reciprocal NDA where one provides parts for use by the other, and both the parts and the final product include proprietary technologies. An MNDA might also be desired by a prospective buyer and seller before they enter into detailed discussions about a possible corporate merger or other similar transaction. The possibilities are essentially unlimited.
On the other hand, a unilateral confidentiality agreement might be used in the possible acquisition of a business, where only the prospective seller would disclose protected information to the prospective buyer. A business entity might require employees and consultants to sign “one-way” NDA's as a condition of being hired if the employees or consultants will have access to or knowledge of the business entity's confidential information as part of their work. A unilateral NDA may also be desired by an inventor who hires an engineering firm to develop a prototype to use in seeking a patent. Again, there are many possible situations where a one-way NDA is advisable.
Whether an MNDA or a one-way NDA is appropriate, any business with confidential, proprietary, or non-public information or trade secrets may benefit from requiring that confidentiality agreements be signed by others before entering a contract or discussions with them, including: investors (although, for good reason, not all investors will sign an NDA), professional advisors, suppliers, creditors, and virtually any outsider who would need to access a business' confidential information in order to perform under a contract.
Other, Similar Agreements
Sometimes business arrangements will include contracts other than NDA's that include provisions covering protection of information. In such a case, the protective provisions take the place of a separate NDA. This is common in a number of contracts, including term sheets, letters of intent, memoranda of understanding, employment agreements, independent contractor agreements, LLC operating agreements, shareholder agreements, buy-sell agreements, asset purchase agreements, and certain contracts used in private-equity transactions, to name a few.
In the start-up world, it is common to use a contract called a Confidential Information and Inventions Assignment Agreement, also commonly called a Proprietary Information and Inventions Assignment (a “CIIA” or a “PIIA”). The CIIA / PIIA combines important matters that could otherwise be covered by an assignment agreement and a confidentiality agreement. A form of CIIA / PIIA may also be required of the startups employees, advisors, and consultants, as well as board members.
What Is “Confidential Information”?
There is no legally required definition for the information that a specific party's NDA is intended to protect. But, common practice over time has come to result in somewhat similar definitions. In NDA's, the term used for protected information is usually “Confidential Information,” though it could be another similar term. The definition given to the term might be short and simple, with the idea that it be as broadly reaching as possible; or, it could be more robust, even dense, and very particularly list many categories and examples of protected information. There is no right answer as to which approach is better, as it depends on the needs of the Disclosing Party (and, although maybe to a lesser extent, the comfort of the Receiving Party). The goal in either case is to make clear that the Recipient is to protect the Disclosing Party's confidential, proprietary, and non-public information. The parties should be sure to not simply assume that “short is sweet” or, in the alternative, that cobbling together a long string of random types of confidential information will be helpful. Thought should also be given to the benefit of including (or excluding) company- or industry-specific language.
How Long Does an NDA Last?
There is no set requirement for the period of time a Recipient must protect Confidential Information. Some Confidential Information will be subject to an NDA for only a year; others for several or many years. For some types of Confidential Information, it may be appropriate or necessary for the information to be protected forever.
There are many other possible business arrangements that would benefit from an NDA. Both the Disclosing Party and the Receiving Party should make sure the NDA they sign has been properly prepared for protecting their interests. Contact an experienced business / corporate attorney if you are contemplating entering into a confidentiality agreement. Make an appointment now for a free consultation.