5 Pitfalls to Understand About Non-Disclosure Agreements

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  • This article is written by Julien Saulgrain, a Partner at blue HF, which sponsors NextMontreal. They are a boutique law firm servicing the Montreal tech community.

Whether you call them NDAs, CDAs, MNDAs or just plain Confidentiality Agreements, it is very likely that you have already or will encounter these. Let’s call them “nasty little contracts”. I have drafted hundreds of them and seen even more, and I am always surprised to see what they can include… or not.

NDAs are often the first contractual encounter of a startup or SME, and they are used on a daily basis by larger companies at the beginning of any new relationship, project or venture. They are supposed to protect one or both parties’ confidential information (data, documents, source code, business intelligence, etc.) from unwanted or unnecessary disclosure, which would reduce the monetary or strategic value of the information or the discloser’s competitive advantage. But quite often, NDAs are more (or less) than that.

The main purpose of this column is to identify a few common pitfalls we see in the drafting of NDAs, so as to limit and hopefully avoid any surprises.

Pitfall #1: Fake Mutual NDAs.

Beware of mutual NDAs (MNDAs), which are supposed to be reciprocal (“you will keep my information confidential, and I will keep your information confidential too”), but, which in fact, are “one-way” NDAs that only protect the information of the other party! Don’t pay attention to the title of the document (“Mutual Non-Disclosure Agreement” or “Reciprocal Non-Disclosure Agreement”) but rather focus on the following:

  • the definition of “Confidential Information”: it should cover the information of both parties. The definition may be different for each party if they each have a different set of information to be protected, but make sure your information includes everything you want to protect;
  • each party’s confidentiality obligations vis-à-vis the other party. In most cases, they should be identical (hence the “Mutual”);
  • each party should have a right to take protective measures such as an injunction in the case of a breach of confidentiality.

Pitfall #2: Flavored NDAs or NDAs with a Hint of Something Else.

Often NDAs do not only cover the use, disclosure and security of the confidential information received or obtained, but also include other obligations for the recipient of the information. The most common ones are: intellectual property (IP) assignment, full-blown IP license grant, warranty (on your product or service), non-compete and non-solicitation. Depending on the purpose of the NDA and the type of relationship you want to build with your counterpart, it may be acceptable to include such clauses. However, if you are only at the discussion stage of a new project or relationship, there is no reason for you to either assign (or license) your IP, provide a guaranty or agree to a non-compete clause:

  • If the NDA includes an IP assignment clause that is drafted broadly, the assignment could include not only the content of your discussions, but also the IP embodied in the confidential information that you pass on (which could well be a central part of your business). It is easy to understand that it is detrimental to assign your IP before the scope of your relationship is defined and a proper contract is negotiated;
  • It is unlikely that, at the NDA stage, you would want to provide a guarantee on your product or service or on the confidential information that you pass on to the other party (e.g., warranty that the product/service is compliant with a specific norm, that your software is non-infringing, that you comply with ALL applicable laws etc.);
  • Agreeing to a non-compete clause can be problematic if you are planning to enter into a partnership, or joint venture agreement with another company which does business in the same field as yours. You could be prohibited from competing with them just by signing the NDA. Even if, down the road, you decide not to do business with them.

Don’t get me wrong: NDAs can include more than just non-disclosure provisions, but it should only be the case if it is the intent of both parties and if everyone is well aware of the scope of their obligations.

Pitfall #3: We Signed a NDA, So We Are All Good!

NDAs are often at the cornerstone of any relationship or, at least, the first contractual connection between two companies or individuals. But they certainly should not be the only documents that will cover your entire relationship with your counterpart. At some point (usually at the end of your discussions which trigger the signing of an NDA), you will need a more substantial contract, which will take into account all the parameters that need to govern your relationship. Also, if in order to be considered confidential, information must be marked as such, make sure that you do so. The same goes for the information provided verbally, which must be confirmed afterwards in writing.

Pitfall #4: I Am Stuck for Eternity!

If you are the recipient of the confidential information, avoid to the extent possible, a clause which would state that your confidential obligations are perpetual (i.e. they never end). This is very burdensome for obvious reasons. If you are the discloser of the confidential information, you may want to push for a perpetual clause, but make sure it makes sense in the context. Generally, the duration of confidentiality obligations (which may be different than the term of the NDA itself) should be consistent with what you are trying to achieve. For example: duration of the discussions, duration of the discussions + x years, x years after the disclosure of the information, or perpetual obligations.

Pitfall #5: Make Sure the NDA Is Signed by an Authorized Signatory.

Many people who sign NDAs are not authorized to do so (e.g. supply manager who buys from a manufacturer or distributor, developer dealing with a client). They do not have the corporate power to bind their company. This may make the signing of the NDA irrelevant. Make sure that the NDAs include in a decipherable way, the printed name and title of the individuals who sign the NDA, and then verify if they are duly authorized to do so.

Conclusion

So, you have met an interesting potential partner for a business relationship and they send you their NDA which just does not sit right or looks like the complete opposite of what you though you would be receiving. My gut (non-lawyerly) reaction would be that it is intentional! This is probably the case if you are dealing with a large and sophisticated company. My more lawyerly and respectful reaction is that the person who sent it to you just used a template and has no clue what lies in the document. This may be the case if you are dealing with a SME. In any case, take the time to carefully review the document and make sure it is consistent with what you are trying to achieve: protecting your confidential information (or the information of the other party) or more than that. Even well-trained lawyers are not always aware of the pitfalls described above, as NDAs are often treated as boilerplate/template contracts. So don’t be shy to ask!

 

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