Loose Lips Sink Chips! Non-Disclosure Agreements

So, remember a post or two back, we talked about intangible assets? And how some types of intangible assets are protected by law?  Well, the corollary to that is that other types aren’t.  That’s right! There is nothing, NOTHING, standing between you and everyone in the whole wide world knowing the top-secret ingredient list of the exclusive chocolate chip cookie recipe which forms the basis of your (soon to be) multi-million dollar cookie empire. Nothing, of course, but an NDA.

Non-Disclosure Agreements

An “NDA” or “Non-Disclosure Agreement” is a binding, legal agreement between parties in which one or both parties commit not to disclose—that is to share or make known—the other side’s confidential information.  You may also see these referred to as “Confidentiality Agreements” or “Confidentiality and Non-disclosure Agreements”.  For simplicity, I’m going to use the term “NDA” in this post.

NDA’s allow you to work effectively and efficiently.  With one in place, you can share information the other side needs to do their thing while still protecting your company’s confidential information.

When you need an NDA

You should be signing NDA’s with:

  • Employees and directors
  • Consultants, subcontractors and other vendors
  • Customers
  • Potential business partners
  • Investors and potential investors
  • Other parties that you want to share confidential information with

While an NDA can be a standalone document, NDA clauses are usually built into employment, consulting, sales, service, partnership and other agreements. This may be as a section of the agreement or as an appendix to it.  However, if you are going to share confidential information before signing off on a contract (e.g. as part of negotiations) it’s a good idea to sign off on an NDA first, even if the resulting contract will include an NDA clause. If you aren’t sure, play it safe and sign.

Sharon Herman Herzoni of SHH Law Office notes that you’ll often find that investors are reluctant to sign off on NDA’s as they say that they are neither competitors nor in the business of sharing confidential information.  Just be aware that not having an NDA, in particular if you are sharing a lot of information, is a business risk.

Types of agreements

The two major types of NDA’s you are going to see are:

  • Unilateral—one side is committed to not disclose the other side’s information
  • Mutual—both sides are committed to not disclose the other side’s information

In theory, a unilateral NDA makes sense in cases where only one side is receiving confidential information. For instance, your cookie distributor is receiving information about your plans but you probably aren’t receiving information about theirs.

At the same time, there can be a tendency, in particular when dealing with a Big Important Company, for them to send over a unilateral NDA as a matter of course, even where you are likely to be sharing your information as well.  When that happens, just ask them for a mutual version.

Where you aren’t sure if a mutual or unilateral version is appropriate, go with the mutual.  If there isn’t any confidential information shared, no harm was done. And if there is, both sides will be glad to have the correct level of protection in place. The other side is also more likely to agree to more reasonable terms if both sides are bound by the same terms!

How to write an NDA

Don’t! Don’t download one either! Have your lawyer do it!

Here is why….  As discussed in my last post, confidential information can include anything from software code, to my hairdresser’s hair color combinations and, yes, to your cookie recipe. Adding to the complexity is that companies will sign contracts for a wide variety of services, and these also may include confidential elements. For example, your recipe is secret, but so are the details of your upcoming marketing campaign, which you want to be able to share with a PR firm without them spilling the cocoa beans.  And to make things even more twisted, you may need to sign NDA’s in a variety of states or countries and each place has its own delightful collection of legislation concerning NDA’s.

As such, have a thorough discussion with your legal counsel about what  you plan to do, where you plan to do it and how you plan to work (e.g. “there is no way we are going to remember to write ‘confidential’ on every piece of information we send out so you just get over that idea”). If you expect to have discussions so secret that even the NDA itself should be confidential (e.g. Nabisco wants to buy you out) share this with counsel as well.  They can draft a template that “catches” the types of information you are likely to disclose,  is appropriate for the range of transactions you are likely to be entering into and  is well-suited to the legal environments in the areas in which you operate and to how you work.

What is not covered

Not everything is protected in an NDA.  The language varies, but most NDA’s include language which exclude information which isn’t confidential or stops being confidential.  For a definition of what is not confidential, see my post about confidential information.