Before You Sign: The Non-Disclosure Agreement (NDA)
The first step in beginning many new business relationships is executing a non-disclosure agreement (NDA), also known as a confidentiality agreement. The NDA protects and provides instructions to handle non-public information. It’s also likely the first time two parties negotiate a written contract, providing insight on their document review, responsiveness, and willingness to compromise. The NDA is a safeguard and first impression that you shouldn’t take lightly.
In this article I review some of the more common provisions in the NDA and detail how you should approach them. Keep in mind that reviewing the document is just one part; you also must analyze the confidential information that you’ll be sharing. I rarely review an NDA without first discussing with my client what the transaction is about and what non-public material will pass to the other side. After you appreciate the information you’ll be sharing, then you’ll be in position to analyze your counterpart’s NDA.
1) Make it mutual.
If you’re handed an NDA, the first thing to check is whether it’s one-way or mutual. One-way NDAs protect only one party’s information, and put all of the obligations to keep that information confidential on the other party. Unless you have little-to-no bargaining power, you should not accept a one-way NDA (and even then you should ask for mutual protection). Most businesses will readily accept a mutual NDA when asked. Since an NDA doesn’t guarantee that you’ll be doing business with your counterparty, you shouldn’t risk sharing your confidential information with no protection.
2) Watch out for other contract obligations.
Sometimes you’ll be faced with an NDA that tries to do too much. Pricing terms, supply obligations, personnel decisions, etc., do not belong in an NDA. The NDA should not guarantee any terms for future performance. After all, the parties will only begin sharing their information after signing the NDA. You’ll likely find something unexpected that will change your preconception of the deal. Leave the transaction obligations for a later contract once you’ve had time to analyze your counterpart’s data. You don’t want to be held to a promise that you can’t later keep because you didn’t have all of the details.
3) Don’t give away your intellectual property (IP) rights.
Part of your own internal review will include identifying your confidential IP. Perhaps your counterpart is interested in paying you to use that IP. That’s great! But don’t give away your IP rights in an overeager NDA. If you need to share your confidential IP then make sure there’s nothing in the NDA that allows your counterpart to use it outside of the scope of the NDA. The NDA should not grant the other side to license or own your IP or anything they derive from that IP. If you want to collaborate on creating something new, then negotiate a separate contract to handle that.
4) Establish an end date.
Many NDAs are silent as to their duration or require the receiving party to protect confidential information indefinitely. There is rarely – if ever – information that warrants your protection for more than a few years in the business world. Technology advances, vendors change, and processes become obsolete. You don’t want contracts holding you to obligations forever. Down the road they could lead to a mistaken breach or create an issue when you need to disclose all of your contracts, such as during an asset sale. The caveat is trade secrets which should remain secret. Get an end date for everything else.
5) Give some extra attention to the dispute resolution.
It’s great to be excited about a potential deal with your counterpart, but don’t breeze through the dispute resolution provisions in NDAs. “We’re on the same page, this deal will never be an issue!” is a common sentiment and later regret of every manager who’s had to litigate a contract dispute. NDA dispute resolution is atypical to most contracts because it often includes non-monetary relief, such as an injunction. That type of relief is okay, but don’t give up your power to contest a claim, be served, or other due process rights. Dispute resolution provisions in NDAs tend to get bloated, so read them carefully in case they over-reach.
The NDA is the door to many promising business relationships, but don’t rush through. Negotiate the NDA like any other contract and display your sophistication to your counterpart. Dedicate some time to ensure it’s fair, and that it sufficiently protects your own confidential information. Your business will be better for it.
