A Non-Disclosure Agreement (NDA) is often the first legal document, a new business downloads from the internet. NDAs are are an important part of a company’s risk management strategy, designed to minimize the risk of an unauthorized disclosure of a company's proprietary and confidential information. Because NDAs can often differ, I have listed some of the key areas that are important to discuss with your attorney before signing a confidentiality agreement. Understanding the key elements of this type of agreement will save you time and money. As always, this blog is not intended as legal advice, I strongly suggest that you consult with your attorney prior to signing any important document.
Note: Levine Bagade Han LLP is offering a template NDA to Patent FindS readers at no cost. Send an email requesting the NDA to attorney Johney Han and mention Patent FindS.
Primary functions of Non-Disclosure Agreement
1. NDAs are often used to minimize the risk of public disclosure prior to filing patent application.
NDAs are used when the details of an invention are disclosed prior to filing a patent application. Inventors often use a NDA to ensure that all discussions about their invention with investors or other parties are confidential and not considered a public disclosure. In the United States, patent applications must be filed within one year of the first public disclosure and most of the remaining countries require a patent filing before any public disclosure. Using a NDA can be effective strategy but there is a continued risk of a breach. It is generally felt that a NDA alone should not be the only protection used to safeguard the inventions that serve as a basis for your business. To protect your ability to pursue US and foreign rights to an invention, it is recommended that a patent application should be filed prior to disclosure.
2. NDAs may also be used to minimize the risk of unauthorized disclosure of proprietary information during a discussion with a third party such as an investor, potential employee or vendor.
There are many business situations where the NDA clarifies what information disclosed in your discussions is confidential and minimizes the risk against its unauthorized disclosure. For example, Company A needs to reveal data and other trade secrets to the vendor (e.g. CRO) in order to initiate clinical trials. In this situation, the NDA is designed to minimize the risk that unauthorized recipients will gain access to the proprietary information.
Important considerations in reviewing a NDA:
1. Definition of Confidential Information
The definition of the confidential information is generally considered the most important part of the NDA. Most NDAs contain a general definition of “Confidential Information”. The scope of the confidential information most important to your company should be clearly defined by you. In the section identified as Confidential Information, the following statement may exist:
“Each party shall disclose to the other certain confidential and proprietary information and materials relating to ____________.”
This section provides an area to clearly limit the scope of the confidential information being discussed (e.g. name (not structure) of new chemical entity).
2. Form of confidential information
Within the definition of the confidential information, you often find language defining when and in what form the information is confidential.
“One often overlooked aspect of nondisclosure agreements (NDA) is that not all communications between the contracting parties may be considered confidential under the terms of the NDA. A disclosing party should not assume that all communications, whether oral or in writing, will be considered confidential” says Johnney Han, partner at Levine Bagade Han LLP.“For instance, there may be a provision indicating that oral communications between the parties are considered confidential under the NDA only if the substance of the oral communication is reduced to a writing by the disclosing party and forwarded to the receiving party within a set time period. Another example is that only communications between the parties which are written in a document and which is physically marked as "Confidential" or "Secret" may be considered confidential under the NDA”.
3. Purpose of the NDA
The purpose of an NDA (e.g. business relationship, testing etc.) should be defined in the “Confidential Information” section . Note, that if the relationship with the other party changes, the NDA must be amended.
4. Strength of NDA- Provisions not to disclosure or use
In a confidentiality agreement, it is important that the Recipient of the confidential information agrees not to disclose the information to third parties. Typical issues faced in negotiating this provision in an NDA include:
a. whether to limit access of Recipient employees to a "need to know" basis. If you (as the Recipient) are a virtual or small company, you may want to include your consultants or other “agents” of your company in this provision.
b. restricting the use information to the purpose set forth in the agreement. If your NDA is used for business discussions, the recipient should not use the information in research planning or other unrelated activities.
Practically every non-disclosure agreement has an exception list that describes information that may not be considered confidential. These exceptions can include:
-the information known to Recipient before it was revealed by the Discloser.
- information was revealed to the Recipient by a third party.
-information that becomes publicly known.
-information that is requested by order of a government agency.
-information that is independently developed.
The term of the NDA is important. A typical NDA term can range from 6 months to 5 years. Often times, the term depends on the confidential information being disclosed and when (if ever) it will be disclosed to the public. Risks to the disclosure of trade secrets (e.g. information not disclosed by the public records) may be minimized by agreements that last indefinitely.
7. Location of Court Action
Notice the location that any court action related to the NDA will be brought. If your company is based in California, and you enter into a NDA lists New York, the cost in time and money to enforce the agreement significantly increases.
8. Other considerations
There are a number of other provisions that are found in different forms of a NDA. Bitlaw.com provides a list of provisions for consideration:
-a provision allowing the remainder of an agreement to stay in effect even if a portion of the agreement is found to be unenforceable,
-a provision stating that the agreement is binding on heirs and assigns,
-a provision calling for a return of confidential materials after use by Recipient,
-a provision stating that the Discloser has the right to receive an injunction from a court if the agreement is breached,
-a provision specifically specifying that the Discloser owns all confidential information,
-a provision specifying that disputes should be arbitrated, and
-a provision governing the controlling law for the contract.
Please discuss with your attorney to determine if any of these provisions are necessary to protect your company.
Questions or comments? Contact Debbie Robertson using Linked or by email.
Next week's discussion: Capturing Internal Intellectual Property