Non-disclosure agreements can be an important key to protecting your trade secrets. We can help draft and review agreements, and serve as your outside legal counsel for trade secret matters. For a free consultation call us at (877) 276-5084.
Here is what you need to know.
8 Key ingredients to have in your NDA before disclosing your idea.
Introduction
Today, there is so much valuable information and trade secrets that give companies a competitive advantage and give their businesses a unique edge. To ensure that sensitive information is not distributed or disclosed to others, a party can create a Non-Disclosure Agreement (“NDA”), a legally binding contract that acts as a confidentiality agreement and establishes a confidential relationship between two or more parties. This confidential relationship means that the parties have a contractual duty not to share the information. NDAs also provide protection on top of confidentiality, such that a party can feel more secure that their ideas will not be leaked, because if they are, the party responsible will suffer legal consequences. At some point, the private information will likely need to be shared with certain people or entities and so an NDA gives the party protection and security while allowing the company to move forward with the transfer of information.
Who do NDAs benefit?
NDAs can benefit and be important to businesses, corporations, startups, employees, collaborators, entrepreneurs, etc. In companies and corporations, NDAs play an essential role in safeguarding private information, especially during high-stake situations such as mergers and acquisitions where lots of critical information is being released. For example, imagine a tech company seeking to acquire a startup with a unique software algorithm. The startup’s algorithm is a trade secret that sets it apart in the market. Before the tech company can fully evaluate the acquisition, it needs access to detailed information about the algorithm. An NDA ensures that the tech company cannot use or disclose this information if the acquisition does not go through. Startups, like in this example, can benefit from their information protected even if they do not go through all the deals they inquire into. The NDA secures and safeguards the startup’s innovative ideas, business plans, technologies, etc., from being taken advantage of or stolen. Employees can similarly use NDAs, ensuring that there are clear expectations for employers as with employees to facilitate an open working environment that creates more clear and deliberate outcomes because the knowledge was able to be shared with less fear of misappropriation. Employees also have NDAs that prohibit them from sharing any of the private information once they have left the company, ensuring they don’t share or misuse the information after their employment has ended regardless of how good or bad the terms may have been.
What are the 8 Key Ingredients?
1. Identification of Parties
The first key ingredient to have in your NDA before disclosing your idea is a clear identification of the parties. This is crucial to an NDA because it clarifies who is obligated to protect the information and who owns it. The party obligated to protect the information is the receiving party, and the party that owns the information is the disclosing party. When there is an unambiguous identification of the parties and their roles and responsibilities, it is easier to prevent misunderstandings and disputes.
Under U.S. contract law, the identification of parties is also a fundamental requirement for any binding agreement. This principle ensures that the agreement is enforceable and that each party’s rights and obligations are clear. Proper identification of parties is crucial for the enforceability of NDAs and is supported by general principles of contract law.
The Uniform Commercial Code (“UCC”) is a comprehensive set of laws governing commercial transactions in the United States. It provides guidelines that standardize and simplify the laws surrounding commercial transactions, including the formation and enforcement of contracts. The UCC offers guidelines on forming and enforcing contracts, emphasizing the necessity of clearly identifying parties in an agreement to ensure its validity and enforceability. UCC Article 1-201(b)(3): Defines “agreement” and stresses the importance of identifying the parties involved as found in their language or inferred from other circumstances. “Agreement” means the bargain of the parties, as found in their language or by implication from different circumstances, including course of dealing, usage of trade, or course of performance as provided in this Act (UCC § 1-201(b)(3)). By stressing the need to identify the parties, the UCC ensures that each contract is legally sound. For example, specifying the landlord and tenant in a lease agreement prevents misunderstandings about who is responsible for paying rent and maintaining the property.
Additionally, the California Civil Code offers specific provisions essential for forming and enforcing contracts under California law. The California Civil Code provides specific provisions regarding contract formation and enforcement under California law, which is often referenced in NDAs. California Civil Code § 1558 specifies that for a contract to be enforceable, the parties must be clearly identified, ensuring no ambiguity about who is bound by the contract terms. For example, in an NDA between a tech startup and an independent contractor, § 1558 provides that both the startup and the contractor are explicitly named, clarifying their respective roles as the disclosing and receiving parties. Furthermore, California Civil Code § 1614 reinforces the necessity of mutual consent and the identification of parties to establish a binding contract.
2. Definitions of Confidential Information
Clearly defining what constitutes confidential information in a Non-Disclosure Agreement (NDA) is crucial to ensure there is no ambiguity about what information is protected. This definition sets the boundaries of the agreement and provides a clear understanding of the obligations and responsibilities of the parties involved. A clear definition of confidential information helps prevent misunderstandings or disputes about what information is covered under the NDA. This specificity ensures that all parties are on the same page regarding what must be kept confidential. For example, an NDA stating that “confidential information includes but is not limited to business plans, financial data, proprietary processes, trade secrets, and intellectual property” leaves no room for misinterpretation. Also, defining confidential information explicitly ensures that the information shared is legally protected. This is crucial for enforcing the NDA and seeking legal recourse if the information is disclosed without authorization. So, if a startup shares its business model and marketing strategy with a potential investor, defining these as confidential ensures that if the investor discloses this information, the startup can take legal action based on the NDA. A comprehensive definition also outlines the scope of protection, ensuring that all sensitive information, whether written, oral, or digital, is covered. This broad protection is essential in the digital age, where information can be easily shared across various formats. It is also vital that the confidential information be tailored to the specific needs of the business and the nature of the information being protected. This customization ensures that all relevant information is covered without being overly broad.
Not all information qualifies as confidential, so we look to the California Civil Code § 3426.1(d), which broadly defines trade secrets and proprietary information, providing a framework for identifying what constitutes confidential information that can be protected. In tandem, the Defend Trade Secrets Act (DTSA) offers federal protection for trade secrets, emphasizing the need for clear definitions to ensure enforceability.
3. Exclusions from Confidentiality
Exclusions from confidentiality in an NDA are crucial because they clarify what information is not considered confidential. This helps prevent disputes over what is protected under the agreement and ensures both parties clearly understand their obligations and rights. Clearly defining what information is not covered by the NDA helps avoid misunderstandings and potential legal disputes about what constitutes confidential information. This clarity ensures that both parties know exactly what is protected and what is not. So, for example, stating that publicly known information is not covered prevents a party from claiming that general industry knowledge is confidential. And, in turn, exclusions ensure that the NDA is fair and reasonable by not restricting the receiving party from using information that is already publicly available or independently developed. This balance encourages open and fair business practices. So, a contractor who develops a similar solution independently without using the disclosed information should not be restricted by the NDA. However, information disclosed to the receiving party by a third party with the right to disclose such information is not bound by confidentiality obligations. So, in a situation where a marketing strategy is shared by a third-party consultant who is not under any confidentiality agreement with the disclosing party, it is not bound by confidentiality obligations.
4. Purpose of Disclosure
Specifying the purpose for which confidential information is shared is a crucial element of a Non-Disclosure Agreement (NDA). This specificity ensures that the information is used only for the intended purpose, thereby preventing misuse and protecting the disclosing party’s interests. By clearly stating the purpose of disclosure, the NDA restricts the use of confidential information to that specific purpose only. This limitation helps prevent the receiving party from using the information for unintended or unauthorized activities. So, suppose an NDA states that the information is shared solely for evaluating a potential business partnership. In that case, it restricts the receiving party from using that information for other purposes, such as developing competing products or services. Specifying the purpose of disclosure also ensures that the receiving party understands the boundaries within which they can use the confidential information. This clarity helps prevent misuse and ensures that the information is not exploited for personal gain or to the detriment of the disclosing party. For example, when a company shares its proprietary technology details for a joint venture, the NDA can prevent the other party from using it independently or sharing it with third parties. Additionally, Clear terms and conditions regarding the purpose of disclosure are fundamental to contract law. They enhance the enforceability of the NDA by providing a specific context within which the information can be used. This specificity makes it easier to prove a breach of the agreement if the information is used beyond the agreed-upon purpose. For example, suppose a startup shares its business model and marketing strategy with a potential investor solely for the purpose of due diligence. In that case, the NDA ensures that the investor cannot use this information for any other ventures or disclose it to other parties. Lastly, be specific to avoid ambiguity that could lead to disputes or unintended uses of the information. Instead of a broad statement like “for business purposes,” specify “for the evaluation of the disclosing party’s financial health and market position in consideration of a potential acquisition.
Uniform Commercial Code (UCC) Article 1-201(b)(3) stresses the importance of clearly defined terms in contracts as it emphasizes the importance of clear terms and conditions to define the scope and purpose of agreements. This clarity is crucial for the enforceability of the NDA. California Civil Code § 1636 requires that the terms and purpose of contracts be clear and specific to ensure that they are enforceable. This includes specifying the purpose for which confidential information is shared. It states that the interpretation of a contract is directed at ascertaining the parties’ mutual intentions at the time the contract was executed.
5. Obligations of the Receiving Party
Outlining the receiving party’s responsibilities in an NDA is crucial as it clarifies their duty to protect the confidential information shared with them. By defining these obligations clearly, both parties can ensure a mutual understanding of the terms of confidentiality, which minimizes the risk of information leaks and potential disputes. The typical obligations of the receiving party in an NDA include, but are not limited to:
– Not disclosing the confidential information to any third parties without explicit permission. The receiving party must maintain the confidentiality of the information and should not disclose it to anyone outside the agreed terms. For example, if a software development company shares proprietary code under an NDA, the receiving party must not share this code with any external consultants or companies without prior approval.
– Using the confidential information solely for the purposes outlined in the agreement and not for any personal gain or competitive advantage. The information should be used exclusively for the purposes outlined in the NDA. For instance, if a biotech firm shares a scientific formula to enable a manufacturing partner to produce a sample product, that partner cannot use the formula to create other products or for reverse engineering.
– Taking reasonable steps to protect the secrecy of the information, such as securing documents and limiting access to authorized individuals. The receiving party must take adequate security measures to prevent unauthorized access to the information. This could include physical security measures like locked file cabinets for paper documents and technological measures such as secure servers and password-protected files for digital information.
– Immediately notifying the disclosing party in case of any breaches or suspected breaches of confidentiality. In the event of any breach or suspected breach, the receiving party is obliged to promptly notify the disclosing party. This allows the disclosing party to take necessary steps to mitigate the effects of the breach. For example, if an employee of the receiving party accidentally emails confidential information to the wrong recipient, they must immediately inform the disclosing party.
In jurisdictions like California, specific legal provisions such as the California Civil Code § 3426.2 reinforce these obligations by offering remedies like injunctive relief against actual or threatened misappropriation of trade secrets. This means that if the receiving party violates the NDA, the disclosing party can seek a court order to prevent further disclosure and potentially secure damages for any harm caused. Such legal measures emphasize the seriousness of the obligations under an NDA and ensure that non-compliance has enforceable consequences.
6. Term of Agreement
Defining the duration of confidentiality obligations in an NDA is crucial for ensuring that both parties know how long the information must be protected. This duration, also known as the “term” of the agreement, provides a clear timeline for confidentiality and helps enforce the agreement effectively. Clearly defining the term of the agreement ensures that both parties understand their obligations and the duration for which they must protect the confidential information. This clarity helps prevent disputes and misunderstandings about the period of confidentiality. An NDA might specify that confidentiality obligations last for five years from the date of disclosure, ensuring that the receiving party knows exactly how long they need to protect the information. Additionally, defining a reasonable duration for confidentiality obligations helps enforce the NDA in court. Courts are more likely to uphold agreements with clearly specified and reasonable time frames. For example, using the five-year term explicated above, a court may find a five-year confidentiality term reasonable for protecting sensitive business information during its most commercially valuable period. Also, A defined term balances the interests of both parties by providing adequate protection for the disclosing party’s information while not imposing indefinite restrictions on the receiving party. So, a supplier sharing proprietary manufacturing techniques with a manufacturer might agree to a three-year term, allowing sufficient time for product development and initial market launch. Something to consider is that the term should be reasonable and proportionate to the nature of the confidential information. For example, trade secrets might warrant longer protection periods compared to general business information. This also relates to customizing the duration based on the type of information and the industry standards to ensure that the term is appropriate and enforceable. Lastly, it can be essential to include provisions for renewing or extending the term, which can provide flexibility if the need for confidentiality persists beyond the initially agreed period.
California Civil Code § 1625 states that a written contract supersedes all the terms agreed upon during negotiations, emphasizing the importance of including clear terms, such as the duration of confidentiality, in the written agreement.
7. Return or Destruction of Information
Including a clause for the return or destruction of confidential information upon termination of an NDA is a critical measure to ensure that the receiving party does not retain any unauthorized copies of the confidential information. This provision helps to protect the disclosing party’s sensitive information from being misused after the agreement ends. Requiring the return or destruction of confidential information ensures that the receiving party does not retain any copies that could be used improperly in the future. So in a circumstance for example where a consulting project ends, the consultant must return all proprietary data and destroy any digital records to prevent misuse. This clause helps the disclosing party maintain control over its sensitive information, ensuring it does not remain in the hands of someone no longer authorized to access it. This is important to ensure the return or destruction of information can help the disclosing party comply with legal and regulatory requirements regarding data protection and privacy.
Lastly, the return or destruction clause is supported by general principles of contract law, which emphasize the need to clearly outline the responsibilities of parties upon the termination of an agreement. This helps to ensure that all parties understand their obligations and can enforce them if necessary. Restatement (Second) of Contracts § 204 (Principles outlining the inclusion of terms necessary for a complete agreement). California contract law also supports the inclusion of terms that provide clear instructions for the handling of confidential information upon the termination of the agreement. California Civil Code § 3426.1
8. Remedies for Breach
Specifying remedies in an NDA is crucial because it establishes clear consequences for violations of the agreement. This provides a deterrent against breaching the agreement and offers a clear legal pathway for the injured party to seek redress. Having predefined remedies ensures that both parties understand the potential repercussions of non-compliance, thus enhancing the enforceability of the NDA. It also streamlines the resolution process, potentially saving time and resources that might otherwise be spent in prolonged litigation. Often the first line of defense in protecting trade secrets, injunctive relief can prevent further breaches by stopping the responsible party from continuing their unauthorized use or disclosure of confidential information. For example, suppose an employee leaves a company and starts using trade secrets at a new employer. In that case, the former employer can seek an injunction to halt this activity immediately, preventing further damage. Compensation for losses incurred due to the breach is another common remedy. This can include actual loss, which is compensation for the direct financial losses the disclosing party has incurred due to the breach. For example, the loss of sales or revenue that can be directly attributed to the breach is an actual loss. Another form of compensation is unjust enrichment, which is payment for the profits unjustly gained by the breaching party from the use of the confidential information. For instance, if a competitor uses stolen trade secrets to produce and sell a product, the damages could be calculated based on the profits they earned from these sales. Additionally, a reasonable royalty is an option of compensation, which is used if actual loss and unjust enrichment are difficult to calculate; a court might award damages based on a reasonable royalty for the unauthorized use of the trade secret.
Under the California Civil Code, § 3426.3 allows for the recovery of damages for both actual losses caused by the misappropriation and for any additional profits of the defendant that are attributable to the misappropriation. This dual avenue for damages ensures that the victim can be made whole if the economic harm can be quantified. Also, provision § 3426.4 allows for the recovery of attorney’s fees to the prevailing party if a misappropriation claim is made or defended in bad faith. This serves as a strong deterrent against both frivolous claims and willful breaches. These legal provisions empower parties to aggressively enforce their rights under an NDA and ensure that they have the means to recover losses and discourage future breaches. By clearly defining these remedies in the NDA, parties can mitigate risks and protect their interests effectively.