Help: Non-Disclosure Agreement

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Contents

One-Way Non-Disclosure Agreement
A Non-Disclosure Agreement (or “NDA”) is an agreement under which a party (the “Recipient”) agrees not to disclose proprietary and confidential information (“Confidential Information”) that it receives from another party (the “Owner”). This type of agreement may be useful in a variety of circumstances.

Some typical provisions that are included for the protection of the Owner include the following:

  • No Warranty. There is a possibility that the Confidential Information could contain mistakes or errors, or be based on assumptions that later prove to be incorrect. Therefore, it is common for Owners to include a “no warranty” provision that specifies that the Owner will not be responsible for any damages that the Recipient might incur from using the Confidential Information.
  • Risk of Disclosure. In addition to the “No Warranty” provision, the Owner may also want to provide that any disclosure made by the Recipient of any information is at the Recipient’s risk. Because the Owner has already stated that it will not warrant the accuracy of the information, the Owner can further provide that the Recipient will bear the risk of using the information in violation of the agreement. For example, if the Recipient acts on some of the information and the information was inaccurate, the Recipient cannot hold the Owner responsible for the harm caused by the inaccurate information.
  • Limited License. Generally, the Owner and the Recipient intend that the Confidential Information will only be used by the Recipient for the limited purpose of reviewing the information and becoming familiar with the Owner’s business to determine whether the parties might have interest in future transactions (based on some additional agreement). A “limited license” provision makes it clear that the Recipient is not acquiring the right to use the Confidential Information on a general basis.
  • General Provisions. A Non-Disclosure Agreement should include provisions that (i) require amendments (changes) to the agreement to be in writing and signed by both parties, (ii) specify the state whose laws will govern and interpret disputes between the parties regarding the matters covered by the agreement, and (iii) prohibit the parties from assigning their obligations under the agreement to third parties. Generally, the state whose laws should govern the agreement should be the state of the Owner or the Recipient.

Two-Way Non-Disclosure Agreement (or Mutual Non-Disclosure Agreement)
A Two-Way Non-Disclosure Agreement (or “Mutual Non-Disclosure Agreement”) is an agreement under which two or more parties agrees not to disclose proprietary and confidential information (“Confidential Information”) that they share with each other. This type of agreement may be useful in a variety of circumstances. For example, two companies might choose to share information on how to improve their on-line sales through promotions on each other’s websites. In such a situation, each company would probably be sharing information about their pricing and promotion methods and would want to protect this information from disclosure to third parties.

The document is written to protect both parties. It defines rights and obligations based on which party is disclosing information and with party is receiving the information. Either party may take either role, depending on the Confidential Information being shared. Some typical provisions that are included for the protection of the disclosing party include the following:

  • No Warranty. There is a possibility that the Confidential Information could contain mistakes or errors, or be based on assumptions that later prove to be incorrect. Therefore, it is common to include a “no warranty” provision that specifies that the disclosing party will not be responsible for any damages that the receiving party might incur from using the Confidential Information.
  • Risk of Disclosure. In addition to the “No Warranty” provision, the document may also provide that any disclosure made by the receiving party of any information is at the receiving party’s risk. Because the document already states that accuracy of the information is not warrantied, the receiving party will bear the risk of using the information in violation of the agreement. For example, if the receiving pary acts on some of the information and the information was inaccurate, the receiving party cannot hold the disclosing party responsible for the harm caused by the inaccurate information.
  • Limited License. Generally, both parties intend that the Confidential Information will only be used for the limited purpose of reviewing the information and becoming familiar with each other’s business to determine whether the parties might have interest in future transactions (based on some additional agreement). A “limited license” provision makes it clear that the parties are not acquiring the right to use the Confidential Information on a general basis.
  • General Provisions. A Mutual Non-Disclosure Agreement should include provisions that (i) require amendments (changes) to the agreement to be in writing and signed by both parties, (ii) specify the state whose laws will govern and interpret disputes between the parties regarding the matters covered by the agreement, and (iii) may prohibit the parties from assigning their obligations under the agreement to third parties. Generally, the state whose laws should govern the agreement should be the state where one of the parties is located.

Confidential Information

Confidential Information includes any information or material that is personal or proprietary to (owned by) the Owner, whether or not it is marked as “confidential”.

For example, business records and plans, trade secrets, technical data, product ideas, contracts, financial information, pricing structure, etc.

A Non-Disclosure Agreement provides for certain exceptions. The Recipient is not required to keep confidential any information that has been previously made public or information received from a third party; information that the Recipient independently creates; information that must be disclosed by the operation of law; and information for which the Owner has granted prior permission regarding its disclosure.

Duration of Confidentiality

After the term of the Non-Disclosure Agreement, the Owner may require that the Recipient continue to protect the confidential information for a period of time. Depending on the nature of the information that was exchanged, a shorter or reasonable amount of time, like one year, may be more legally enforceable. However, information like trade secrets may benefit from being kept confidential for an indefinite amount of time.

Indemnity

Indemnity in this Agreement pertains to each party agreeing to hold the other liable legally and monetarily from any and all third party claims that result from the indemnifying party’s material breach. Indemnification clauses protect the party who is disclosing information against wrongful disclosure by the party receiving information and any of its representatives.

Non-Circumvention

A non-circumvention paragraph protects an Owner from being bypassed in a business transaction. This paragraph ensures that if the Owner shares its business contacts with the Recipient, the Recipient cannot do business with or engage with those contacts for any purpose. If the Owner is bypassed, the non-circumvention paragraph states that the violating party will be liable to pay for penalty fees.

Protection of Information

The Recipient agrees to protect the Confidential Information. This protection is enhanced by limiting the Recipient’s authority to make copies, permitting the Recipient to disclose the information only to the Recipient’s employees who have an important reason for needing to know the information, and by allowing the Owner to obtain an injunction if it appears that the Recipient may disclose the information. The Owner can also attempt to further protect the Confidential Information from disclosure by requiring that any written materials be returned upon request.

Relationship

The Non-Disclosure Agreement should state the relationship between the parties. For example, information could be provided as follows: The Owner is “engaged in the business of selling computer software and related products.” The Recipient is “a marketing firm that specializes in marketing computer products.” Information will be disclosed to the Recipient to enable the parties to determine whether the Recipient could assist the Owner with the development of a marketing plan.

Term of the Agreement

The term of the agreement may encompass the entire period of time that the owner discloses the confidential information to the recipient, which may or may not include the entire duration of the business relationship between the two parties. This time period can also include the exploratory phase of the business relationship between the parties.

Reasons to Disclose Confidential Information

There are many reasons for individuals or businesses to use a Non-Disclosure Agreement. A common example is between an employer and an employee. An NDA will protect the employer from having its employees, consultants, or agents using confidential company information against the business. Another example is when a company might choose to share information with a web marketing consultant for the purpose of improving its on-line sales through its web site. In such a situation, the company would probably be sharing product and customer information with the marketing consultant and would want to protect this information from disclosure by the consultant to third parties.