What is a non-disclosure agreement?
A non-disclosure agreement (NDA) is a contract to keep a secret. A non-disclosure agreement is often used when two companies want to meet to discuss a joint opportunity involving the exchange of confidential information. An NDA is especially useful when discussing an invention with a prospective licensee. This non-disclosure agreement then, would be an agreement between you and a potential licensee in which you exchanged your invention for a promise by the licensee to keep the invention secret.
A non-disclosure agreement may be unilateral, that is, one person is bound by the obligation to keep a secret, or it may be mutual, in which both parties have an obligation to keep the secrets of the other disclosing party. As in all contracts, both parties must receive a benefit; this benefit is called consideration. In the case in which you are disclosing your invention to a potential licensee for the promise of keeping your invention secret, the benefit received by the potential licensee is to learn of your invention, knowledge that he would not have otherwise had but for the exchange of the agreement. The benefit that you receive under this non-disclosure agreement is that, in exchange for disclosing your invention, the licensee or receiving party promises to keep the information secret. In this case, the consideration is the exchange of information for the promise.
Anatomy of an NDA
Non-disclosure agreements are generally not particularly complex, and most such agreements contain several basic components or parts. At the beginning of the general non-disclosure agreement is a preamble or paragraph identifying the parties. The next section of a typical non-disclosure agreement includes definitions of terms that are used in the agreement. Such terms might include the words “proprietary information,” “trade secrets” and “protected technology.” Any other terms that might be either ambiguous or key terms of the agreement are often also defined in this terms section.
The next section found in the typical non-disclosure agreement is the exclusions section. The exclusions section generally contains five or six different carve-outs to secrets or confidential information that is not covered by the non-disclosure agreement.
The first of these is typically information that is already public or has become public through no fault of the receiving party. Information that might be thus characterized as confidential information in disclosure meeting and marked confidential is not covered under the agreement if that information is already known by the public.
A second carve-out to the non-disclosure agreement is typically information that, as of the time of receipt by the receiving party, is already known to or in the possession of the receiving party. That is to say, if under a non-disclosure agreement you give me information that I already know, you cannot force me to keep it secret by this NDA obligation.
A third typical carve-out in an NDA is information that at any time is received in good faith by the receiving party from a third party that was lawfully in possession of the information and had the right to disclose the same. If you and I enter into a non-disclosure agreement and you give me confidential information pursuant to that agreement but I then purchase technology from a third party and as part of that purchase receive the same information that you and I agreed would be held private, then I no longer have the obligation to keep that information confidential because I have received it from a third party who had no obligation with you to keep that information confidential. The summary of this particular carve-out is that if I get information from somebody else who knows about it and who received that information lawfully, my obligation to you to keep it secret no longer exists.
A fourth carve-out to the non-disclosure agreement typically is information that is disclosed to third parties by the disclosing party on a non-confidential basis, that is, if you give me information under the non-disclosure agreement but then you pass the same information on to third parties on a non-confidential basis, then I no longer have that obligation to keep that information secret.
A fifth carve-out that is typically included in a non-disclosure agreement is information that is independently developed by or on behalf of the receiving party without benefit of the transferred confidential information. This occasionally happens in large companies where you pass information on to me under a non-disclosure agreement, and another division of my company, without ever having received the confidential information, develops the same confidential information or the same technology independently. This independent development relieves me of the responsibility to keep that information confidential under the agreement.
In addition to the term that lists a number of carve-outs to the non-disclosure agreement, the typical NDA includes a number of other terms, including a term that each party shall use the same reasonable efforts to protect the confidential information as are used to protect its own proprietary information. Related to this is often a requirement that the disclosure of the confidential information shall be restricted to those individuals in the company who are directly participating in the review of the information and have a need to know such information.
Another term in the agreement might clarify that execution of the agreement does not give a license or other transfer of proprietary rights to the technology, but only is construed to be a sharing of information.
Most non-disclosure agreements have a period of time of effectiveness of the information. This time period or term of the agreement is one, two, three or some finite number of years. The reason for this is that as time goes on, it becomes increasingly difficult to protect confidential information, as memories of the agreement and changes in personnel often result in accidental dissemination of the confidential information. It is also understood that confidential information typically has a relatively short period of viability. Over time, the value of trade secrets and other technical information diminishes as others independently develop or are able to reverse-engineer products to learn of the trade secrets. Trade secrets naturally disseminate as employees move from company to company, understanding, of course, that there are some trade secrets that can last many years, such as the formula for Coca-Cola©, but generally most confidential agreements expire after some period of time. The non-disclosure agreements are typically signed by both parties and may include an exhibit attached to the end of the NDA, describing in broad terms the specific confidential information that is being exchanged.
Contact John Ferrell at JFerrell@carrferrell.com if he can further assist you.
About the Author
John Ferrell is a founding partner of Carr & Ferrell LLP, one of Silicon Valley's foremost technology law firms, and specializes in patent and intellectual property law matters. He is the Chair of the firm's Intellectual Property Practice Group.