Did you just receive an NDA and are contemplating on whether to just sign it? Did you find an NDA template somewhere and want to send it before disclosing your great next-billion-dollar-startup idea to someone else? Then look no further! This post is for you to understand how to read NDAs like a professional and why you should, at the end, actually consult a lawyer to help you with this.
What are NDAs?
NDAs are “Non Disclosure Agreements”; you may see them in most businesses, and they are meant to protect the confidentiality of information exchanged between the parties. The requirement to execute an NDA may come due to the fact that one party has a secret that it wishes to protect (think of Coca Cola’s secret formula) or when financials are disclosed in the sale of a business, but it may also come when a researcher wants to share their ideas with another person and still be able to apply for a patent later on in life, as patents should be only for ideas which were not published up to date (see this, where a patent was invalidated due to a lack of an NDA).
So, NDAs are executed as common practice between parties; where in some cases there are people who categorically refuse to sign them. One example would be a venture capital investor. A VC Investor might say “I see a dozen startups per day, so if I’m bound by confidentiality some kid with an idea may come and say that I stole his idea and invested in another startup that formed to practice this idea”.
What doesn’t fit in an NDA and people still try to sneak in?
Non-disclosure agreements are meant to protect confidentiality of information, that’s it. However, I’ve seen some other sections put in these documents that may or may not be reasonable to ask. Hiding them inside an NDA may not be fair, and if you see them in a document do ask your counterpart why it was there.
Some examples are “non-compete” sections, where the disclosing wishes that in consideration of receiving confidential information you are prohibited from entering into any business that competes with them. While it may be reasonable to ask for a non-compete in a commercial agreement that would be executed later on, and includes your services and consideration, in the negotiation section that includes only exchange of information, it may not be reasonable to request.
The same goes for IP assignment. If the other party requests that you assign all intellectual property rights, copyrights, patents and other similar rights in the NDA then it means that they obtain ownership without you being entitled to any consideration. I would avoid that.
Another section which is borderline is the “non-solicitation” or “non-circumvention”; this section requests that upon signing the NDA, you undertake not to poach the other party’s employees or not to go around them in a specific deal. This may be reasonable if they are an agent or reseller of some sort, but not if you’re just looking for a service provider.
What type of NDA is this?
After understanding what doesn’t fall into the NDA’s scope, you need to first understand what type of document is in front of you; is this a mutual NDA or a unilateral one? Meaning, does this agreement cover the confidential information of both parties (“mutual”) or whether it protects only one side. You can understand that by seeing whether the “disclosing party”, “discloser” or similar definition in the agreement applies only to one party, or to both. In some cases, the definition may be mutual, but the confidential information may be defined only as information belonging to one party.
How is “Confidential Information” defined?
Next, we need to understand how confidential information is defined.
There are some different ways to define it; the first is by asking that all information be marked. I, personally, am against this. The reason for that is that marking information may be almost impossible when dealing with a potential transaction, and that in such an event most of the time oral information may not be covered.
The second is having a specific list, something like “all information relating to business, data, financials, etc”. This is better; but may be either too broad or too narrow.
Third, some people may also add something like “as well as any other information reasonably understood to be confidential due to its nature”. This is great as adding another layer of protection.
Please note, however, that if there is a requirement to mark the information then the second and third definitions become moot. Meaning, only if it is both marked and falls under those categories.
In some cases, the definition won’t be of “confidential information”, but of “proprietary information”; while legally there’s a difference between the two, for the purpose of this post I’ll ignore it.
What is excluded
Next usually comes the section that discusses what is excluded from being confidential. It is important to review this section and look for things like “third party disclosure”; meaning that if there was a meeting between you, the counterparty and another guy, let’s call him Bob, and you said something confidential and Bob isn’t bound by confidentiality, then the information won’t be confidential. Please mind these.
The most important section is the “independent development” section. We’ll get back to it when discussing the residuals, but generally, people would say “yeah! I developed it myself, so it’s not based on your confidential information”. That’s why I prefer to have this section state that independent development means only information developed by people not exposed to confidential information.
What is the term of protection?
When you read an NDA, you may say to yourself that all is well, and then fail to understand that there wasn’t a survival clause. Some lawyers or templates just forget it and some leave it out on purpose. What does that mean? When the NDA terminates, it terminates. There are no more obligations, the agreement came to an end.
However, if there’s a survival clause, then the obligations will apply after termination. This is important when you want to understand for how long your information would be protected. The optimal duration, of course, is in perpetuity. However, perpetual NDAs may be illegal or unenforceable in some jurisdictions.
Some NDAs try to force you to protect information only for a short time, like one or two years. This means that if someone is exposed to the information discloses it after that term, they won’t be in default and your information would be out.
What are the requirements at the end of the term?
Some NDAs require that at the end of the term you would delete the other party’s confidential information. This is great, except that no one really deletes stuff; right? You have archives and backups of your data, you have the cloud that remembers everything; so how can you be certain that the information was actually deleted.
Another issue is that in some cases, you need to keep the confidential information and not delete it. Let’s say you provided an hourly service to the other party. This means that time sheets that may include what you developed, are confidential. But if the other party didn’t pay you, how can you sue them if you have to delete the timesheets?
Is there a “residuals” clause?
A residuals clause says something like “while we want to protect your information, our staff can’t unlearn what they saw, so if they did something similar to what you showed us, it isn’t a breach of this agreement”. This is bad. I would try to avoid this section if possib;le.
Where are the applicable laws?
This is important when the two parties are from different countries. You need to make sure that you can enforce your rights. If you live in Israel and the other party is in Mexico, and the applicable laws are those of Mexico, then you have to address the Mexican courts to prevent a disclosure. This is not just expensive, but requires that the Mexican laws provide similar protection to your laws.
This list, of course, is not exhaustive, it is meant to help you understand the nature of the NDA you just received from someone else. If you have any document, get a professional to review it.