Important Notes on Non-Disclosure Agreement (NDA)

What is an NDA?

A non-disclosure agreement or NDA is an agreement used by parties to create a legal obligation not to disclose or use confidential information. Such confidential information mainly includes trade secrets, innovative ideas, etc., that are of utmost importance for the company’s business.

There are various instances when companies need to share confidential information with different individuals for commercial transactions, and that is when NDA comes to use. NDA is also prominently known as Confidentiality Agreement or Confidential Disclosure Agreement.

How does NDA work?

The NDA is generally used by businesses or companies when they have to share confidential information with an investor, employee, creditor, advisor, supplier, client, or other stakeholders. NDA creates an obligation on the other party not to share the information with any third party and not to use it for any purpose, other than for the purpose defined in the NDA.

For example, if a tech-oriented company having a new technology, desires to engage a divest investor who may also have interest in the company’s competitors, or a customer looking for deep product-integration who may also be a potential acquirer, the company it may use an NDA, to prevent these potentially involved parties copying its technology or using other important assets, and to protect its interests.

In such a scenario, it is important for the parties to be aligned on the purpose of their engagement, to understand the risks involved and the sensitivity of the information and to have a well-drafted NDA that defines the borderlines and secure the company’s interests.

What are some of the key terms in NDA?

Following are the key terms in an NDA:

Definition of Confidential Information: It is one of the most important clauses in any NDA agreement. It defines the information that needs to be protected. This clause should be clear, specific, and not leave any room for ambiguity. The issuer of NDA should usually keep this clause as broad as possible so as to include business trade secrets, intellectual property rights, and any other sensitive information.

Non-disclosure and Nonuse Obligation: This clause defines the obligations imposed on the party receiving the information. It also states that confidential information can be shared with certain employees and officers who need to know it for the successful conduct of business transactions. Consequently, all the people who have access to the information directly or indirectly are also bound by the obligations under this agreement. Lastly, this clause mentions that the recipient of the information may use the information only for the pre-defined specific purposes as agreed upon by the parties.

Exclusions from Nondisclosure and Nonuse Obligations: This term defines the exceptions to confidentiality obligations. These exclusions include information already present in the public domain or the information received by the recipient from some other means or third party. There may also arise an occasion when the recipient of the information might have to share the information pursuant to an order issued by a court or any other government body, but such instances do not render the information non-confidential. The list is not exhaustive and includes various other exceptions also. A common mistake would be to include under these exclusions, a statement saying that an authorized disclosure request for judicial or governmental authority would render the information to be non-confidential. The appropriate reference should state, however, that recipient of the information may disclose the information pursuant to an order issued by a court or any other government body, and that such disclosure does not turn the information to be non-confidential.

Term and Duration: NDA should spell out the term of the agreement. This includes the duration for which the agreement will be in force. Also, this clause spells out the duration for which the recipient’s obligations survive even after termination of the agreement. Some disclosures choose to restrict the period of disclosure, but demand that the confidentiality and non-use obligation shall survive until the information “falls into the public domain,” or in other words, becomes public.

Jurisdiction and Laws: The jurisdiction and applicable laws clause should favor the disclosure of information, who may need access to legal remedies to prevent the recipient’s deviation from the agreed upon NDA terms. However, it is important to make sure the NDA’s jurisdiction clause allows the discloser to file petitions for injunctive relief even outside the agreed jurisdiction, so discloser has an efficient and fast tool to enforce its rights globally.

Conclusion:

From the above discussion, it can be concluded that NDA is a very important agreement for companies to protect their sensitive information. It ensures that information is not entering the hands of the competitors. NDA is useful while entering into a new business deal and sharing new ideas with potential investors or starting a new project.

NDA is essential for startups because it ensures that their new ideas and strategies are well protected while dealing and negotiating with different stakeholders. NDA not only protects innovative ideas and trade secrets, but it also protects valuable intangible assets like intellectual property and their usage by the recipient of the information.

NDA is a useful tool, but it should be used with utmost care and precaution, and it is advisable to consult a lawyer before entering into one.

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