“Shhh…Can You Keep A Secret?”

May 2002
The Licensing Book

"Be sure to get an NDA before you tell them our plans," the President warns his VP.  Next day, the VP shows up for the meeting with the potential business partner, requests an NDA ("Non-Disclosure Agreement"), signs the document put in front of him and takes comfort in having fulfilled the Boss's instruction.  But how many executives - even senior officers - know what an NDA should say?

What To Look For

When two entities discuss a potential deal, one or both parties may come to the table with business plans, product concepts, technology or other information that it considers "confidential".  From a business perspective, the possessor of confidential information  knows that it wants the information to be "protected", but may not have a specific idea of what protection is needed. 

Consider this: If the Recipient of the information discloses it indiscriminately to third parties or uses it for its own purposes without permission of the party making the disclosure, either activity would be harmful to the interests of the Discloser.  In order to be effective, an NDA must protect against both improper disclosure and improper use.  Not coincidentally, many NDA's drafted by Recipients prohibit disclosure but don't mention use.  In the context of our hypothetical, the only proper use would be for purposes of determining whether to enter the potential business relationship, and the NDA should say so.

The NDA also should establish ground rules by which the confidential information must be documented and identified as such.  This is best handled by requiring that all confidential information be recorded in tangible form, be identified on its face as "Confidential", and that a copy of  such record be provided for each party's records.  If there is a dispute later, it will be crucial to have records of  what information was disclosed, when it was disclosed and to whom.

Another important consideration is whether the NDA protects information disclosed in a single meeting or whether it will provide protection for disclosures made on a continuing basis over some period of time.  Surprisingly, many NDA's are written without the foresight to anticipate a sequence of disclosures as negotiations continue.

Also to be addressed is whether specific actions are required of the Recipient, eg that the material be placed "under lock and key" when not in use, or that disclosure  within the Recipient's organization be on a "need to know" basis.

What are the Exceptions?

It is wise to describe situations that will exempt the information from the restrictions.  If portions of the information are, or later become, "public domain", or are already known to the Recipient before the disclosure, or are disclosed by a third party to the Recipient without violation of the Discloser's rights, the restrictions should not apply.  There can be other exceptions depending upon unique facts of the situation.  If, for example, the Recipient needs assistance from an outside contractor in evaluating the proposed deal, an exemption should permit disclosure, so long as the contractor also agrees to maintain confidentiality.

What Happens Afterward?

Most NDA's specify a term, and it is important to understand what the end of that term means.  For example, is the Recipient free to use and disclose the information at the end of the term, or does some form of obligation survive expiration?  Must the Recipient return all documentation relating to the disclosure or can it retain a file copy?  If no business deal is established between the parties, these questions can be important, because the parties may be or  may become competitors.  At least the Discloser would be wise to seek some measure of continuing protection against disclosure to third parties.

Final Cautions

An NDA agreement can have all of the above elements and still do you no good at all!

Many NDA's provide protection only in one direction.  Before signing such a document, if you are the Discloser, you must read it carefully to be certain that it is your information that will be protected, and not just the other party's.

However strongly worded an NDA may be, it cannot prevent violation of confidentiality, but only can provide a basis for a lawsuit if violation occurs.  A party who intends to misuse or disclose your information may not be deterred by an NDA, no matter what it says.

For these reasons:  First, never disclose more information than is absolutely necessary to accomplish your purpose, even if you have a strong NDA in place.  Second, deal only with people you believe to be trustworthy.  Third, an NDA is merely a form of "due diligence"; anyone  who refuses to sign an NDA because it is "insulting", or who has any other excuse to avoid signing should not be considered trustworthy . . . Best look elsewhere for a business partner.

The writer is a veteran of twenty years representing Licensors and Licensees in negotiating entertainment, sports, artwork, brand, invention and technology agreements.  Mr. Kipling is Of Counsel with Frost Brown Todd LLC in Cincinnati, Ohio, and can be reached at jkipling@fbtlaw.com, (513)651-6101