August 20, 2019

Non-Disclosure Agreements in Review

Catherine Bragg

Introduction

At the mid-winter meeting of the American Bar Association Forum on Construction Law, Erin Ebeler Rolf of Woods & Aitken LLP gave a presentation on the topic of Non-Disclosure Agreements (NDAs) to a packed lunch crowd hosted by Division 6 (Labor & Employment) and Division 11 (In-House Counsel).  In that presentation, she provided a helpful review of the typical components of a good NDA and discussed a not-so-typical provision that sometimes finds its way into NDAs.  This article will summarize Rolf’s presentation and highlight some practice tips (Note: use of NDAs in the employment context is excluded from this article).

The Purpose of an NDA

Non-disclosure agreements (NDAs) are amongst the most common agreements that come across an in-house attorney’s desk.  In the construction industry NDAs are used in many contexts, such as: limiting access to a confidential request-for-proposal, prefacing discussion of an asset purchase, or protecting proprietary information shared with a subcontractor. Despite the variations, the primary purpose of an NDA is to protect information that one or both parties do not want to become public or shared with competitors.  There are certain things that NDAs cannot do, such as protect information that is generally known or knowable from public sources, and exclusions such as this are usually understood and accepted by practitioners.   

Components of an NDA

An NDA should include clarifying language regarding the following:

  • Who is bound?   The determination of who is bound by an NDA first depends on whether the NDA is unilateral (binding only one party from disclosure of confidential information) or bilateral (binding both parties from disclosure of confidential information).  It is also important to consider all other individuals acting on behalf of the named parties who will access confidential information.  Limiting such access to certain categories of people, such as employees, financial advisors, attorneys, and subcontracted consultants, reduces the number of unintended recipients and makes it easier to manage third party recipient risk. 
  • What is protected?  We have all seen overly broad definitions of confidential information that span the length of an entire paragraph.  A more specific description of covered items can contribute to the enforceability of the confidentiality of those items.  From a practical standpoint, eliminating inapplicable categories of data from the definition of confidential information can help eliminate the risk that recipients fail to treat as confidential that information that is not relevant to the purpose of the engagement, but is still considered confidential by the disclosing party.  Even if the disclosing party desires a broad definition of what should be given confidential treatment, typical carve-outs includes information that:
    • became generally known to the public other than as a result of disclosure by the recipient in violation of the NDA;
    • was available to recipient on a nonconfidential basis prior to disclosing party’s disclosure;
    • became available to recipient on a nonconfidential basis from a source other than the disclosing party if such source was not bound by an NDA; and
    • was independently developed by recipient without violating any obligations under the NDA.
  • How long is the confidentiality obligation?   It is not uncommon to see a confidentiality obligation that is indefinite in duration.  However, this approach may not be appropriate for data that has a limited useful life and represents an unfair burden on the recipient for the on-going costs of storing disclosing party’s data.  The recipient may hope that some of the information eventually falls outside of confidential treatment if it becomes publicly available (as described in the carve-outs above).  In many cases, the acceptability of the term of confidentiality depends upon the industry and the type of information being disclosed. 
  • What remedies exist?  In the event of an unauthorized disclosure of confidential information, the disclosing party seeks to prevent further unauthorized disclosure.  The remedy most commonly sought is injunctive relief through a temporary restraining order and where the NDA is bilateral, the parties typically agree to a minimal bond. 
  • Should disclosed information be marked The recipient of confidential information typically wants disclosures to be marked in order to avoid confusion about what disclosures should receive confidential treatment.  Oral disclosures can be summarized within a finite number of days subsequent to disclosure.  The disclosing party, on the other hand, may view marking as inconvenient and seek to shift the burden to the recipient by including in the definition of confidential information “all information that would be considered confidential by a reasonable person given the nature of the information or the circumstances of disclosure”.   In bilateral NDAs, both parties can usually see the value of avoiding subjective language such as this.  
  • The following are some additional practice tips:
    • Retain all IP rights and disclaim any license to use disclosed information for purposes other than those stated in the NDA.
    • Select governing law/venue carefully based upon how NDAs are treated in specific jurisdictions.
    •  If reliance on accuracy and completeness of disclosed information is important, beware of disclaimers of these two concepts.  
    • Avoid obligations to enter into other agreements and beware of unwanted exclusivity created through the terms of the NDA.

NDAs are not Non-compete Agreements

It is increasingly common to see non-compete provisions buried in NDAs.  While this is more prevalent in NDAs pertaining to acquisitions and in the employment context, these provisions can also appear in teaming arrangements.  A non-compete provision requires a separate analysis under governing law as to enforceability based on duration and geographical scope.  The author suggests that an NDA with a non-compete provision should be renamed “Non-Disclosure and Non-Compete Agreement” so that the restrictive intent of the agreement is clear up front.  

Anticipating a Request to Return Disclosed Information

If the NDA requires that all disclosed information be deleted from the recipient’s IT environment, the recipient should make sure it has the technological ability to accomplish complete deletion.  Many firms implement archiving policies that operate automatically and create duplicate images of servers and databases that go into the cloud.  It is often impractical to isolate discrete pieces of information in these back-ups.  For many, a safer approach is to revise this language to exclude confidential information that is part of “an automated archiving process made in the ordinary course of business such that archived data will not be available for any business purpose.”  Confidential information retained by the recipient will continue to be treated confidentially pursuant to the terms of the NDA. 

Conclusion

No two NDAs are alike.  Even though all good NDAs address the concepts discussed in the above sections of this article, there are innumerable ways of drafting these concepts.  Rolf’s key practice tip is “Live by it; it is not boilerplate.”  A well-crafted NDA is only as good as how a recipient and individuals with access to confidential information comply with it.  Make sure all of these individuals understand their obligations so that efforts to build a strong and protective NDA will not be in vain.

A sincere thanks to Erin Ebeler Rolf for her words of wisdom and for keeping us on our proverbial NDA toes. 

Entity:
Topic:

Catherine Bragg

TRC Companies, Inc., Charlotte, NC, Division 11 (In-House Counsel)