One Size Does Not Fit All
While many businesses have developed standard one-way and bilateral (or “mutual”) NDAs, they may not have not developed appropriate checklists to consider whether and how their standard NDA should be modified under particular circumstances. It is important to remember that one size does not fit all.
Best practices include requiring that (1) an appropriate NDA must be in place before a company’s confidential information is disclosed to anyone outside the company and (2) employees are not to sign an NDA before the company’s counsel has vetted it.
Consider developing
- a set (albeit flexible) process for negotiating, reviewing, and approving NDAs before execution—such as the requirement that no NDA be signed before company counsel has approved it and that all negotiations begin with the business’s NDA, if possible; and
- a “cheat sheet” that sets out the scope of changes that are acceptable to key terms (e.g., marking requirements, term of confidentiality, governing law, and forum selection). Note that such a document may be more useful for a company’s counsel rather than its executives.
Also consider providing periodic trainings for employees on the importance of NDAs, including an explanation of why they must be vetted by company counsel prior to execution.
Pay Close Attention to How You Define “Confidential Information”
A key provision in every NDA is the one that defines the scope of information that is to be treated as “confidential” under the agreement. The definition of “confidential information” should be clear and tailored to the particular circumstances at hand. If the definition is not appropriate, important proprietary information may not be protected, meaning that it is “fair game” for the receiving party to use or disclose information as it wants. On the other side of the coin, if not scrutinized, the definition of “confidential information” may be overbroad, sweeping in nonconfidential information or information that the receiving party already has in its possession or that is already public. Or it may authorize a party to disclose confidential information to the other party in a subject matter area that the other party has no desire to receive. Further, a poorly drafted definition may give the disclosing party an ability to make breach of contract and misappropriation claims that the receiving party never intended.
The defined scope of “confidential information” under NDAs can vary widely. The most common types of definitions fall into three categories: (1) the strict characterization of confidential information, (2) the loose characterization of confidential information, and the (3) subject matter characterization of confidential information.
The first category, strict characterization, often contains descriptions of the type of information that is to be treated as confidential under the NDA (e.g., “financial information,” “product specifications”). If descriptions like these are used, it is important that they not be so broad that they cause the NDA to run afoul of applicable law. See, e.g., Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 317–20 (Cal. Ct. App. 2020) (holding that an employee confidentiality agreement may be voided as a de facto unlawful non-compete agreement if its overbreadth prevents the employee from working in the industry in violation of California public policy).
Under the strict characterization category, confidential treatment is limited to written information that is specifically marked with a confidentiality designation and oral information that is specified as confidential at the time of disclosure or shortly thereafter. Before agreeing to such requirements, a business should carefully consider whether its employees can and will realistically abide by designation requirements, especially if the exchange of information is fast-moving or continuous or both. If designation requirements are agreed to but not followed, the disclosing party may lose its right to enforce the information as its trade secret. See, e.g., Big Vision Private Ltd. v. E.I. Dupont De Nemours & Co., 1 F. Supp. 3d 224, 253–55 (S.D.N.Y. 2014), aff’d 610 F. App’x 69 (2d Cir. 2015) (refusing to treat information as confidential when disclosure “failed to comply with the terms . . . set forth in the NDA,” which required “contemporaneous designation,” and noting that “[i]f the [discloser] believed the confidentiality designations in the NDAs were too burdensome, it was free to negotiate different terms”).
The second category, the loose characterization model, uses provisions that purport to deem all information disclosed under the NDA to be confidential. Alternatively, all information that the receiving party might “reasonably believe to be confidential information of the disclosing party, due to the nature of the information or the circumstances of its disclosure” (or something comparable) may be deemed confidential. The additional breadth provided by this model is often useful for smaller companies that might struggle to meet the designation requirements of the strict characterization model or to fit the fast-moving working relationships for which designation requirements are impractical. That said, it still may be best to affirmatively mark confidential information even under the loose characterization model, as there is always a possibility that a court could find information would not be considered confidential under the objective “reasonability” standard. See, e.g., Am. Greener Techs. Inc. v. Enhanced Life Water Sols. LLC, No. CV-15-02491-PHX-JJT, 2016 WL 1573309, at *9–11 (D. Ariz. Mar. 23, 2016) (“Plaintiffs failed to show that their [materials] were conspicuously marked as confidential or that the individual Defendants should have reasonably understood they were confidential.”).
Under the subject matter characterization model, the confidentiality obligations apply to all information disclosed under specified circumstances or in the context of a designated “purpose” (e.g., all due diligence documentation exchanged in connection with a contemplated transaction). This model offers a combination of the advantages conferred by the first two models: It limits the scope of the confidentiality obligations to a specific context, but at the same time, it can also provide expansive, default protection for information that falls within those limitations. Parties must be sure to fully define the subject matter of the information that is intended to be covered by such provisions, as well as any exceptions to those definitions. See, e.g., Berkla v. Corel Corp., 66 F. Supp. 2d 1129, 1146–50 (E.D. Cal. 1999) (finding that boilerplate designation of information exchanged in connection with recipient’s provision of “certain services” as confidential was insufficiently specific with respect to the “public domain” carve-out, as there was “not a scintilla of . . . evidence that either [party] considered or negotiated” that language).
Carefully Consider What Happens upon Termination of the NDA
If it is expected (or contemplated) that trade secrets might be disclosed, it is important to consider whether to insert special designation requirements into the NDA for such trade secrets so they can receive enhanced protections under the NDA. For example, the disclosing party may want to include a term that provides perpetual confidentiality for designated trade secrets (if permitted under applicable law) or the requirement that the parties negotiate appropriate special protections for trade secrets if they are to be shared.
Be sure that the NDA is clear as to whether the duty to protect the information ends when the NDA terminates. Confidentiality obligations can survive termination of an NDA, but they may not if the contract does not expressly state that they survive. See, e.g., BladeRoom Grp. Ltd. v. Emerson Elec. Co., No. 19-16583, 2021 WL 3852630, at *5–8 (9th Cir. Aug. 30, 2021) (applying canons of contractual interpretation when considering whether confidentiality obligations under an NDA terminated contemporaneously with the termination of the underlying agreement).
Or the NDA may state that the confidentiality obligations for a particular piece of information expire after a set time after it is received. If so, it is important to keep track of when each piece of information is received (because after that period, the receiving party is free to use the information as it likes and the other party will have difficulty claiming it as a protected trade secret).
Similarly, parties should pay special attention to their obligations with respect to the disposition of confidential information in tangible form upon termination of an NDA. For example, the NDA should address questions like the following:
- Are the parties obligated to destroy the documents upon the expiration or termination of an NDA?
- Is the receiving party to return the documents to the disclosing party?
- Is there a carve-out for the receiving party’s own confidential documents derived from or referencing the disclosing party’s confidential information (the receiving party should not want to have to turn over its privileged documents or other confidential work product that it did not intend to turn over).
- Do the parties need to destroy or return confidential information automatically upon termination—or only after receiving a request from the disclosing party? The receiving party should plan from the onset of the NDA relationship so that it is in a position to destroy or return the information if required (e.g., through the use of trackable “confidential” tags within its document management system).
Another term that may cause problems for the disclosing party is the “unaided memory” residuals clause. A basic “residuals” provision allows a receiving party to keep “archival” copies of confidential information, provided that the receiving party continues to keep them confidential under the NDA. On the other hand, an “unaided memory” residuals provision allows the receiving party to make use of the confidential information so long as it is contained only within the “unaided memory” of someone to whom it has been disclosed. While certain trade secrets could not be realistically used from unaided memory (for example, because they are too complicated), other trade secret information can be memorized, and this type of residuals clause could result in the loss of the trade secret information. See, e.g., Space Data Corp. v. X, No. 16-cv-03260-BLF, 2017 WL 3007078, at *2 (N.D. Cal. July 14, 2017) (plaintiff failed to adequately allege how the alleged misuse of confidential information exchanged under NDA was not authorized by the “unaided memory” residuals clause).
Other Important Considerations
The provisions discussed above are not the only ones that should be carefully considered when reviewing a proposed NDA. Below are examples of some other important issues:
“Governing law” provisions
It is a mistake to gloss over the provision that designates the law that is to be applied to the interpretation and enforcement of the NDA, particularly where foreign law is proposed. Indeed, foreign jurisdictions often have differing conventions of contractual interpretation than those in effect within the United States, which can lead to unexpected results when attempting to enforce an NDA. See, e.g., BladeRoom, 2021 WL 3852630, at *4–5 (describing the conventions of contractual interpretation under English law, which “balances textual and contextual analyses” in a manner that differs from general U.S. practice, and reversing district court’s reading of NDA term).
Forum selection clauses
Similarly, forum selection clauses should be scrutinized to ensure that the jurisdiction designated for enforcement of the agreement is both practical and accessible, as well as suitable for enforcement. Some jurisdictions—like China and Korea, as well as many arbitral forums—may not provide for discovery as is permitted in U.S. courts. Foreign jurisdictions may likewise place limitations on the availability of injunctive relief.
Conflicts with terms of subsequent agreements
Take care when negotiating agreements that follow—or even result from—the execution of an NDA. Often the typical agreements (e.g., services agreements, collaboration agreements, and licenses) contain their own terms, regarding confidentiality or other matters, that may conflict with the preceding or antecedent NDA. These conflicts can also be created when the parties execute multiple NDAs, without clarification regarding which agreement should govern their relationship. See, e.g., Callendar v. Anthes, No. DKC 14-0121, 2014 WL 1577787, at *6–7 (D. Md. Apr. 18, 2014) (evaluating whether forum selection clause of an NDA was superseded by the terms of a subsequent agreement); Uni-Pixel Displays, Inc. v. Conductive Inkjet Tech. Ltd., No. H-13-0202, 2013 WL 1828843 (S.D. Tex. Apr. 30, 2013) (untangling the obligations created by three separate NDAs entered into by the parties).
In sum, NDAs should not be treated as routine, form agreements of little consequence. A poorly drafted NDA can have devasting ramifications, such as loss of trade secrets that give the business its competitive edge or having to defend—at significant expense and business disruption—litigation commenced by the other party. Accordingly, NDAs should be afforded the attention they deserve and be vetted by counsel before they are executed with all potential “danger areas” in mind.