December 21, 2017

Strategies for Drafting and Negotiating Non-Disclosure Agreements

Sean W. Fernandes

In an economy where information is a key competitive asset, safeguarding secrets has never been more important. However, deriving value from those secrets often requires sharing them with business partners and employees. Lawyers can help clients thread the needle of sharing that information through well-drafted non-disclosure agreements. This article provides an overview on drafting non-disclosure agreements, primarily from the disclosing party’s perspective.

As with any contract, non-disclosure agreements are least effective when treated as boilerplate afterthoughts. To ensure that clients obtain the maximum benefit of non-disclosure agreements, lawyers should tailor the agreement to the information being shared and the risks attendant to the disclosure.

First, identify the nature of the transaction to determine the negotiation dynamic and the agreement’s structure. A disclosure transaction can be bilateral or unilateral. A bilateral agreement involves mutual disclosures of confidential information between counterparties and will provide more opportunity to negotiate. If the agreement is unilateral, determine whether your client is receiving or disclosing the information, but be aware that few interactions are likely to involve one-directional information sharing.

When drafting a non-disclosure agreement, lawyers should ensure that it includes the following provisions:

  • a statement of purpose
  • terms governing permissible uses
  • a definition of confidential information
  • procedures for labeling confidential information
  • what steps should be taken to secure confidential information
  • procedures governing unauthorized disclosures
  • expiration of the agreement and return or deletion of confidential information
  • a discussion of remedies

Statement of Purpose and Terms Governing Permissible Uses

For the statement of purpose and the acceptable use provisions, the goal is to define what the information can be used for, and most importantly, what it cannot be used for. While the ultimate purpose of the agreement is to avoid further disclosures, a disclosing entity may also want to ensure that the recipient cannot use the information for its own benefit, even if it does not disclose it further.

Defining Confidential Information

The definition of confidential information should be drafted as clearly and as specifically as possible. Often the inherent tension between a disclosing party’s desire for a broad definition and the recipient’s desire for a narrow definition results in vague terms. Vagueness or overbreadth makes enforcement of the non-disclosure terms more uncertain. For example, in Trailer Leasing Co. v. Assocs. Commercial Corp., No. 96 C 2305, 1996 WL 392135, at *6-7 (N.D. Ill. July 10, 1996), the court held an agreement unenforceable due, in part, to an overbroad definition of the confidential information.

It is also advisable to make exclusions from the definition to avoid overbreadth. Standard exclusions include publicly available information, additional developments not derived from or using the disclosed information, information previously disclosed, information obtained from a third party without a non-disclosure duty, and information required to be disclosed by law or regulation.

Additionally, if the agreement involves or potentially involves disclosure of a trade secret, make sure to clearly establish the difference between a trade secret and confidential information in the definition. This is important because obligations regarding confidential information typically expire after an agreed-upon term, which can lead to a client inadvertently surrendering its trade-secret rights.

Procedures for Labeling Confidential Information

For confidentiality designation and labeling terms, lawyers should discuss with their clients the feasibility of identifying and designating documents containing confidential information. Common problematic scenarios include determining how to designate emails and documents created by third-party vendors. The agreement should also account for designating oral communications. It also may be worth designating the agreement itself as confidential, depending on its contents.

Securing Confidential Information

A non-disclosure agreement should also define the standard of care required to protect confidential information. A common approach is to require the receiving party to protect the information using the same care that it uses to protect its own confidential information, but not less than reasonable care. However, depending on the sensitivity of the information, the disclosing party may want to require specific measures. For example, an addendum specifying physical and technical safeguards can be a simple way to manage this term. It may also be worth specifying which of the recipient’s employees will have access to the confidential information.

Procedures Governing Unauthorized Disclosures

Non-disclosure agreements should include a clear definition of what constitutes an unauthorized disclosure of confidential information and what the receiving party’s notification and remediation obligations are. Timing requirements for notification and specific remediation activities can also provide some assurance that risk arising from the breach will be effectively managed.

Expiration of the Agreement

A non-disclosure agreement should specify how long the agreement will remain in effect and how long the confidentiality obligations will survive. The non-disclosure agreement should typically remain in effect no longer than is truly necessary to accomplish the purpose of the parties’ interaction. Any confidentiality obligations can last long after the parties’ business has concluded, depending on the sensitivity of the information and its value to the disclosing party. A lawyer should also address what should be done with confidential information upon expiration and any continuing obligations, especially regarding trade secrets, as described above.

Remedies

Non-disclosure agreements should expressly address whether injunctive relief is available and specify any limitations or exclusions of liability.

Non-disclosure agreements are a powerful tool that can maintain competitive advantages for clients and create new business partnerships. Lawyers and clients should approach the drafting and negotiation process for a non-disclosure agreement with care.

Sean W. Fernandes

Sean W. Fernandes is an associate in Ellis & Winters LLP’s privacy & data security and litigation practices in Raleigh, North Carolina.