By: Mark Magas  [3/23/22]

A non-disclosure agreement (“NDA” or “confidentiality agreement”) is a legally enforceable contract that creates a duty for one or more parties to keep certain information confidential. [1] The party disclosing the confidential information is typically called the “Disclosing Party,” and the party receiving the confidential information is typically called the “Receiving Party.” Although NDAs are commonplace when engaging in many types of business transactions, you must still carefully review the terms of the agreement. Many NDAs are poorly written or have unnecessary terms that may create future legal headaches. These are the key aspects of an NDA:

1. Mutuality

An NDA may be either one-way or mutual. In a one-way NDA, only one party is the Disclosing Party. One-way NDAs are typical in agreements between employers and employees and other situations where only one party needs to provide confidential information. By contrast, in a mutual NDA, both parties may be at some times the Disclosing Party and at other times the Receiving Party. Mutual NDAs are typical with joint business ventures and other situations where both parties need to provide confidential information. A one-way NDA is preferable to the Disclosing Party where only one party needs to provide confidential information because there is no reason for the Disclosing Party to accept unnecessary confidentiality obligations.

2. Purpose

The purpose of sharing confidential information under the NDA should be stated clearly. For example, a purpose might be “for the Receiving Party to perform website development work for the Disclosing Party,” “for the Receiving Party to manufacture a prototype for the Disclosing Party, or “for the Parties to enter into a potential distribution agreement related to Product X.” Other parts of the agreement may reference this stated purpose to better protect the Disclosing Party by limiting the Receiving Party’s use of the confidential information. An NDA may also provide that confidential information may only be shared with only those individuals at the Receiving Party who reasonably need to know the confidential information in connection with the stated purpose.

3. Definition of Confidential Information

Defining what constitutes confidential information is inherently one of the most important parts of an NDA. The Disclosing Party typically seeks a broad definition to provide as much protection as possible. For example, a broad definition might include any proprietary, technical, financial, or other non-public information shared under the agreement. On the other hand, the Receiving Party typically seeks a narrow definition to limit their obligations to maintain confidentiality. For example, a narrow definition might require that confidential information be limited to certain sensitive topics, such as financial data of a company from the last two years or technical information related to a specific product.

Additionally, certain types of information are typically excluded from the definition of confidential information, such as information that is (a) is publicly available, unless the information became publicly available due to a breach of the NDA; (b) was already known by the Receiving Party; (c) was independently developed or received from a third-party by the Receiving Party; or (d) required to be disclosed under a court or other legal proceeding. However, with element (d), an NDA may still require the Receiving Party to provide notice to the Disclosing Party that such information must be shared and take steps to mitigate any harm from the disclosure or permit the Disclosing Party to oppose its disclosure.

4. Procedures for Designating Information as Confidential

An NDA may require parties to follow certain procedures to designate information as confidential. For example, a narrowly written NDA may require that information must be shared in writing and be specifically marked “Confidential.” As another example, a narrowly written NDA may require that information shared orally be summarized in a written report and designated as confidential within a week of disclosure. By contrast, a broadly written NDA may not have any requirements for designating information as confidential.

5. Who May Receive Confidential Information

Another key aspect of an NDA is defining who is permitted to receive confidential information. The first thing to consider is who at the Receiving Party actually needs to know the confidential information. If the Receiving Party is a small company with only a few employees, it may be fine to have no restrictions on access within the company. However, if the Receiving Party is a large corporation with hundreds or thousands of employees, it may make sense to limit disclosure to certain employees, such as C-Suite executives, employees within a certain department, or even specifically enumerated individuals.

You must also consider whether partners, affiliates, contractors, or other entities or individuals associated with the Receiving Party are permitted to receive the confidential information. This may be necessary, for example, if the Receiving Party employs technical expert consultants to assist on a project. Typical provisions may allow sharing confidential information with such third parties only if sharing the information is necessary to further the purpose of the NDA, the third parties are bound by NDAs that are no less restrictive than the NDA at hand, and the Receiving Party provides notice to the Disclosing Party.

6. Consequences for a Breach

If the Receiving Party or any associated third party breaches an NDA, the Disclosing Party will usually seek an injunction to prevent further unauthorized disclosure of its confidential information. An NDA will typically include a provision where both parties agree that irreparable harm is presumed, which makes it more likely that a court will grant the injunction.[2]

One other clause to be careful with is a liquidated damages clause. Liquidated damages is an agreed upon amount of money that parties agree should be awarded in the event of a breach. This clause is often used in situations where actual damages are difficult or impossible to prove.[3] As the Disclosing Party, agreeing to a liquidated damages clause may be risky in that it may prevent recovering the actual damages incurred, which may end up being significantly greater than the liquidated damages amount. To the receiving party, the amount may be overstated.

7. Duration

Although there is no standard duration for an NDA, the duration must be reasonable.[4] NDAs typically last for anywhere between 1-5 years. Setting a proper duration is context specific. In some instances, a duration of a specific number of years is appropriate. In other instances, the duration may be tied to the specific purpose of the NDA. Different types of confidential information may be subject to different confidentiality obligations. For example, trade secrets are typically required to be kept confidential indefinitely.

An NDA may also include a provision for the Receiving Party to return or otherwise destroy confidential information after the NDA expires. The Disclosing Party might want to include this provision to help safeguard their confidential information from inadvertent disclosure. But the Receiving Party should be wary of burdensome obligations. For example, an obligation to destroy confidential information after an NDA expires is not always so simple. If the Receiving Party uses cloud computing infrastructure to manage its data, it can be extremely difficult to ensure that all copies of the confidential information are deleted from the cloud. In such situations, it is common for cloud-based data to be excluded from requirements to destroy confidential information.

8. Jurisdiction and Choice of Law

The jurisdiction clause controls where an NDA may be enforced. Parties will usually agree to jurisdiction in a specific judicial district, state, or country. Alternatively, parties may agree to arbitrate any disputes relating to the NDA, waiving their right to pursue the disputes in court. In some instances, parties may agree to multiple jurisdictions depending on who breaches the agreement (i.e., the jurisdiction will be where the Disclosing Party is located).

Separately, the choice of law clause controls what jurisdiction’s law will be used to interpret and enforce the NDA. This may be different than jurisdiction. For example, the parties could agree to jurisdiction in the Northern District of Illinois, but select Delaware as the Choice of Law. This is important because some states have different laws surrounding NDAs.[5]

9. Intellectual Property Rights

It is often necessary for information related to intellectual property to be shared under an NDA. For example, you may need to share information related to patents, copyrights, or trade secrets. As the Disclosing Party, it is important to specify that no rights to the intellectual property are being granted under the NDA and that proper protections are put in place to safeguard the intellectual property rights.

Furthermore, rights to the intellectual property, and in particular trade secrets, may be lost if a party fails to take adequate steps to protect the confidential information. Separate from the general term of an NDA, discussed above, the confidentiality of trade secrets shared under the NDA should be protected indefinitely.

10. Prior Disclosure

NDAs may be entered into at various stages of a business transaction or engagement. While it is best practice to always have an NDA in place before sharing any confidential information, this is not how it always works in practice. If prior disclosures have already been made, it is best to specify that all such prior disclosures will be covered under the NDA.

To learn more about Dunlap Bennett & Ludwig and how we assist you, contact us by calling 800-747-9354 or emailing

  [1] Non-disclosure agreement, Wex (Legal Information Institute), https://‌‌cornell.‌edu/‌wex/‌nondisclosure_‌agreement (accessed Jan. 18, 2022).

[2] Irreparable harm is a key factor in whether a court will grant an injunction. See Winter v. NRDC, Inc., 555 U.S. 7, 20 (2008).

[3] Liquidated damages, WEX (LEGAL INFORMATION INSTITUTE), https://‌www.‌law.‌cornell.‌edu/‌wex/‌liquidated_‌damages (accessed Jan. 19, 2022).

[4] Seee.g.Lasership, Inc. v. Watson, 79 Va. Cir. 205, 215 (Cir. Ct. 2009) (holding that NDA is unenforceable in-part because of indefinite duration).

[5] E.g., Non-disclosure agreements in California are prohibited from preventing the disclosure of information related to sexual assault, sexual harassment, or discrimination based on sex. https://‌leginfo.‌legislature.‌ca.‌gov/‌faces/‌billTextClient.‌xhtml?‌bill_id=‌2017‌20180SB820

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Posted in: Intellectual Property

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