NDAs: 6 key sections to pay attention to

Posted 25 January 2023

In Large Business, Small and Medium Business

Today, I will focus on one of the most fundamental and widely used commercial agreements: non-disclosure agreements (NDAs). NDAs are critical tools for protecting a company’s confidential information and maintaining a competitive advantage in today’s fast-paced business environment. They are commonly used in various business transactions, including mergers and acquisitions, joint ventures, and developing new products or services to protect sensitive information such as intellectual property, including trade secrets owned by the two parties to the agreement.

However, drafting and negotiating confidentiality agreements can be a challenging process.

This blog post will provide a comprehensive overview of NDAs, including their essential elements, common uses, and best practices for negotiating and drafting these agreements.

What is a Non-Disclosure Agreement?

If you are new to the business world, an NDA, also known as a confidentiality agreement, is a legally binding contract that provides for the confidentiality of information to be shared between the two parties. Both parties will agree that what is defined as “Confidential Information” collected from them will be kept confidential by them for a specific duration.

NDAs have become unavoidable when businesses or individuals contemplate making a deal with another company. This enables parties to exchange sensitive information without the risk of it being shared by competitors.

The most common type of NDA, and the most practical for any reciprocal relationship, are mutual non-disclosure agreements.

This is what confidential information looks like according to the Midjourney AI.

Six key elements to pay attention to

When reviewing NDAs, it is crucial to consider several key factors to protect sensitive information. Here are the top things to consider in my opinion:

Defining Confidential Information

The NDA should clearly define what constitutes confidential information. This could include trade secrets, proprietary information, and other sensitive data. A good definition of “Confidential Information” in a mutual non-disclosure agreement (NDA) may be as follows:

“Confidential Information” shall mean any and all information or material that is disclosed by the Disclosing Party during the Term, whether or not owned or developed by the Disclosing Party, including without limitation, research, product plans, products, services, customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business information disclosed by Disclosing Party to Receiving Party.

This definition is broad and encompasses a wide range of information that the Disclosing Party considers confidential and proprietary information such as product plans and software, as well as business information like marketing and finances. The definition also explains that the Confidential Information is proprietary or confidential, owned or developed by Disclosing Party.

It’s important to note that confidential information should be tailored to the specific nature of the relationship and the information that will be shared to be as transparent as possible and avoid ambiguity.

How long should NDAs last?

The duration of the confidentiality obligation is crucial to consider when reviewing an NDA, given how short a business relationship can be nowadays. In today’s fast-paced business world, it is generally recommended that NDAs have a maximum duration of 5 years, with the market standard being three years, unless the information disclosed requires a long period of research and development or could be considered trade secrets.

It also is essential for the reviewer to ensure that there are no termination sections in the agreement that extend the confidentiality obligation’s duration beyond the agreed-upon time frame.

The reviewer should also be mindful that in today’s business environment, the longer the duration of the NDA, the more the receiving Party has to be aware of whether or not the data they use should remain confidential. Therefore, a shorter time can be more beneficial for both parties.

Permitted Use of Confidential Information

The permitted use of confidential information will vary depending on the nature of the information and the relationship between the parties. However, in general, the market standard for permitted uses of confidential information in an NDA includes the following:

Use for the specific purpose or project:

The NDA should specify that the recipient of the confidential information can only use it for the specific purpose or project for which it was provided. For example, if the information is related to a joint venture, the recipient can only use it about that joint venture.
Use by authorized employees:

The NDA should specify that the recipient can only the recipient’s authorized employees or representatives who need to know the information and have been informed of their obligations under the NDA to use confidential information.
Use for legal compliance:

The NDA should permit the recipient to use confidential information as required by law or a governmental or regulatory body.

It’s important to note that the permitted uses should be as specific as possible and avoid ambiguity. The permitted uses of confidential information should be clearly defined to prevent any data misuse by the recipient.

Exclusions from Confidentiality

Exclusions from confidentiality are essential to consider when reviewing a confidentiality agreement. These exclusions provide exceptions to the confidentiality obligations under the NDA and typically include the following four market-standard exclusions:

Publicly available information:

Information that is already publicly available or becomes publicly known through no fault of the recipient is typically excluded from confidentiality. This means the recipient will not be held liable for disclosing information already in the public domain or common public knowledge.
Pre-existing knowledge:

Information that the recipient already knows or has possession of before receiving it from the disclosing Party is typically excluded from confidentiality. This means that the recipient will not be held liable for disclosing information they already knew before receiving it from the disclosing Party.
Independent development:

Information that the recipient independently develops without using the confidential information received from the disclosing Party is typically excluded from confidentiality. This means that the recipient will not be held liable for disclosing information they developed without using the confidential information provided by the disclosing Party.
Required by law:

Information that must be disclosed by law, a court or administrative order, or a governmental or regulatory body is typically excluded from confidentiality. This means that the recipient will not be held liable for disclosing information if they are compelled to do so by law.

The exclusions should be clearly defined to prevent confusion or misunderstandings regarding the confidentiality obligations under the NDA.

Independent Development Clause

The NDA should include a clause that allows the recipient to independently develop similar technology or products without breaching the NDA. This could look like this:

“The Disclosing Party acknowledges that the Receiving Party may develop, acquire or have access to similar technology, products or information independently, or receive such items from a third party without breach of this Agreement, so long as the Receiving Party does not use any Confidential Information of the Disclosing Party for such development, acquisition, or access.”

This clause is vital to protect the recipients, especially if the two parties have similar products or services.

Return or Destruction of Confidential Information

The Return or Destruction of Confidentiality Obligations clause is a provision in a non-disclosure agreement (NDA) that lays out the process for the recipient to return or destroy the confidential information received under the NDA upon request or upon the termination of the NDA. A sample clause that allows the parties to keep a copy during the normal archival process of the receiving Party or to comply with laws could be:

“Upon request by Discloser, or upon termination of this Agreement, Recipient shall promptly return or destroy all Confidential Information of Discloser in its possession or control. Recipient may retain one copy of the Confidential Information solely for archival purposes and to comply with legal requirements, but such copy shall be subject to the confidentiality obligations of this Agreement.”

This clause establishes the recipient’s obligation to return or destroy the confidential information and acknowledges that the recipient may retain a copy for archival purposes or to comply with legal requirements. Still, such a copy must remain subject to the confidentiality obligations of the NDA.

In conclusion, reviewing NDAs is crucial to protect confidential information and should be done with care. Understanding the terms of an NDA and how they will be enforced before agreeing to it is essential. These top 6 things to consider when reviewing an NDA should help ensure that your confidential information is better protected and that your reviewing process is more refined in the future.

Need help with your NDAs? Contact me!

For more information on this topic, feel free to take a look at the following resources:

Me Renaud Laliberté, LLB, CIPP/C, CIPP/E