The Complexities of Non-Disclosure Agreements

A confidentiality agreement, also referred to as a non-disclosure agreement (NDA), has a variety of uses. A company will often require that employees and independent contractors do not disclose or make use of the company’s confidential information without proper authorization. In some cases, businesses or individuals that are entering into discussions about a possible business transaction may use an NDA to prevent the other party from disclosing any confidential information they may have access to during negotiations. In any instance, NDAs should be reviewed by an attorney experienced in such agreements to ensure that they adequately protect parties’ interests.

Protect Yourself Thoroughly

Often, NDAs are written in such a way that they only protect against disclosure of confidential information generally. However, they should also prohibit the parties from using confidential information accessed to further a business transaction for unsanctioned purposes. Employment NDAs, for example, should be composed in a way that prohibits the use of confidential information in any way other than what is necessary to execute the job that the person receiving the information is engaged to perform.

When negotiating a business transaction, the parties should draft an NDA that prevents disclosure of confidential information gained for the purposes of furthering that transaction. However, the NDA should also prevent the parties from acting upon the confidential information for any other purpose such as making business decisions in other areas that might harm the other party. Outside disclosure of confidential information is not the only serious threat that may be posed in such situations.

Definition of Confidential Information

NDAs must have reasonable restrictions to be enforceable. First, the defined confidential information must have a reasonable scope. A properly drafted NDA will include certain exclusions that ensure that only truly confidential information is covered. For example, information that is reasonably available to the public should be excluded from the information covered by the NDA. Other information that should be excluded includes information that the parties possessed before entering into the agreement, information learned from a third-party, and information that one party learns on its own without the assistance of the other party’s confidential information.
A superior NDA properly defines what is considered confidential and what is not. This not only protects each party from having its confidential information improperly exploited, but it also protects them from being restricted from the appropriate use of information that should not be covered.

Reasonable Time Limitation

Like non-compete agreements, confidentiality agreements generally cannot last forever. The obligations of confidentiality must have an expiration date, and the effective period must be reasonable. Reasonableness is a flexible standard that is usually dependent on the type of information being protected. However, there is an exception to this rule: trade secrets.

Because a trade secret can last forever, the obligation to neither disclose nor exploit information deemed a trade secret can be permanent. This assumes that the rightful owner of the trade secret takes reasonable steps to prevent the trade secret from being compromised in other ways. Once a trade secret is no longer secret, it loses the permanent protection that status afforded it.

NDAs that encompass information that is not a trade secret, if they are not drafted with an appropriate expiration date, may be held by the courts to be unenforceable. To the contrary, and NDA that does cover trade secrets may offer too little protection if the trade secret is not defined and expressly protected in perpetuity.

Defend Trade Secrets Act

Trade secrets were once covered entirely by state law. However, in 2016 the federal government passed the Defend Trade Secrets Act. This statute made the misappropriation of trade secrets a federal crime with federal penalties. The statute also imposed very specific requirements for the confidentiality agreements concerning such secrets.

There are many complexities involved in a confidentiality agreement. Properly drafting an NDA or properly assessing one someone else has drafted prior to signing it are important tasks that should only be undertaken by competent legal counsel. Call the lawyers at McNeelyLaw for assistance with NDAs and all other contract and business needs.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.