There are a lot of poorly drafted NDAs out there. You should avoid them like the plague and make sure you always use a well-drafted NDA.
From a practical standpoint you won’t sign an NDA every time you talk to someone. But when one party is sharing their secret sauce, the information that really makes their company valuable and gives them a competitive advantage, a well-drafted NDA should be involved.
Here are four things to consider before signing an NDA.
1. Mutual or Unilateral
The first consideration is whether your NDA is unilateral or mutual. A unilateral NDA means only one party is agreeing not to disclose the other party’s confidential information; while a mutual NDA means both party’s are agreeing not to disclose the other party’s confidential information.
This is an important consideration and the final outcome will depend on several factors including the bargaining power of the parties and whether or not both parties are actually disclosing confidential information.
2. Non-Disclosure & Non-Use Obligations
The core element of an NDA is the obligation not to use or disclose the other party’s confidential information. In most situations, the NDA will say the receiving party (a) cannot disclose the confidential information to anyone, (b) cannot use the confidential information for their own benefit, and (c) will use commercially reasonable efforts to protect the confidentiality of the confidential information.
However, it is usually a good practice to include exceptions that allow the recipient to disclose the confidential information to certain people such as lawyers, accounts, and other parties, provided those additional recipients are under a written agreement not to disclose the confidential information.
3. What Constitutes “Confidential Information”
The scope of a NDA is largely dictated by the definition of the term “Confidential Information.”
There are several ways to define “Confidential Information.” You can say all information disclosed is “confidential” or that only stamped information is “confidential.” More commonly, you’ll see a definition that describes what constitutes “confidential information” but then states that any information that a reasonable person would deem confidential is included in the definition.
You might also want to include exceptions to the definition. For example, information commonly known in your industry, or information the recipient properly obtains from some other source, should be excepted from the definition.
4. Length of Non-Disclosure Obligations
Your NDA should also include a term. If the NDA is created for exploring a potential business relationship, it will normally have a short term of about one year. If the NDA is part of a larger ongoing agreement, then the term should be for the length of that agreement.
In either event, the non-disclosure obligations should survive the termination of the agreement for an additional time period of one to five years. However, protection for statutorily protected trade secrets should survive for as long as your state’s trade secret law provides.
Bonus Tip: Look for Additional Terms
Sometimes a party will try to sneak other terms into an NDA such as non-solicitations, non-competes, transfers of intellectual property, and similar terms.
In some situations that is appropriate. But our general thought is that an NDA should be just that – an NDA. If you need to agree to those other terms, then the parties should create some other agreement, be it an employment agreement, contractor agreement, client agreement, or something similar.