Ask the Attorney: The Dreadfully Misunderstood NDA (Part 1)

By 09/23/2010
Ask the Attorney: The Dreadfully Misunderstood NDA (Part 1)

Ask the Attorney - NDA

The Legal Filigree of NDAs

A recent question in the “Ask The Attorney” column of Tubefilter led us to launch this series of articles on NDAs. Perhaps it’s because we have a soft spot for misunderstood contracts, which is true—the misunderstood part not the soft spot—because many people believe that one size NDA can fit all (or most) circumstances. We can’t change that behavior (everyone insists on using standard forms), but we can explain a few of the critical elements of an agreement.

In this first article of the series, we’ll summarize the main issues and provide a few pointers on the first of the topics: the purpose for the disclosure of the confidential information. Subsequent pieces in the series will go into more detail on some of the issues. For purposes of simplicity, we’ll use NDA to cover just about all forms of confidentiality obligations, but keep I mind that they show up elsewhere—such as the nondisclosure or confidentiality provisions of other agreements (e.g., employment agreements). OK, now, stay awake!

The Main Points of NDAs

As with many other agreements, NDAs share some basic elements but, as with other agreements, the devil is in the details. And the details are where you tailor the agreement to the circumstances.

In this series we’ll cover several topics on NDAs–the first few on the provisions of just about any NDA and then some negotiating pointers. Obviously, there are many provisions that can be important but, hey, we’re not writing an academic treatise here. Go to the law library (actually, there isn’t much that is good on NDAs that is there).

Let’s get one thing out of the way: Why not have an agreement that essentially says:

Anything I give or tell you or that you otherwise receive about my company or my project will be confidential forever and I will hunt you down and force you to watch weeks of CSPAN re-runs while dressed as a giraffe if any of that information gets out.

Well, putting aside the constitutional issue of cruel and unusual (or at least silly) punishment, you could write such an agreement, but who would sign it? Not a good thing.

To the topics:

  • Purpose: Be specific.
  • Confidential Information: Tailor the definition to the purpose. Include the usual “carve-outs” carved to your purpose and your CI.
  • Third Party Access: Those to whom the receiving party provides the CI to accomplish the purpose. Make them subject to NDAs (or other confidentiality obligations) covering this CI with provisions at least as stringent as those in the NDA in question.
  • Return of CI: Include destructin as an option and specify destruction of all information derived from the CI. Please note that some companies (e.g., banks) must keep an archival copy for regulatory purposes, so take that into account.
  • Term: From the Effective Date and for a reasonable period (longer for material financial terms). “Forever” can make an agreement vulnerable.
  • Disclaimers: The receiving party gets no rights in the CI simply because of disclosure and no obligations of a relationship is to be inferred from the existence of the NDA.
  • Remedies: Equitable remedies should be specified (i.e., you can get a TRO).
  • Negotiations/Drafting: If the document will be superseded by another agreement (e.g., a license, merger, etc.) then make certain that the two are “synchronized” (if the earlier one terminates with the new agreement, then make sure previous material disclosed is now covered).

Let’s turn to the first of these points.

Purpose: Be Specific

The defined purpose of the NDA will determine the substance of most of the other terms–the type of information that will be confidential, the other people who will have access to the information and the term. It is also one of the provisions challenged in (the few) cases on NDAs.

Yet, the standard forms often include broad language, along the lines of

[. . .]to consider a business relationship between the Parties.

In principle, this could mean that the receiving party could use the information in its internal models because it wants to compare the relative benefits of a deal with you against the proposed deal with someone else.

Besides, circumstances differ. Employment decisions have consequences different from, say, acquiring a script. Specify a purpose that says what you intend.

So, specify what the purpose of sharing the information is supposed to be. It’s not always easy, as you will see in the examples below. (We invite any readers to suggest ways to improve them or to point out their inherent weaknesses.) But just why are you doing it and what do you expect to get out of it? Here are the examples:

For both parties to consider the engagement of M. Asterix as a director of the TV Series.

This one (above) works for us, because it is pretty specific (assuming that “TV Series” is a defined term).

For the parties to negotiate for the possible engagement of Obelix LLC as the South American distributor of a certain line of products of TinTin Inc.

That works, again due to the specificity. We don’t like the phrase “to negotiate” because it implies that TinTin will retain Obelix as the distributor, but that’s another issue.

For the parties to discuss the possible sale to and acquisition by Paperinik LLC of the inflatable dartboard line of products of Hewey, Dewey and Louie Inc., such discussions to end not later than thirty days after the Effective Date.

Apart from the nepotism issues, this one works, too. Putting in the time limit for the discussions here might not be a great idea, but it would depend upon the full agreement.

OK, next time: The Definition of Confidential Information

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James C. Roberts IIIJames C. Roberts III is the Managing Principal of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group. Between the two groups there are offices in California, Colorado, the East Coast, Shanghai and Milan. He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies. Mr. Roberts speaks English and French and, with any luck, Italian in the distant future. He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California Berkeley. Have a question? Email James

This ‘Ask the New Media Attorney’ post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented without seeking the advice of counsel in the relevant jurisdiction. Tubefilter, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

(Top photo by maisonbisson.)