Four Key Concepts to Know About Non-Disclosure Agreements

In business relationships of all kinds, parties may have the need to keep certain information generally confidential, while simultaneously divulging that information to officers, employees, or unrelated third parties. Sharing information between employees of a company is typically necessary for the company to perform its business. Also, unrelated parties, like two different companies, may need to share confidential information with each other. This can happen as part of exploring a proposed buy-sale transaction, agency relationship, joint venture, purchase and sale of a company, development of product, joint research and development, or other contemplated action. Confidential information can take many forms, but it is usually associated with intellectual property owned by a party.

Regardless of the context, when a person or company has invested time and resources in developing confidential and proprietary information relevant to its business, it is clearly important that this information not be disseminated. Serious detriment would occur if this information were shared with a third party who then used it to compete against the original holder of the information or gave it to others that used it for their own ends. A non-disclosure agreement, often called an NDA, can be very helpful in protecting a business from this risk.

At the law firm of Racine Olson, our experienced attorneys have been helping business clients protect their confidential information and companies for over seven decades. Our goal is to provide the best counsel and insight possible, drawing on lessons learned and insights gleaned from the many transactions we have assisted with over time.

A non-disclosure agreement is appropriate when confidential information may be shared and needs to be protected. It is a written agreement, normally in the form of a contract, signed by one or both parties. The contract is usually drafted to:

• explain the background of the intended discussions and sharing of information;
• specify what is and is not confidential information;
• limit a party’s ability to use received confidential information for its own benefit; and
• provide for consequences and penalties from breach of the agreement.

NDAs can be either unilateral or mutual. A unilateral NDA is used where one party will receive confidential information from the other party, but will not be sharing any confidential information of its own. This is often used when an individual is talking with a company, but it can be used in many contexts. The key factor, when using a unilateral NDA, is that one party is willing to agree to tight restrictions without getting a reciprocal agreement from the other side.

In contrast to a unilateral NDA, a mutual NDA is drafted so that both parties acknowledge and agree that they may obtain confidential information from the other. Normally, both parties have the same (or very similar) restrictions and consequences if they inappropriately use the other party’s confidential information.

A key aspect of an NDA is its definition of exactly what constitutes “confidential information.” Precisely defining this is a balancing act. Too narrow of a definition risks harming the disclosing party by allowing the other side to use information that the discloser thought was confidential. Making the definition too broad risks harming the one receiving the information, since it could be claimed to cover information that the recipient needs to conduct its own affairs. Courts will review the document for reasonableness, and a definition that is too broad may cause a judge to look unfavorably on that provision or even the document as a whole, especially if other clauses are also too broad or seem to be anti-competitive. Since each company and transaction is unique, the parties should always review the provisions and analyze whether their interests are covered by the contract.

Confidential information can include a broad array of items; some examples of listed items include documents, records, models, drawings, processes, client lists, marketing plans, product plans, software, prototypes, formulats, results, asset lists, work product, studies, and many other types of items.

From a practical perspective, a practice that can be especially helpful is to print, on all information meant to be confidential, the word “CONFIDENTIAL” or something similar, so as to avoid any doubt as to the intent for that information.

We have assisted numerous clients to analyze their businesses and the requirements for discussions of different types, to consider what information should be confidential but still disclosed, and how they can tailor their NDA to protect them while still allowing them to accomplish their business objectives.

A good contract usually specifies some of the actions that a party may take if the other party breaches its obligations set forth in the agreement, and an NDA is no exception. In some cases, monetary damages may suffice. However, the vast majority of the time, disclosure or dissemination of confidential information could have a massive detrimental impact on the party seeking to keep it confidential and monetary damages may be insufficient. Also, it may be impossible to quantify the damage that such an action would cause. Accordingly, many NDAs include a provision specifically allowing for an injunction to be issued by a court, so as to prohibit a party from taking such action or to prevent the party from continuing to breach the agreement.

Our team of Idaho lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation, or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.