NDAs — A First (And Critical) Step When Doing Business
Gone are the days when business discussions and information sharing occurred in the form of a formal, structured meeting. Today, information flows freely and all of us rely on a wide-ranging, ever-growing mix of communication vehicles — email, videoconferencing, social, text, and more.
Given this ease, the Non-Disclosure Agreement (NDA) has become more prevalent and more important than ever.
The scope of information that one business can disclose to another is quite broad and can include such things as proprietary technical information, product plans, new or contemplated product features, customer and marketing information, pricing information, product designs and plans, and software roadmaps. That’s significant!
Generally speaking, an NDA protects a company’s disclosure of confidential or proprietary information during discussions and negotiations regarding a potential business relationship (i.e., the discussions that lead up to a more formal contractual arrangement). During this preliminary period, when businesses are evaluating the benefit of working together, neither side – for the most part – has an obligation to the other – unless an NDA has been signed.
Absent an NDA, if a business receives confidential information from another business, the receiver (with limited exceptions) is generally free to disclose that information without restriction. The NDA enables the parties to stipulate their respective rights and obligations and clearly defines permitted uses and disclosures.
Like I said, the risk of proceeding without an NDA is significant! The often-overlooked NDA represents a critical first step in any business arrangement, whether you are selling or buying products or services or pursuing some other business relationship.
NDAs Come In All Shapes And Sizes
Certain elements are more or less standard in every NDA, such as the applicable standard of care, permitted disclosures, and the requirement to return or destroy confidential information. From time to time, however, unusual or one-sided terms may creep in. (In general, one-sided terms impose restrictions or obligations on just one party.)
None of this, however, is set in stone. NDAs can be negotiated, like any other legal document. With that in mind, here are five things to keep in mind when considering an NDA.
#1. No deeper than the web site.
In the absence of an NDA, discussions should be limited to general, high level information that’s publicly available. One way to determine whether certain information should be considered “confidential” is to ask, “Would the company be willing to reveal this information on its web site?” If the answer is “no,” and you don’t have an NDA in place, you’re jeopardizing your company’s ability to keep that information secret.
#2. Two-way is the best way.
When you receive a request to sign another company’s NDA, the first thing to consider is whether the NDA protects disclosures by both parties (i.e., is it a two-way NDA?). If it doesn’t, immediately ask for the two-way NDA.
I rarely encounter a scenario where two parties are engaging in an ongoing business relationship, yet only one of them is disclosing confidential information (the notable exception being the sale of a business to a potential buyer). It’s reasonable to request the two-way NDA.
A request for a two-way NDA achieves two purposes. First, it assures that your disclosures will be protected. Second, because the obligations apply equally to both parties, the agreement is likely to be fair, evenhanded, and absent burdensome obligations on the receiving party.
#3. Don’t wait until the last minute.
I’ve seen plenty of opportunities missed because the salesperson showed up at a company (pre-COVID!) without an NDA in place and was asked to wait in the lobby until the NDA was signed. Getting the NDA out of the way ahead of time not only ensures that your disclosures are covered, but it also avoids unnecessary delays in the sales process. Teach your folks to complete the NDA early on or include it as a required item for setting up an account in your CRM.
#4. Avoid “follow-up writing requirements” for oral disclosures.
Some NDAs require that, when making oral disclosures, a party must state that “the information is confidential” and/or follow up the disclosure with a written summary within a short time period, such as 15 days.
This requirement is especially impractical if a significant amount of information is involved. The individuals speaking with each other (e.g., sales people, engineers) will have no awareness of these specific terms (they trust that “Legal” has negotiated reasonable and practical terms), and it’s highly unlikely that anyone involved will remember to state “these disclosures are confidential,” or to follow up the discussion with written correspondence.
Instead, ensure that the definition of “Confidential Information” includes “information that a reasonable person would consider confidential in this business context” or something similar. At the very least, incorporate terms indicating that failure to identify disclosed information as confidential does not constitute a waiver of confidentiality overall.
#5. Make clear that personal or highly sensitive information is not included under the NDA.
When engaged in preliminary discussions regarding a potential business relationship, neither party should be disclosing personal information (e.g., names, addresses, bank account information, or health information). This degree of disclosure generally requires additional terms and conditions that will ultimately be covered in the contract governing the ongoing relationship or in an ancillary contract, such as a Data Processing Addendum or a Business Associate Agreement.
In cases where it’s necessary to process this type of information so that a business can evaluate or test another’s offering, a vendor should insist on receiving “test” data that doesn’t include any actual personal or sensitive information.
Business conversations between prospects and potential partners occur in numerous settings. If you are disclosing information that you wouldn’t post on your company’s web site, make sure an NDA is in place. Treat these commonly encountered contracts with the respect they deserve!