Protect Your Golden Goose with Non-Disclosure Agreements.

There are numerous instances where one may need to share confidential information as part of your business dealings. But before you jump to sharing your “secret sauce” or the parts of your "golden goose", consider whether a non-disclosure agreement (a.k.a. NDA or confidentiality agreement) makes sense.[1] It’s typically best to make sure the recipient of confidential information is bound to keep the information secret and not use it in a way that hurts you. There are a variety of circumstances where it is crucial that NDAs are used, such as when:

• Sharing or discussing a business idea, an invention, or trade secrets with prospective investors or partners
• Releasing marketing or financial information to prospective buyers of part or your entire business
• Presenting a new product of technology idea not yet made generally public (e.g. presenting to a possible buyer or licensee)
• Employees’ job duties make it necessary to access or use confidential information
• Working with consultants or other business professionals who will or need access to confidential information
• Receiving services from a company or person who will have access to confidential information when providing those services

The above are all instances where confidential information must be conveyed or will be available to the recipient, but where business owners or insiders want to ensure that the recipient does not share or use the confidential information without the company’s approval.[2] As such, NDAs can be a very effective tool.

Every NDA should have the following key elements:

• Definition of what is being deemed confidential
• Scope and extent of the confidentiality being required of the recipient
• Exclusions from the confidentiality, if any
• Term, or time period, of the confidentiality
• Identification of the parties to the agreement

Defining what is to be kept secret (the “confidential information”) is of extreme importance. It would be ill-advised to use generic terms. However, the NDA must define the confidential information enough to protect it, but not too much as to expose it before the NDA is signed in the first instance. One must strike the right balance for one’s particular “secret sauce.”[3] Typically, the discloser prefers the broadest definition possible, while the recipient prefers a narrowed definition so it’s less likely there could be inadvertent breach of the NDA.

The heart of the NDA is the recipient’s obligation to keep the sensitive information secret and not use the information for an unauthorized purpose. This means that the recipient must take reasonable steps to not let others not contemplated by the NDA receive or have access to the confidential information. This also means that the recipient simply can’t use the information without authorization from the discloser and certainly not to the discloser’s detriment. In other words, it’s best to define the purpose of why the confidential information is being disclosed and to limit the recipient’s use of the information to that purpose only.

Exclusions are circumstances when the recipient has no obligation to protect the confidential information and are intended to address instances where it would be unreasonable or burdensome for the recipient to keep the information confidential. One such example is when the recipient has discovered or created the information independent of and prior to any related dealings with the disclosing party. Other common exclusions include information that is already publicly known (without any wrongful release by the recipient), already known to the recipient, disclosed to the recipient by a third party who has no obligation to keep the information confidential, or required to be disclosed by a court of law.

While there may be different rules of thumb for different industries or businesses, what time period is reasonable varies and should be evaluated on a case-by-case basis. The confidentiality obligation often ends when the sensitive information is made public anyway. As the recipient, it’s best to get a definite term when the agreement ends, especially to avoid ongoing obligations to police the secrecy of the confidential information.  It is common to use a future event, instead of a pre-defined numerical time period to trigger the end of the confidentiality obligation.

Also, consider whether other miscellaneous provisions should be added to the NDA:

• Who is responsible if there is a breach of contract? Should indemnity provisions be included?
• Which state should have jurisdiction if the agreement is breached?
• How should confidential information be destroyed when the NDA is terminated? What other steps are necessary at the termination of the NDA?
• Are there any unique obligations or circumstances that should be addressed?
• Is it important to prevent the possibility of the recipient soliciting or hiring the discloser’s employees for a certain period of time?
• Is it crucial to the discloser’s business to be able to get a court-ordered injunction to stop breaches rather than only the prospective of getting money damages for breaches?

Notably, it is important that any NDA makes clear that the disclosing party is not giving up any rights (such as under intellectual property laws) to the confidential information simply by disclosing it to the recipient, during the term of the NDA and even after it has been terminated.

While the use of NDAs are just one way to protect your confidential information, they are commonly the easy go-to options for small and large businesses alike. NDAs can be the difference between whether your "golden goose" may take flight and leave you with devastating financial loss. Simply put—always consider whether an NDA is appropriate to protect your “secret sauce”. Be proactive and protective, and as they say: better safe than sorry.

— By Keobopha Keopong, Esq., Barnes Law

Keo Keopong is an associate attorney with Barnes Law, licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] NDAs can be one-sided or mutual. Mutual NDAs are used in situation where both sides will be sharing confidential information. It is unnecessary to use a Mutual NDA unless there is a reasonable likelihood that both parties will in fact share confidential information.

[2] NDAs may not be make sense in some situations where NDAs may just deter prospective investors, buyers, and the like. For instance, NDAs may not be feasible for some startups who are raising money from venture capitalist investors, as some may simply refuse to sign NDAs. Consulting a knowledgeable business attorney for your individual situation/needs is highly advisable.

[3] NDAs themselves aren’t always confidential, so beware of sharing too much detail about your confidential information in trying to description what confidential information is in the first place.