Intellectual Property Law Knowledge Center

Key Aspects of Non-Disclosure Agreements Usage and Potential Pitfalls

May 19th, 2021

By Stephen E. Murray

Non-disclosure agreements, commonly known as NDAs, are a ubiquitous type of contract in many industries. NDAs can be useful in all sorts of situations, such as when companies look to work together on joint projects, when a party seeks investors, when an employee needs to use confidential information on the job, when a customer shares private data, or when parties agree to a legal settlement. It is important to craft these agreements carefully to protect your sensitive or confidential information.

The main goal of an NDA is to protect confidential information, so the most essential thing it must include is a defined scope of what is covered. This may be as broad or as general as you wish, so long as it is reasonable. If it is too onerous or unreasonable, a court will be unlikely to uphold that agreement. There are several types of common exclusions from confidential information, which include information that is: (1) already known to the receiving party, (2) publicly available, (3) independently developed, and (4) learned from a third party. The policy behind these general exclusions is clear – for example, it is unfair to prevent a party from using information that it already knew or that others can use freely.

Another important provision has to do with labeling confidential information. It is to the benefit of all parties that confidential information is clearly and accurately identified as such. This avoids confusion and the potential for accidental misuse or disclosure. And if there is a dispute? There should be a mechanism for a receiving party to challenge confidentiality designations, but be sure that the information remains confidential while the matter is being resolved, in case it turns out the receiving party was wrong.

A very important consideration is what happens to intellectual property (patents, know-how, trade secrets, trademarks, etc.) as part of the agreement. When parties bring their own IP into a project, the NDA will usually clarify that ownership is retained and no licenses are granted unless absolutely necessary. But what about IP that comes about as a result of work under the NDA? That can be assigned in any matters the parties desire, but it should be thorough and explicit because  a court deciding the matter down the road might otherwise reach a conclusion the parties did not have in mind.

Another critical aspect of NDAs deals with what happens when the contract is over. Information usually must be kept confidential for some period of time afterward. Only reasonable time periods will be enforced, and take into consideration the shelf life of the information and the particular industry. Disclosing parties should also be sure to get their information back (or see to its destruction) when the agreement expires. The NDA should require the receiving party to provide written certification about the return or destruction – otherwise the disclosing party may not be able to confirm that certain information is still lingering out there for potential misuse.

Finally, like any contract, make sure the NDA has adequate consideration exchanging hands. This is especially important in agreements between employers and employees. An NDA is signed at the time of hire is usually safe because the very fact of employment can be viewed as consideration. But if the employee signs an NDA down the road, they will ordinarily need to receive something of value to make a valid contract. Continued employment is not generally deemed sufficient in such cases.

If you have questions about non-disclosure agreements or any other matters involving intellectual property, please contact me or one of the other IP attorneys at Panitch Schwarze at 888.291.5676.

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