Eclipsing Your Trade Secrets Through Non-Disclosure Agreements

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Because we don’t stop here at Weinstein + Klein (despite having both an earthquake and solar eclipse in the span of a week), let’s pick up right where we left off. Last time we gave you an overview of various agreements that you’ll come across and (hopefully use) during day-to-day operations: employment agreements, independent contractor agreements, confidentiality agreements, and client services agreements. In this edition, the spotlight is on the most secretive agreement of all: non-disclosure agreements (or, “NDAs”). NDAs are known by various names such as confidentiality agreements, confidential disclosure agreements, and proprietary information agreements. Regardless of what you call them, their overall role is the same:  safeguarding sensitive business information. Let’s pull back the curtain on NDAs shall we?

What’s an NDA Anyway?

We’re sure some of you, if not most of you, have at least a vague idea of what an NDA is, even if you haven’t seen or used one in your business yet. From Hollywood to Silicon Valley, NDAs are frequently mentioned and depicted in various forms of media. But what exactly is an NDA? Well, we can tell you what they’re supposed to be: an agreement to protect, keep confidential, and not disclose confidential information. That’s basically it in a nutshell. You might also use what’s called a “Proprietary Information and Inventions Agreement” or “PIIA”, which is an NDA on steroids. PIIAs have a lot more detail with respect to ownership of intellectual property and inventions, can oftentimes include restrictive covenants like a non-compete or non-solicit, and are overall a bit more complex than a run-of-the-mill NDA. Regardless of which type of confidentiality agreement you use, the key is the level of specificity and breadth you include in its terms. For example, if you are a tech startup, the definition of “confidential information” and “proprietary information” is going to be (or should be) incredibly broad, and you should pay very close attention to terms regarding ownership of your intellectual property and inventions.

NDAs are used in a variety of contexts as well: whether it’s to protect the exchange of confidential information in advance of an anticipated joint venture, business sale, or other transaction, or to go hand-in-hand with an underlying employment or independent contractor agreement. It also comes up in the context of disputes (although, when it comes to employment disputes, be careful – NDAs for harassment and discrimination claims have been a no-go for a while now).

Point is – NDAs have many forms and differing provisions and the version that’s best for you will depend on why you’re using it. Let’s dive deeper.

Key NDA Provisions

There are several key provisions that you should see in an effective NDA: (1) scope; (2) ownership of intellectual property; (3) term/duration; (4) permitted disclosures; (5) remedies for breach; and (6) disclaimers. Of course, NDAs will include more than these, but for purposes of this blog, we’re highlighting the terms that you should make a bee-line for.

Scope: You want to make sure that the definition of confidential information is broad enough to protect you, or, if you’re the party on the other side, isn’t so broad that it defeats the purpose of even engaging in the anticipated transaction. And make sure the definition excludes standard carveouts – like things that are publicly known already – as well as anything protected by statute (i.e., New York recently changed its rule and required additional carveouts for certain employee work product created outside business services).

Intellectual Property: Protection and ownership of IP is critical. Ensuring that your IP is protected, and that disclosing the “secret recipe” doesn’t give ownership away, is fundamental. Takeaway: don’t make it easy for someone to steal your stuff.

Term: when does the confidentiality restriction begin and end (if it does end . . .)? Generally speaking, we like NDAs that govern confidential information even if it was disclosed before the agreement was signed. This is just good practice. We also prefer indefinite NDAs in most scenarios. You don’t want your information out there in 3 years and 1 day. Again, what is the purpose of the NDA? What information is being disclosed? In some cases, it’s OK if the confidentiality obligations fall away after a period of time.

Permitted disclosures: Permitted disclosures are just what they sound like – the NDA should spell out situations where you can disclose information: whether it’s to comply with certain laws or pursuant to a court order. But if the other side is going to disclose your information, do you get a contractual right to advance notice? 7 days? 30 days? Does the other side have to take reasonable steps to only disclose exactly what is necessary and no more?

Disclaimers: We love this one. NDAs are meant to encourage the free flow of information so that a decision can be made (buy the business, enter into the partnership, etc.). When the NDA is being used for a business transaction or provision of certain services (as opposed to hiring someone), it’s helpful to have a disclaimer in there regarding the truth, accuracy, and completeness of your information. That way, if the other side takes that information, relies on it, and the information was stale, you’re not on the hook.

Remedies for breach: NDAs will often have provisions regarding the ability to go to court for an injunction, or provide for liquidated damages, which are reasonable estimates of damages incurred as a result of the breach.

BONUS TIP: Arbitration is all the rage these days, and that’s OK to have for NDA disputes. But always remember to have a carveout for injunctive relief (like a restraining order or similar court order). Why? Because if someone takes your confidential information and starts reading it aloud in Times Square, monetary damages may not be enough – you also likely want a court order stopping them from doing that, requiring that they turn over the information, and more.

Understanding these provisions will help you understand what your exact obligations are, for how long, and what happens in a worst-case scenario.

Common NDA Pitfalls and Tricky Provisions

Now for the dark side of the moon/NDAs. NDAs can sometimes work like a trojan horse. The purpose should be to protect confidential information, and yet, drafters will sneak in terms like non-competes. Imagine entering into a contract to provide a service, and signing what you think is a standard NDA, only to find that you’re now subject to a broad non-compete or other unduly restrictive covenant. The NDA might also be, as a whole, entirely one-sided when it should be mutual. It could also include an arbitration clause where only one party has the ability to choose to go to arbitration or not, while you might prefer mutuality or no arbitration at all. Similarly, the NDA may include an overly broad indemnity provision that goes outside of the terms of the NDA. And to revisit liquidated damages, a problematic NDA imposes excessive liquidated damages that aren’t actually liquidated damages at all, but an unenforceable penalty. At the end of the day, the NDA should be tailored to your business, based on your individual business needs, and the transaction at issue.

So there you have it: the secret is out, and NDAs are in. Don’t let your genius idea get eclipsed by sneaky contract drafters. Your NDAs should protect you, not hurt you. With that being said: use them, read them, understand them, and, as always, if you’ve got questions, you know we’ve got answers. 

~ The W + K Team

ABOUT WEINSTEIN + KLEIN P.C.

Established in 2019, Weinstein + Klein is a boutique law firm focused on labor and employment law, business matters, and litigation. W + K works with businesses, individuals, and entrepreneurs to protect their legal interests. In addition to advising clients on employment matters and working with businesses to minimize their risk of litigation, we advise small businesses and start-ups on various business law matters. 

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