For startups, for any business, NDAs are one of the building blocks of successful commercial cooperation.
This is especially true in the tech world, but applies in any context where the secrecy of how you do business, what you know or what you have, is important, a key business asset. Your pricing can be a key asset, as can the source of your raw materials, how you manufacture, how you develop business, where you intend to expand and how, the identity of your team and its members’ compensation. . .
The list goes on.
You want to be able to share some of the key assets of your business without the person you share them with copying them or otherwise using them in competition with you.
That’s where a Non-Disclosure Agreement, or NDA, comes in. You sign one with a potential business partner to help ensure that your trade secrets will not be used by it. It signs one with you to protect its trade secrets. A mutual NDA, like the one below, protects both parties if they are in good faith.
Of course, this is a form, and not suitable for every context. For a tech company employee, for example, an Invention Assignment Agreement and NDA is often signed, rather than a simple NDA.
Also, NDAs are not foolproof, meaning that a lying cheat can still breach an NDA that it signs with you. No contract works in a foolproof manner when confronting bad faith.
And no form contract is good in all facts and circumstances. If your read of the clauses here and the included explanations suggests to you that one or more of them don’t work for you, you should check in with a commercial lawyer.
But this form and its explanations
which are included in block quotes like this
will give you a good sense of what you are signing on to when you sign an NDA with a business partner.
MUTUAL NONDISCLOSURE AGREEMENT
THIS MUTUAL NONDISCLOSURE AGREEMENT (the “NDA”) is by and between _____________________________, a business entity
an entity which is a party to a contract is normally identified by the name on its constitutive documents and its State of origin (e.g. Delaware)
with an address for notices at ________________________, ______________________, (“Company”), and _______________________, an individual with an address for notices
addresses should be included for both parties to help identify them and to facilitate giving any notice required or permitted under the Agreement
at ____________________, _____________________, (“Individual”)
Please note that a “dba” is not an entity. An individual doing business as another name or as a sole proprietor is still an individual
and is dated as of _____________, 201__ (the “Effective Date”). Company’s worldwide subsidiaries and affiliates shall also comply with and benefit from this NDA.
If these related entities are not included within the scope of the NDA, the Company may indirectly disclose the other Party’s Confidential Information to a third party through a subsidiary entity
Company and Individual are each “Parties” to this Agreement.
1. Purpose. Company and Individual anticipate exchanging information: (i) to determine whether to enter into a business relationship; and (ii) if entered into, to conduct such relationship (collectively, the “Purpose”).
The NDA may need to be revised depending on the relationship established. That would normally happen in the contract covering that relationship. This simple form form is generally adequate until another contract is entered into covering the relationship.
This Agreement shall not obligate either Party (a) to disclose Confidential Information to the other,
You withhold whatever Confidential Information you wish to withhold
(b) to pursue any proposed relationship or transaction with the other, or (c) to respond to any proposal therefor. Neither Party is authorized to act for or on behalf of the other Party under this Agreement. Neither Party is authorized to act for or on behalf of the other Party under this Agreement.
An NDA does not create a business relationship other than for the purposes of mutual disclosure.
2. Confidential Information. “Confidential Information” means information disclosed by either Party (the “Discloser”) to the other Party (the “Recipient”) in connection with the Purpose, even if before the Effective Date, and that should reasonably have been understood by the Recipient (because of legends or other markings, the circumstances of disclosure, or the nature of the information itself) to be proprietary and confidential to the Discloser or to a third party
for example, this protects know-how obtained by Discloser from an earlier business partner who requires that it be kept confidential by Discloser, such as technology or software licensed to Discloser
(“Discloser Confidential Information”).
“even if before the Effective Date:” Most business discussions have already begun when someone mentions signing an NDA. While more sophisticated participants may have been careful about what they disclosed before the NDA is signed, to ensure that there was no Confidential Information disclosed, such caution is far from uniform. Accordingly, it is good practice to cover exchanges of information which occurred before the NDA is signed
“…should reasonably have been understood by the recipient” While subjective, this language encompasses a lot of what an NDA seeks to cover. The examples in the next paragraph should all reasonably be understood to be confidential. An alternative approach is to restrict the protection afforded by an NDA to information marked or otherwise identified as being Confidential Information. That approach is more objective, but risks allowing disclosure of Confidential Information simply because someone forgot to mark it as such. Busy founders and engineers cannot be expected to remember to mark every business secret that they discuss with outsiders!
Notwithstanding the foregoing, all software (both object code and source code), customer information, product documentation, specifications, as well as information concerning business plans and future product offerings, shall be deemed Discloser Confidential Information whether marked as such or not.
If a particular type of confidential information is particularly crucial for your business, mention it in the preceding sentence. For example, “information relating to online marketing, search engine optimization and paid search” may be mentioned by a Search Engine Optimization firm. Or “process recipes” may be mentioned by a semiconductor manufacturer
In addition, Discloser Confidential Information shall include information which can be obtained by Recipient through observation, examination, testing or analysis of any sample, hardware or other item embodying Discloser Confidential Information shown or provided by Discloser or through any visit or tour of any Discloser plant or other facility.
3. Termination. This Agreement terminates thirty (30) days after delivery of a written notice of termination by one Party to the other. The obligations of Recipient with respect to any Discloser Confidential Information received prior to termination will survive any termination or expiration of this Agreement until such time, if ever, as that Confidential Information is or becomes a matter of public knowledge through no fault of Recipient.
This is potentially a very long time. If either party believes that it is too long, simply replace this language with an agreeable period of time, such as “for three (or five) years.”
4. Restrictions on Disclosure and Use.
This is the general rule, the meat of an NDA
Recipient may use Discloser Confidential Information solely for the Purpose and will not disclose any Discloser Confidential Information to any third party except as expressly permitted herein. Recipient may not disclose any Discloser Confidential Information to any of Recipient’s business partners except as may be needed for its outside accountants or lawyers to perform their respective assigned duties.
When Recipient is a corporation or other entity, a key question is who is a part of the entity and may have access to Discloser’s information. It is a question which can be answered in different ways. The above formulation only allows disclosure to lawyers and accountants outside of the corporation
Recipient may not disclose Discloser Confidential Information to any of its officers or employees (or any of its contractors performing services comparable to employees) unless she or he (i) has a need to know the information in order for Recipient to accomplish the Purpose, and (ii) has signed a nondisclosure and nonuse agreement with Recipient containing obligations substantially similar to those in this Agreement. Recipient shall be responsible for any breach of this Agreement by any of its officers, employees or contractors (collectively, Recipient’s “Representatives”).
In some cases, a Discloser company will want to specifically state which employees or contractors of the Recipient party may have access to Discloser’s confidential information. The first sentence of the above paragraph would then be changed to: “Recipient may not disclose Discloser Confidential Information except to Recipient’s employees and contractors listed on Schedule A hereto while each remains an employee or contractor of Recipient, after each has signed a nondisclosure and nonuse agreement with Recipient containing obligations substantially similar to those in this Agreement.”
Without limiting the generality of the foregoing, Recipient: (A) shall not, and shall not cause or permit any third party to, reverse engineer, disassemble or decompile any prototypes, software or other tangible objects which embody or incorporate any Discloser Confidential Information; (B) shall not include any Discloser Confidential Information in any application for patent or utility model or design protection in any country filed by or on behalf of Recipient; and (C) shall not use Discloser Confidential Information to manufacture, or enable manufacture by any third party of, products that are derived in whole or in part from the Discloser Confidential Information or a Discloser product.
The preceding paragraph is a far from exhaustive list of examples of prohibited disclosure. You could add to it based on your business and its particularly sensitive information.
N.B. Patents are public. The patented invention is protected because the law encourages invention by allowing the inventor alone to exploit it. Third parties often know the patented technology (perhaps not always how it is used), but can’t use it without paying a fee, or royalty, to the patent owner. NDAs protect trade secrets, which are not public and will not remain secret if disclosed in a patent application.
5. Recipient’s Duty of Care. Recipient will use at least the degree of care in protecting Discloser Confidential Information as it uses for its own highly confidential information, but in no event less than reasonable care. Upon discovery of any disclosure or misuse of Discloser Confidential Information, Recipient shall promptly notify Discloser and shall use commercially reasonable efforts to prevent any further disclosure or misuse.
Without limiting the generality of the foregoing, Recipient shall not cause or permit any Representative of Recipient to disclose or use any “residuals” of Disclosure Confidential Information in any manner other than in accordance with this Agreement. The term “residuals” shall mean Discloser Confidential Information that may be retained in memory after expiration or termination of this Agreement, whether unintentionally or not, by any Representative of Recipient who has had access to Discloser Confidential Information.
Certain major corporations, (Intel and IBM come to mind) seek to obtain permission in their NDAs for their employees to use “residuals” of the confidential information disclosed to the corporations. This is a hole in the protection afforded by an NDA to a company or person working with IBM or Intel which is big enough to drive a truck through. Avoid giving such permission if you can.
6. Exceptions to Recipient’s Nondisclosure Obligation. Recipient’s obligations of confidentiality and restrictions on use will not apply to information that, as is proved by Recipient’s documentary records: (i) was rightfully in Recipient’s possession before receipt from Discloser; or (ii) is or becomes a matter of public knowledge through no fault of Recipient; or (iii) is rightfully received by Recipient from a third party without a duty of confidentiality to Discloser or any other person or entity; or (iv) is independently developed by Recipient without any use of Discloser Confidential Information.
These exceptions to Recipient’s obligation not to disclose are rooted in common sense. If Recipient already has information that Discloser feels is its Confidential Information, then Recipient cannot be obliged to restrict its use of that information.But there are questions of fact to be answered: for example, was any particular piece of information actually in Recipient’s possession before Discloser’s disclosure?
The questions of fact become more difficult going down the above list. If Recipient somehow manages to come up with the same know-how as Discloser has disclosed, and after Discloser disclosed its version, Discloser may well suspect that its information was used. Recipient then will need to prove that Discloser’s information wasn’t used.
7. Exception for Required Disclosures. Recipient is permitted to disclose Discloser Confidential Information as required by law or regulation provided, however, that Recipient will (i) give Discloser written notice promptly upon learning of a disclosure requirement and before the disclosure is made, (ii) take reasonable actions and provide reasonable assistance to the Discloser to secure confidential treatment of the Discloser Confidential Information, and (iii) disclose only such Discloser Confidential Information as is required after such actions have been taken and such assistance has been provided.
8. Copies and Return of Confidential Information. Recipient will make copies of Discloser Confidential Information only as is necessary for the Purpose. Any copies will reproduce proprietary markings included therein. All Discloser Confidential Information, including all drawings, documents and other tangible manifestations of Discloser Confidential Information and all copies and reproductions thereof, will remain the property of Discloser.
Upon Discloser’s request, Recipient will promptly return all tangible Discloser Confidential Information and all copies thereof, delete all electronically stored Discloser Confidential Information, and deliver to Discloser written certification of such return and deletion, except that Recipient may retain one copy for archival purposes only.
9. Rights Not Granted to Recipient. Recipient acquires no license or other intellectual property right, including without limitation in any patent, copyright, invention, discovery or improvement, or in any application therefor, in Discloser Confidential Information other than the limited rights necessary to carry out the Purpose.
10. Absence of Warranty. Discloser only warrants that it has the right to disclose Discloser Confidential Information. OTHERWISE, ALL DISCLOSER CONFIDENTIAL INFORMATION IS PROVIDED “AS IS.” Discloser will not be liable for any errors or omissions in, or any decisions made by Recipient in reliance on, any Discloser Confidential Information.
As Discloser, you need to be sure that you do not disclose any confidential third party information. For example, if you license technology from a third party and incorporate it in your products, your licensor may restrict disclosure of the licensed technology, and you should be careful to respect that restriction when dealing with Recipient.
11. Injunctive Relief for Discloser. The parties agree that breach of this Agreement would cause irreparable harm to Discloser for which money damages would be inadequate. Therefore, in the event of a breach or threatened breach of this Agreement, Discloser will be entitled to seek timely injunctive or other equitable relief, without the requirement of posting a bond or other security, among other legal remedies.
This section is intended to help ensure that Discloser can more easily seek to “enjoin,’ or have a court stop, Recipient’s use of Discloser Confidential Information.
12. Export Restrictions. Discloser will inform Recipient if Discloser Confidential Information or other information disclosed hereunder may be technology subject to US or EU export control laws (“Export Laws”). In each such case, Recipient: (i) shall comply with applicable Export Laws and obtain required approvals before disclosing such technology to foreign persons, businesses or governments; and (ii) shall not directly or indirectly export, re-export, use, distribute, divert, transfer, or transmit any such technology (even if incorporated into a product), except in compliance with Export Laws. In the U.S., Export Laws include the Export Administration Regulations, the International Traffic in Arms Regulations, and the regulations administered by the Office of Foreign Assets Control, U.S. Treasury Department.
The above section is needed if your product or technology may be subject to Export Laws. If so, you as Discloser must notify Recipient
13. Notices. All notices or reports permitted or required under this Agreement shall be in writing and shall be delivered by personal delivery, electronic mail, facsimile transmission or by certified or registered mail, return receipt requested, and shall be deemed given upon personal delivery, the date of the carrier’s delivery receipt, or upon written acknowledgment of receipt of electronic transmission. Notices shall be sent to the addresses first set forth above or such other address as either Party may specify in writing in accordance herewith.
14. Miscellaneous. This Agreement (i) is the entire agreement between the Parties as to its subject matter and supersedes any previous agreements, oral or written, as to its subject matter; (ii) may be modified only by written agreement of the Parties; (iii) will not be assigned without written authorization of the other Party, and (iv) will be governed by the laws of the State of California
if you and the other party have no connection to California, you will need (i) to provide for another State’s law to govern this Agreement, and (ii) to check with a lawyer in that State on whether the clauses of this Agreement are appropriate there
without regard to its choice of law provisions. When the authorized representative of either Party signs this Agreement, a copy or facsimile of such signed agreement will have the same force and effect as an original signed copy. If any provision of this Agreement is found by a competent court to be unenforceable or invalid, such unenforceability or invalidity shall not render this Agreement unenforceable or invalid as a whole. In such a case, the unenforceable provision shall be modified so as to best accomplish the objectives of the parties within the limits of applicable law and court decisions.
Please note the distinction here. The individual signs for him or herself, but someone (an authorized officer) needs to sign for the Company.