FUNDAMENTALS OF CORPORATE LAW: THE NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENT
May 24, 2011
Placing my corporate clients on a firm legal foundation is fundamental to the beginning of any working relationship, whether I’m counseling executives of area start-ups or established companies. While there are many governing documents that drive the structure and functioning of a business, I can think of no more vital set of contractual agreements to help mitigate risks than having a standing library of Non-Disclosure and Confidentiality Agreements (otherwise known as NDAs).
Mitigating risk is about protection, and NDAs protect Forrest Firm clients in a number of business contexts. In today’s world, companies partner with each other at an unprecedented rate—“you do the things where you are strong, and so will I—and we’ll be stronger together” is a prevailing motto among subject matter and industry experts looking to expand their businesses. While collaboration is a great goal, exploring these partnerships is attendant with risk. If you are communicating information regarding your company’s technology or product to another company in an effort to evaluate whether a strategic alliance or joint venture is appropriate, an NDA can curtail the risk that the other party will disclose or commercialize the sensitive information to your company’s detriment.
Another effective use of NDAs is the governance of the level of proprietary information your employees may disclose to third parties, both during the term of their employment and for a time afterwards. In the same respect, many types of vendor relationships often necessitate an NDA to assist a company in the revelation of its proprietary information to the vendor in order to receive the vendor’s services or products. Overall, it’s important to remember that NDAs minimize the risk that critical company information will be disclosed to unauthorized recipients.
Here are the key areas of focus when you find yourself creating, evaluating, and reviewing Non-Disclosure and Confidentiality Agreements to guide your business development:
Pay attention to exactly what information must be kept confidential. Most NDAs define “confidential information.” To the extent disclosed information falls within that definition, it may not be disclosed to third parties. Ensure that your company’s most sensitive information is specifically included in the definition.
Take note of the duration of the agreement, or, how long the proprietary or sensitive information must be held in confidence. A typical NDA term can range from two to five years. Often times, the term depends on the life cycle of the technology being disclosed. It is not abnormal, however, to see NDAs require that the disclosed information be held in confidence in perpetuity, or at least until the disclosing party notifies the receiving party that the information may be disclosed. Generally, these types of requirements are enforceable.
Make sure the NDA properly protects your company’s information. Many NDAs only protect one party’s information, particularly where NDAs are designed for a company’s own employees. Other NDAs state that each party must safeguard the proprietary information of the other party in a reciprocal fashion. I’ve personally observed oversight with unnecessary confusion regarding this issue from CFOs and executive vice presidents on several occasions. The one-size-fits-all-NDA approach can be problematic, which is why I wholeheartedly recommend having an arsenal of NDAs at your disposal to meet a variety of needs, whether it’s a partnership/alliance exploration, employee relationship guidance, or meeting vendor information requests to provide you with better service or for your company to serve as another’s vendor.
Finally, evaluate the “forum provision” that determines where any litigation related to the NDA must be brought. If your company is based in North Carolina, for example, and you enter into an NDA that contains an Alaska forum provision, the likelihood of your company’s suing the other party for unauthorized disclosure is reduced for obvious reasons. Your NDA will hopefully afford you the opportunity to enforce the agreement in the jurisdiction of your choice, and proximity is of fundamental concern here.
Incorporating NDAs into your corporate processes is a fundamental building block of corporate risk management strategy and can be an effective driver in facilitating win-win relationships with other companies and individuals. If you are unsure about your own company’s non-disclosure and confidentiality protocol, you should meet with your team and devise a strategy to forge ahead.