It's Only An NDA


It is only a nondisclosure agreement, a one-pager, what can it hurt? Such is often the observation when confronted with a simple, often one-page, nondisclosure agreement (NDA). Since it is so simple, one need not contact legal counsel to review the terms, or so the client thinks. Yet an NDA is a critical document that can, by itself, impair rights or reduce risk, depending on the terms. There is no such thing as a standard NDA and many terms may vary widely with significant consequences for the parties. This article provides an examination into a few of these terms and their use.

The NDA creates contractual and confirms equitable rights that provide protection for ideas and information. Information, data, ideas, plans or concepts, whether technical or business in nature, may be protected under trade secret law under a breach of confidence action. The breach of confidence action gives the person to whom the obligation of confidence is owed (discloser) the right to require the person who owes the obligation (recipient) to maintain the secret.

The elements of the action include a relationship of confidence, existence of specific confidential information and detriment arising from disclosure. The obligation of confidence may arise expressly in an NDA or other agreement, by implication, conduct or operation of law, including in pre-contractual negotiations. A special relationship, such as fiduciary, also implies an obligation of confidence.

Advantages of an NDA include that the scope and extent of these obligations may be set out and displace implied obligations that may otherwise arise. An NDA also provides tangible evidence of the existence of the obligations of confidence as well as defining specific issues in the relationship. The following discussion introduces a number of the points in a basic NDA.

Form of Agreement

The essential elements of an NDA can typically be provided in a short document. Brevity is desired to facilitate establishing a relationship in a timely manner. A shorter document may provide less certainty in respect of other issues and so some NDAs add additional terms to further define the relationship. The decision on the degree of formality of an NDA is a matter of business judgment balancing the advantages of an informal shorter document versus the greater certainty provided in a more formal NDA.

An NDA may be unilateral or mutual. A unilateral NDA deals with the disclosure of confidential information from one party to the other party. A mutual NDA addresses where both parties will disclose confidential information to each other. Normally, consideration is stated to be the agreement to disclose and to the restrictions.

Parties

The disclosing party needs to know who will be bound by the obligations of confidence. One must differentiate between individuals to whom disclosure is made and a corporation that may be bound by the obligations. An issue is legal capacity of the signing party to bind an entity for which he purports to sign. While ostensible authority would typically be raised, query whether such an argument is effective where a junior individual in an organization signs on behalf of the organization.

Purpose of the Disclosure

Many NDAs define a specific purpose for which the confidential information is being disclosed. This seeks to limit other possible uses of the confidential information. Identifying such a purpose may assist in defining the scope of use restriction.

Definition of Information

Many NDAs contain a broad definition of "confidential information" or some other term. The definition often contains operative terms that are of significance to the parties. Some issues are coverage of a broad class of information and whether or not the form in which information is expressed or communicated (i.e. written, oral, by demonstration) is relevant.

Some NDAs define the type of information that is being disclosed. A narrower definition of the scope of information disclosed may not limit the obligations between the parties in respect of other confidential information disclosed outside the scope of that relationship. One should be aware of limitations to the type of information that is communicated.

Requirements for Formality

Some NDAs require certain formalities in order to provide for protection of confidential information. Such formality might require that confidential information only include information that is clearly marked "confidential" or, if disclosed orally, is reduced to writing within a specific period (say 15 days from oral disclosure) and marked "confidential".

Formality requirements seek to provide certainty over what specific information is covered by and to exclude informal or similar disclosures from the obligations of confidence that arise under the NDA. The use of formalities is desired by the recipient who wishes to define or limit the specific information that is bound. The use of formalities imposes a substantial compliance requirement on the discloser or face risk of loss of some information.

Such clauses may be coupled with a term that the receiving party owes no obligations in respect of confidential information it receives except as provided in the agreement. The effect is to preclude any obligation in respect of informally disclosed confidential information.

Use

Most NDAs provide for obligations of confidence and restrictions on use of the confidential information for purposes other than the indicated activity. One should review an NDA to see that it addresses both issues.

Scope of the Duty

An advantage of an NDA is the definition of the scope of the obligations. Some standards found in NDAs, depending on the circumstances, would include:

  1. an obligation to keep confidential information strictly confidential;
  2. an obligation to use reasonable care in keeping confidential information confidential:
    • sometimes the standard of care is defined as that which the receiving party uses for its own confidential information it does not wish disclosed or disseminated; or
    • sometimes the standard is defined as the degree of care taken by the receiving party for its own confidential information provided that this is no less than reasonable care; or
  3. all reasonable precautions to protect the confidentiality of the information (although this approach is criticized because the term "all" could pose a high duty to investigate and determine what precautions might be available).

Permitted Disclosure to Others

Often the recipient must disclose the confidential information that it receives under the NDA to its own employees or, possibly, third-party contractors, in order to carry out the contemplated activity. Some NDAs provide a procedure regulating such disclosures to other parties or individuals. Some NDAs restrict disclosure in the receiving party on a "need to know" basis so that the receiving party has a further duty to monitor and manage the extent to which the confidential information is disclosed within the organization.

For disclosure to employees or third parties, some NDAs require an additional process involving each individual to sign a form of NDA acceptable to the discloser. A recipient may resist such terms.

Duration of the Obligations

Some NDAs provide that the obligations and restrictions in the agreement terminate on the expiration of a particular time (often measured from the date of disclosure or signing). As obligations of secrecy may be enforceable indefinitely, provided that the information is still secret, such limitation places the specific information at risk of not being protectable beyond the stated period. The discloser will wish no time limit to exist. The recipient may wish to have some certainty about when its obligations have ended.

Common Exclusions

Many NDAs provide for exclusions on the restrictions. Recipient's concerns include if it already knows the information, may be working on similar projects and wishes to prevent its own activities, business opportunities and the like from being "tainted" by receiving the information from the discloser.

Typical exclusions might include information that:

  • is in the public domain;
  • is made available by the discloser to a third party without similar restrictions (the recipient will not wish to be in a worse position than a third party);
  • is subsequently made available to the public without such disclosure being as a result of a breach of the NDA by the recipient;
  • is already known to or is developed by the recipient without access to the information provided. Such an exception may require proof of the allegation either to the reasonable satisfaction of the discloser or as may be required by a court;
  • must be disclosed as required by law although some NDAs provide that if a court or regulatory body requests disclosure of the confidential information, the recipient may be obligated to notify the discloser who may then seek a protective order.

Return of the Information

Many NDAs provide that, on request, the recipient will return the physical form in which the information is expressed.

No Implied License

In order to avoid doubt about the limited nature of the rights provided under the NDA, some NDAs indicate that no right or license in the information or any underlying intellectual property rights or opportunity are implied.

FURTHER READINGS:

  • Cadbury Schweppes Inc. v. FBI Foods Ltd. (1999), 167 D.L.R. (4th) 577 (S.C.C.);
  • Seager v. Copydex Ltd., [1967] 1 W.L.R. 923, [1967] R.P.C. 349, 2 All E.R. 415 (C.A.);
  • International Corona Resources Ltd. v. Lac Minerals Ltd., [1989] 44 B.L.R. 1 (S.C.C.);
  • Boardman v. Phipps, [1967] 2 A.C. 46 (H. L.).

*article courtesy of Martin P.J. Kratz of Bennett Jones LLP.