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Due Diligence and Protection of Confidential Information

The "New Economy" is a catchphrase describing the efforts of entrepreneurs to supply consumers' insatiable demand for information. The demand was always there, but with the advent of the Internet and other technologies it has been unleashed like never before, creating new and vast opportunities for firms specializing in the creation, storage, management and transmission of information. Technologies facilitate the New Economy, but at bottom the information itself is the life blood of this worldwide market.

The most valuable assets of New Economy companies are intangibles such as ideas, know-how, compilations of data and intellectual property rights. The business of New Economy companies essentially consists of managing that information in such a way as to maximize its value. If valuable information is mismanaged-- revealed prematurely or disclosed to someone other than the intended audience -- its value may be lost to competitors or squandered entirely. Accordingly, maintaining the confidentiality of valuable material is of utmost importance in the information age.

But just as paper gains in a stock portfolio are not realized until the shares are disposed of, the value of confidential information is not realized until it is used or disclosed to others. So, how does a party use confidential information or reveal it to others while protecting its value? There are, of course, procedural and technological safeguards against the improper disclosure of confidential information and each firm should implement those safeguards as a matter of policy. Beyond internal safeguards, the nondisclosure agreement ("NDA") is the instrument by which parties' establish legal rights with respect to the use and flow of information.

Standing alone or as part of another agreement, such as acquisition agreements, license agreements or development contracts, NDAs are ubiquitous tools of the New Economy. Their purpose is to define the information that falls within the scope of the agreement and state what the parties may or may not do with such information. Ordinarily, NDAs also set forth the parties' understanding concerning available remedies in the event the party receiving the information violates the restrictions, and instruct the parties concerning the disposition of confidential information after termination of the NDA.

The definition of confidential information should be very broad, encompassing "all technical, business and financial information," and it may further enumerate particular types of information that the disclosing party expects to share with the receiving party. The receiving party is typically restricted from divulging, copying or using the disclosing party's confidential information for any purpose, except in connection with the parties' business transaction(s). In order to make the NDA palatable to the receiving party, the disclosing party usually has to allow for some exceptions to the foregoing definition and restrictions. In particular, the receiving party will want to carve out of the NDA any information that was known to it prior to receipt from the disclosing party, is or becomes generally available to the public, or was independently developed by the receiving party.

In the event of a breach by the receiving party, the disclosing party will be most concerned about stopping the unauthorized disclosure of its confidential information. Accordingly, the disclosing party should insist that the NDA provide for immediate injunctive relief without prejudice to any rights and remedies otherwise available to it.

The NDA should provide that immediately upon termination of the agreement the receiving party will return to the disclosing party all confidential information an any copies thereof. The disclosing party will probably also want the right to demand the return of all confidential information at any time prior to the termination of the NDA, and a provision specifically stating that the restrictions on the receiving party's use of confidential information remain after termination of the NDA.

Finally, the NDA should contain several standard provisions relating to choice of law, modification, integration and assignment, all of which further define the parties' relationship, reduce the scope of disputed issues in the event of a breach, and prevent the NDA from being used by either party as evidence of a purported agreement with respect to any other transaction(s) contemplated by the parties.

A form of non-disclosure agreement that may be acceptable to potential buyers and sellers follows.

Confidentiality Agreement

[Company A], its affiliates, successors and assigns (all of the foregoing entities are collectively referred to herein as "Company A"), and [Company B], its affiliates, successors and assigns (all of the foregoing entities are collectively referred to herein as "Company B"), desire to enter into discussions with respect to a potential business transaction (the "Transaction"). In connection with the Transaction and discussions relating to it, Company A will provide Company B, either orally, in writing or by inspection, certain information, materials and documents deemed by Company A to be confidential and/or proprietary, regarding Company A, its business, financial results and pro formas, know how, techniques and processes related to the development, preparation, formulation or presentation of [insert nature of business], business and trade secrets, methods of doing business, marketing techniques, and other secret, confidential and/or proprietary matters relating to Company A's business (collectively the "Confidential Information"). As a condition to Company A furnishing Company B with the Confidential Information and/or entering into discussions regarding the Transaction, Company B hereby agrees as follows:

All Confidential Information furnished to Company B in connection with the Transaction, as well as the existence of the Transaction and the discussions relating thereto, shall be deemed confidential and shall be kept in strict confidence under appropriate safeguards by Company B. The term "Confidential Information", as used herein, does not include information which (i) was lawfully in Company B's possession prior to any disclosure by Company A, (ii) is or becomes generally available to the public other than as a result of disclosure by Company B, Company B's employees, agents, representatives or others acting on Company B's behalf, (iii) is obtained by Company B from a third party who, to Company B's knowledge, has disclosed such information without breaching a contractual or legal duty to Company A, or (iv) is developed by Company B without use of Confidential Information.

Without Company A's prior written consent, Company B shall not, directly indirectly: (i) disclose or reveal any Confidential Information to any person, firm or entity except to a limited group of Company B's, officers, employees, attorneys and agents who are actively and directly participating in the Transaction or the negotiations relating thereto (collectively, the "Recipients"), each of whom shall be informed by Company B of the confidential nature of the Confidential Information; (ii) use the Confidential Information for any purpose other than in connection with the Transaction; (iii) use the Confidential Information for the benefit of any entity other than Company A; or (iv) disclose to any person or entity the terms, conditions or other facts with respect to the Transaction (including the existence and status thereof) or that Confidential Information has been made available to Company B. Company B shall be responsible for any disclosure by the Recipients of the Confidential Information, or the existence, content or status of the Transaction, and Company B shall be responsible for enforcing the confidentiality of the Confidential Information and will take such action as is necessary to prevent any disclosure thereof by any of the Recipients. Without Company B's prior written consent, Company A shall not, directly or indirectly, disclose to any person that confidential information has been made available to Company B, that Company B is considering the transaction or any of the terms, conditions or other facts with respect to Company B's involvement in the transaction, including the existence and status thereof.

Company B acknowledges and agrees that in the event of any breach of this letter agreement by it, and without prejudice to any rights and remedies otherwise available to Company A, Company A shall be entitled (i) to equitable relief by way of injunction, and (ii) to compel specific performance without the need of proof of actual damages. Company B further agrees to waive any requirement for the securing or posting of any bond in connection with such remedies. No failure or delay by Company A in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise hereunder.

Upon written notice from Company A, Company B will promptly deliver to Company A all copies of the Confidential Information and all written or tangible materials containing or reflecting any information contained in the Confidential Information without retaining any copies, summaries, analyses or extracts thereof. All documents, memorandum, analyses, summaries, compilations, notes and other writings whatsoever prepared by Company B and the Recipients based on the information contained in the Confidential Information shall be destroyed and if requested by Company A certification thereof shall be given by an officer of Company B.

Should the Transaction require or entail disclosure of any of Company B's confidential or proprietary information to Company A, Company A agrees to the same confidentiality and non-use obligations as are imposed on Company B under this letter agreement.

This letter agreement shall be binding upon Company B's successors and assigns and shall inure to the benefit of and be enforceable by Company A's successors and assigns.

The provisions of this letter agreement are intended to be interpreted and construed in a manner so as to make such provisions valid, binding and enforceable. In the event that any provision of this letter agreement is determined to be partially wholly invalid, illegal or if such provision cannot be modified or restricted in such a manner, then it shall be deemed to be excised from this letter agreement and the validity, binding effect and enforceability of the remaining provisions of this letter agreement shall not be affected or impaired in any manner.

This letter agreement constitutes the complete agreement of the parties and supersedes any and all prior agreements, Transactions and understandings, oral or written, between the parties concerning the subject matter hereof.

This letter agreement shall be construed (both as to validity and performance) and enforced in accordance with, and governed by, the laws of [insert jurisdiction of choice] applicable to agreements made and to be performed wholly within such jurisdiction, notwithstanding any choice of law principles, statutes or rules to the contrary.

This letter agreement may be waived, amended or modified only by an instrument in writing signed by both parties or by the party against which such waiver, amendment or modification is sought to be enforced, and such written instrument shall specifically set forth the provisions of this letter agreement that are to be so waived, amended or modified.

Company B's obligations hereunder shall expire two (2) years after the date hereof; provided, however, that nothing herein shall abrogate or diminish the rights and protections afforded to Company A with respect to any Confidential Information under any applicable state trade secrets laws; and provided further, that Company B shall not release or publicly disclose of any Confidential Information that is not at such time otherwise publicly available.

Company A acknowledges that Company B and its affiliates are engaged in a broad range of businesses that may be similar to, or identical with Company A's business and that Company B and its affiliates have considered, and will consider, the acquisition of, or joint ventures with, other persons or entities that are engaged in businesses similar to, or identical with, Company A's business. Accordingly, Company A agrees that neither this Agreement, nor Company B's consideration of the proposed transaction, will impact or restrict Company B's or its affiliates operation of such businesses or their consideration of, or participation in, such transactions. In addition, Company A acknowledges that Company B has informed Company A that Company B and its affiliates, have, and will continue to, work on the development of a wide variety of products and techniques, including products and techniques that may be similar to Company A's products and techniques, and that neither this Agreement, nor Company B's consideration of the proposed transaction shall restrict Company B's use of the results of such development.

Please indicate your agreement with the foregoing by executing the accompanying copy of this letter agreement and returning it to us, whereupon it shall constitute a binding agreement as of the date first above written.

Very truly yours,



[John Doe]

Its Chairman






Mr. Porter is a litigator with the firm's Pittsburgh office and focuses on trade secrets, confidential information, employment agreements, employees' fiduciary duties to employers and unfair competition.

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