EA-TOKYO ARTICLES & ADVICE
NON-DISCLOSURE AGREEMENTS
Critical Points to Confirm Before You Sign
by David B. Hoppe
Access International Law Group
Sometimes it seems that no meaningful business interaction today can occur without a non-disclosure agreement, usually referred to as an “NDA,” being presented and signed by both parties. After just a few months in business, most startup companies and entrepreneurs will have accumulated a folder full of these, and before long the perception may be that an NDA can be signed without much reflection or even review of the document’s terms.
As some companies discover a year or two later, however, NDAs can create legal obligations and potential liability that in some cases can be just as significant as a financing or joint venture agreement. This article summarizes a few of the more important points to consider if you are asked to sign an NDA by another party who will be disclosing information to your company (points to look for if you’re the one disclosing information will be covered in a later article).
“Proprietary Information”
The definitions in an NDA are important. Be careful in particular to review the definition for “Proprietary Information” (sometimes “Confidential Information” or, in the more oblique forms, simply “Information”). This definition helps to set the boundaries of the disclosure made to you that you will need to be concerned about. Almost inevitably, the form presented by the disclosing party will define “Proprietary Information” so broadly that you may wonder what information the disclosing party might provide that would not be covered. Usually the breadth of this definition is cut back by the limitations and exclusions in other parts of the NDA. However, you might want to ask the other party to revise the definition so that it only covers the specific type of information that they have a legitimate interest in protecting (for example, “relating to the technology developed by [disclosing party] for use in transmitting graphics files via wireless networks”).
Designating Proprietary Information
Since a variety of information may be provided during the course of your discussions or transaction with the disclosing party, in different forms and media, it is important that you understand exactly what information the disclosing party considers to be within the scope of the definition of “Proprietary Information.” It is advisable to require the disclosing party clearly to mark all documents or computer files that contain Proprietary Information as “Confidential,” and for information disclosed orally to require the disclosing party to preface the disclosure with a statement that the information is Proprietary Information (and/or to follow up with a defined period (usually 24-48 hours) with a written communication to this effect).
Restricted Period
Most NDAs will require that the party to whom Proprietary Information is disclosed maintain the confidentiality of the information for two years, though more aggressive forms will require three, four or even five years. While information that constitutes legitimate trade secret information is probably protected indefinitely regardless of what language is used here, the party receiving the disclosure should request a term of no more than two years.
Exclusions
Every NDA should include an exclusion for information already known to the receiving party or information that is generally available to the public. An exclusion should also be included for information that the receiving party might be required to disclose to a court, pursuant to a request from law enforcement, or other government requirement (though there may be some limitations on this exclusion, such as a requirement that the party receiving disclosure notify the disclosing party as soon as possible of such a request). NDAs should also include an exclusion for technology or information developed independently by the receiving party, or obtained by the receiving party from another party without breach of any confidentiality obligation applying to that other party.
Permitted Disclosure
Be sure that the NDA allows you to disclose the Proprietary Information to your consultants, bankers, lawyers, and other advisors. Depending on the shareholding structure of your company and its stage of development, you may also need to be able to disclose at least some of this information to your principal shareholder(s) in order to get their approval to proceed with a transaction. Finally, if you expect to be taking in investment in the near future, or if the transaction with the disclosing party is particularly important to your business, you may wish to be able to provide at least some kind of disclosure of the nature the transaction to potential investors. Note that, to the extent the NDA allows you to share Proprietary Information with these other parties, you will almost inevitably be required to take responsibility for any breaches by them, so you should be sure to sign appropriate NDAs with these other parties before sharing information with them.
Destruction of Information
All NDAs will either require you to return all media containing Proprietary Information to the disclosing party at the termination of your relationship, or completion of the transaction, or to destroy the information and provide confirmation of destruction to the disclosing party. It is advisable to include a carveout from this term for data stored in backup systems, since in most cases it is not practical, or perhaps even possible, to identify and delete information from these systems.
Governing Law/Jurisdiction
Parties signing NDAs with disclosing parties in other countries should beware of broad terms requiring submissions to jurisdiction of courts in those other countries. While it is almost inevitable that the disclosing party will require that the agreement be governed by the law of their country and that you submit to the jurisdiction of the courts of that country, it is important to be sure that any such jurisdiction is limited to action required to enforce the NDA, and nothing more.
Conclusion
Every NDA should be reviewed for the points highlighted above before signature. However, because of the potentially significant impact that an NDA can have on a company’s future activities, it is advisable in most cases to have a lawyer who is familiar with the law in this area do a quick review of an NDA before you sign.
David Hoppe is an international business lawyer and the founder and principal of Access International Law Group (www.ailawgroup.com), based in San Francisco and Silicon Valley. David has several years’ experience working in Japan and assisting Japanese clients, and travels to Japan often. David may be contacted at dbhoppe@ailawgroup.com.
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