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Agreements to restrict the disclosure of certain types of information—often called confidential disclosure agreements (CDAs) or non-disclosure agreements (NDAs)—have become ubiquitous in the daily transaction of business. Even before companies begin discussing opportunities to enter into a business relationship, they generally execute some form of confidentiality agreement.
However, inasmuch as businesses now understand the importance of protecting their valuable information, the actual confidentiality agreements oftentimes do not receive the attention they deserve. As a result, state and federal courts in the United States have been busy finding reasons not to enforce or to limit the enforcement of many such agreements.
Because NDAs tend to be viewed as boilerplate documents, many businesses simply find a generic agreement and stick with it, regardless of the particular circumstances. Worse yet, form agreements may not be well drafted in the first place, which only serves to exacerbate the enforceability issue. In an age when information represents considerable value for many businesses, it is time for the generic confidentiality agreement to graduate to a well-drafted and appropriately tailored business document that maximizes the potential for enforcement of the agreement’s terms.
There are countless factors that should be considered in preparing an appropriate confidentiality agreement to address the variables that exist in any given business situation. However, business owners and their attorneys can start by focusing on several key questions.
1. What information is to be protected?
Defining the information to be protected is fundamental to a well-crafted NDA and an area where many form agreements fall short. For example, some agreements specify a laundry list of information, regardless of whether such information is actually confidential (e.g., patents and trademarks are often included, but neither can be confidential). Other NDAs may simply include language specifying “information that is confidential and proprietary to the disclosing party,” which creates ambiguity in the interpretation of what is truly intended to be covered by the agreement. Worse yet, the latter approach could require that the information meet the definition of a trade secret, which might not be the case for the type of information disclosed and, therefore, could render the confidentiality agreement useless. By contrast, careful consideration of how confidential information is defined can go a long way towards improving enforceability.
2. Who is allowed access to the information?
Many generic confidentiality agreements simply restrict disclosure to third parties. Some even allow disclosure to advisors and consultants who are assisting with the transaction. These limited restrictions may do little to protect a business in certain situations and, in fact, may create an exception to what information is to be kept in confidence under the agreement. Therefore, it is important to consider the practical and legal consequences of all restrictive clauses.
Should the recipient of the information be able to disclose to all employees of the company or just those directly involved in the transaction at hand? What about third-party consultants? From a practical perspective, it may be easier to limit unauthorized disclosure when fewer people have access to the information. Third-party consultants, for example, may not have an obligation of confidentiality to the disclosing party just because of their relationship with the recipient of the information. In fact, disclosure to third parties without an obligation of confidentiality may place the information in the public domain, thus rendering the confidentiality agreement unenforceable against anyone.
Because an NDA, like other agreements, may be assigned to another party to whom the disclosing party may not want to grant access to certain information, it is important to consider restrictions on assignability. A well-drafted restrictive provision not only helps safeguard information, but also facilitates and regulates the flow of information as the parties intended.
3. How long is the information to be kept in confidence?
Businesses often overlook the term of a confidentiality agreement, but many courts focus on that detail in determining enforceability. A number of jurisdictions view agreements without a term limit as terminable at any time or terminable within a reasonable period of time based on the circumstances. Because neither of these results may be desirable, business owners should carefully consider what term would be reasonable for the type of information being disclosed. For example, certain business data may only have a useful life of a year or two, while the formula for manufacturing a product may qualify as a trade secret and be protectible until such information is no longer considered a trade secret. While there is no single right answer for every type of information, setting appropriate term limits may equate to greater enforceability.
The questions above only scratch the surface of the many issues that business owners and their attorneys should consider when crafting an effective and enforceable confidentiality agreement. There is no time like the present to upgrade from a form agreement and begin maximizing protection of one of your most valuable assets: your information.
© 2010 Much Shelist Denenberg Ament & Rubenstein, P.C.
