What is an NDA and when to use them?

A non-disclosure agreement is one of those everyday documents that everyone seems to sign without hesitation. Unfortunately, the simplicity and familiarity of the non-disclosure agreement are what lulls people into a false sense of security which can have serious consequences.  Read on to find out more.

So, what is a non-disclosure agreement and when do you use it?  A nondisclosure agreement is a contract to keep information secret. It usually limits what the parties can do with confidential information. Preferably, parties use a non-disclosure agreement when they have identified confidential information that they want each other to know. 

Let’s dive into the details of a nondisclosure agreement.

What is a non-disclosure agreement?

Definition

A non-disclosure agreement (also known as an NDA for short or confidentiality agreement) is a promise by one party (the recipient) to keep the information of the other party (the discloser) secret.  The confidentiality agreement may be unilateral or bilateral.  A unilateral confidentiality agreement imposes the duty to keep the information secret on only one of the parties.  A bilateral or mutual confidentiality agreement imposes the duty to keep the information confidential on both of the parties when they do receive information from the other party.

An NDA is an agreement with the terms directed to the requirements to keep information secret.  Alternatively, a larger agreement that contains confidentiality provisions is not an NDA. It may contain confidentiality provisions but it is not an NDA. For example, an independent contractor’s agreement that assigns the intellectual property created by the independent contractor might include confidentiality provisions.  But, the independent contractor’s agreement is not an NDA.

This article is pertinent to both non-disclosure agreements and broader agreements that contain confidentiality requirements.

When to use non-disclosure agreements?

Preferably, parties use an NDA after they identify key confidential information that the parties need to know to further their business relationship.

For example, opposing parties may enter into a confidentiality agreement so that they can privately discuss profit and loss to determine damages. When you hire an engineer, you may tell the engineer confidential information which he or she has to keep secret. If you want to pitch your idea to a potential licensee, then the potential licensee should sign an NDA. These relationships require a nondisclosure agreement.  Otherwise, the parties cannot freely talk about the details of what each party has to offer the other.

Related article: Basic agreements

This article discusses non-disclosure agreements in the context of intellectual property and those circumstances where you want to convey or receive an idea or invention so that the parties can evaluate the idea.

The situations where the information in this article may be useful include:

1. An inventor wants to pitch an idea to an investor, potential licensee or buyer, and vice versa.
2. A startup wants to hire an engineer to design and prototype their invention, and vice versa.

The first meeting should be done without a nondisclosure agreement, if possible. If the parties identify confidential information in the first meeting, the parties should sign the nondisclosure agreement. However, preferably, you don’t start the first meeting with the nondisclosure agreement.

When are Non-Disclosure Agreements not recommended?

Generally, I don’t recommend a non-disclosure agreement if the parties only discuss general ideas and not the specifics.  For example, if an inventor wants to talk to a potential licensee about licensing a patent, then the first meeting will probably not be of any significant substance.  The parties are feeling each other out and finding out if they want to do business with the other person.  In this situation, the parties won’t tell each other any critical secret information, and if they do, it would not be of any significant value.

By entering into a non-disclosure agreement, the parties are signing up to keep the information confidential.  The NDA is an invitation to a lawsuit.  As such, until the parties can identify a piece of sensitive information that is crucial to the discussion, I do not recommend entering into a non-disclosure agreement.

Where do you get the non-disclosure agreement forms?

Patent attorney

Because each situation is different, the non-disclosure agreement that is right for you might require some adjustments to make it suitable for your scenario.

The terms of the agreement will change if you are the discloser or the recipient or if you have the core information to be disseminated.  For more information, see the checklist of terms and conditions below.

Contact me if you would like me to check your situation and prepare one for you.

Online forms

A standard non-disclosure agreement does not exist.  I have a standard non-disclosure agreement for a particular situation, but this would be different from the next patent attorney.  No one-size-fits-all non-disclosure agreement exists.  Some of the web-based non-disclosure agreements do have some form of customization.  Here are a few that I’ve found on the internet.  I have not checked out their quality and do not know whether they would be suitable for you in your situation.  Use at your own risk.

• Confidentiality Agreement (www.legalcontracts.com)
• Free Confidentiality Agreement (www.lawdepot.com)
• Create a Free Non-Disclosure Agreement (www.formtemplates.org)

Online google search

Search on www.google.com for “sample non-disclosure agreements”.

Patent agent

Patent agents may not be able to provide advice on non-disclosure agreements. A non-disclosure agreement is a contract based on state law.  Patent agents are not authorized to practice law.  If they provide an NDA to you, then it might be considered the unauthorized practice of law.

Opposing party

When two parties start a conversation, they may want to be protected by a non-disclosure agreement. One of the parties may volunteer to provide their “standard non-disclosure agreement.” Usually, it is a mistake to accept their non-disclosure agreement. Their agreement will include terms that are favorable to them, not you.  At best, it might be well balanced, but it will not favor you.

If they volunteer to provide their standard non-disclosure agreement, I recommend that you immediately volunteer your version even if you don’t have one.  At least you have a fighting chance to enter into a fair agreement or one that is in your favor.

The other side might require you to sign their non-disclosure agreement.  In this situation, you could ask if the terms are negotiable.  If not, you should get counsel to review the contract so that you know what your responsibilities will be under the agreement.

Pros and cons of a non-disclosure agreement

Understanding the benefits and limitations of a non-disclosure agreement is important. A deeper knowledge of the agreement will help you know the risks involved in using the non-disclosure agreement.  Sometimes, inventors use a non-disclosure agreement as a replacement for a patent application.  An NDA can contractually protect you against investors, potential licensee, and buyers. These individuals might steal the inventor’s idea. However, the contract may not provide the inventor with sufficient protection.

However, if your funds are limited, then a non-disclosure agreement might be the only way to get the information to the other person.  It might not be superior protection, but at least it is some protection against those who you have to deal with and might take advantage of you.

Benefits of a non-disclosure agreement

The benefits of a non-disclosure agreement are speed and cost.

You can typically ask your patent attorney to give you an NDA within a day or two. The cost of the non-disclosure agreement is very low. It is significantly lower compared to the cost to submit a comprehensive patent application to the Patent Office.

Non-disclosure agreements prevent problems with unintended public disclosures. These public disclosures start your one-year grace period to file a patent application on your invention in the United States.  If you miss the deadline, you cannot do anything to get your rights back. For foreign countries that require absolute novelty, non-disclosure agreements prevent people from publicly disclosing your invention and forfeiting your right to seek foreign patent protection.

Limitations of using a non-disclosure agreement

First, you have to sue the party that breached the non-disclosure agreement.  When you sue someone, you have to spend time and money in court to get damages for a breach of the contract.  The time and money you spend suing someone might be time and money that you don’t have. Plus, you might not want to spend it especially given that there are no guarantees that you would win.

If you are not willing to spend the time and money to take the person to court, then the contract right that you have might not be worth much. In this case, although the initial cost for the non-disclosure agreement is cheap, the cost to enforce the contract is very high compared to the cost of securing patent pendency for your invention.

Patent pendency protects you against people who would file their own improvement to your invention. Your patent-pending application gives you priority because you filed your patent application first.  No time or money needs to be wasted on a lawsuit to reserve the right to get a patent.

Secondly, the parties may argue about who owned which idea. The other person might create an improved version of your idea.  How does this happen?  After executing a non-disclosure agreement, the inventor or startup tells the other person about the idea.  That part is fine.  However, when the other person starts to make suggestions, then those suggestions are ideas that belong to the recipient, not the inventor (i.e., the discloser).  If those suggestions are valuable, then the recipient may now own a useful improvement to the basic idea.

A more common situation is where the inventor discloses a basic idea, but the recipient suggests something that is an obvious variant of the underlying invention.  The inventor may have already thought of these obvious variants. In this scenario, if the inventor incorporates those obvious variants into their patent application or their product, the recipient may now complain that you or the inventor stole their idea.  Now, if you had a patent application already on file or a notebook that already showed those obvious variants, you could show that you already conceived of those obvious variants.

These two situations are meant to show some examples of how non-disclosure agreements are not a good way to protect inventors and startups without patent pendency.

Warning: you can get stuck with an unfair non-disclosure agreement

Below is a checklist of standard provisions in a non-disclosure agreement.  The provisions of one NDA to another are generally about the same.  However, the devil is in the details.

For example, a non-disclosure agreement must have a way to identify secret information. People won’t know if the information is confidential or a trade secret. The discloser needs to tell the recipient when the information is secret. Otherwise, no one will know whether the information is secret. The discloser and recipient may have a different standard to gauge whether information should be confidential. Some criteria might be beneficial to the discloser while others are more beneficial to the recipient.

If the confidential information is identified by the nature of the information, then the discloser does not have to orally or confirm in writing that the information should be treated as confidential.  This standard is more beneficial to the discloser than the recipient because it covers all of the information that “appears” to be confidential.  This standard also invites litigation, because the recipient might have a different opinion as to what the nature of the information connotes.

If the NDA requires the discloser to identify secret information in writing, then this standard is beneficial to the recipient because it places the burden on the discloser before information is treated as confidential.

Each of the terms of a non-disclosure agreement can be adjusted to be beneficial to the recipient or discloser.

One way to mitigate the harshness of the agreement is to require that the obligations be mutual so that the standards are imposed equally on both parties.  However, this might only work if both parties are disclosing confidential information.  If only one party is disclosing confidential information, then this may not give the most benefit for the discloser and vice versa.

Checklist of terms and conditions for non-disclosure agreement

Before reading through the checklist, read through the Warning above. Instead of going through all of the possible standard clauses or provisions, here are a few links to a list.

Checklists:

• Key elements in NDA
• Confidentiality clauses

Key clauses for a non-disclosure agreement

Identification of the parties

Discloser, recipient and third parties (e.g., employees, associates, etc.) associated with the recipient

Types of information to be covered under the agreement

A laundry list of data to be treated as confidential information is normally given.

Identifying information to be treated as confidential information

The agreement may specify a way to identify confidential information.  The way to identify confidential information can be via a stamping system or oral communication or by the nature of the data.  The vital aspect to note is what the standard will be to identify confidential information.  Sometimes, it says that everything disclosed is to be treated as confidential information unless excluded in the exclusions.

Exclusions of covered information

These exclusions are known as the cutouts of what is confidential information.  These exclusions include situations where the recipient receives a subpoena to tell the court about the secret information. It also includes situations where the information was already publicly known. In these situations, the information is not considered to be confidential.

Level of confidentiality

This provision deals with the actions that you must take to keep the information confidential.  Are you required to keep the information in strict confidence?  Any inadvertent disclosure would be a breach of the agreement.  You could be required to put in place reasonable measures to keep the information confidential.  You could be required to keep the information confidential to the same degree of care that you keep your information confidential. However, in no instance will those measures be anything less than reasonable, or vice versa.

Authorized uses of confidential info

The agreement should specify how you can use that information.  Typically, for investors, potential licensees, and buyers, the authorized use is for evaluation purposes only.  They should not be able to exploit the information.

IP ownership rights

IP ownership is a hotly contested provision.  Often, people will agree that each party owns their inventions and ideas.  This type of arrangement would be unfair if the inventor disclosed an underlying invention to someone else who comes up with the improved version.  The basic version is owned by the inventor.  However, the improved version would be owned by the recipient.  Because of this, the conversation would not be as free as it should be to make the conversation worthwhile.

Time

The agreement may last for one or two years.  It is also conceivable that if trade secrets are concerned that the agreement will last for as long as the trade secret is still a trade secret.

Choice of law and jurisdiction

Non-disclosure agreements are covered under state law.  Hence, you need to receive counsel from an attorney that can advise you on the state law that governs the agreement.  Here is an example of how state law might change the outcome of the agreement.

California Section 16600

Under California Business and Professions Code Section 16600, any agreement that prevents someone from engaging in a profession or career is void to that extent.   This situation normally comes up with independent contractors—engineers, designers, and the like.  If the agreement prohibits them from securing future work because of a non-disclosure agreement, then under Section 16600, they are not held to the requirement to keep the information confidential.  This non-requirement is only true for agreements where the choice of law is California.

Related article: Trade secret exception to Section 16600 

Rev history: [Published 3.10.18, Revised 7.8.19]