Non-Disclosure Agreement (NDA) and How Does it Work

A non-disclosure agreement (NDA) legally enforceable contract creates a confidential connection between two parties. The signatory party or other party mutually agrees that they will not share any sensitive information they collect for the other party. The confidentiality agreement is another name for an NDA. Businesses regularly utilise non-disclosure agreements while dealing with other companies. They allow parties to send critical information without the risk of it slipping into the hands of competitors. In this case, it’s known as a mutual non-disclosure agreement.

NDA Requirements can be tailored to any extent, but at least six essential aspects must be included:

• The names of the contracting parties;
• In this example, a definition of what constitutes confidential information;
• Any exceptions to the rule of confidentiality;
• A statement describing how the information to be revealed should be used;
• The duration (time); and
• Miscellaneous provisions;

Key Points:

• The NDA recognises the existence of a confidential relationship between two or more parties and safeguards the information they disclose from outsiders;
• The NDA is commonly used before business conversations about possible joint ventures;
• Employees are frequently compelled to sign NDAs to preserve their employer’s secret business information;
• A confidentiality agreement is another name for an NDA;
• Mutual and non-mutual NDA are the two main types of NDA.

NDAs are routinely used before negotiations between a company seeking funding and potential investors. In these cases, the NDA is meant to keep competitors from learning about their trade secrets or business plans.

Particular Points to Consider in the NDA

• A marketing strategy and sales plan, potential clients, a manufacturing process, or proprietary software are all examples of information that needs to be protected;
• If one party violates NDA, the other party can file a lawsuit in Court to prohibit additional disclosures and prosecute the offending party for monetary damages; and 
• Incorporating an Expiration Date into NDAs.

BladeRoom Group Limited v. Emerson Electric Co., a recent decision by the Ninth Circuit Court of Appeals, emphasises the importance of carefully crafting the terms and conditions of the NDA. It also ensured that there is no ambiguity as to when the NDA’s confidentiality protections expire.

In Bladeroom, the Court overturned a multi-million dollar judgment favouring the plaintiff, partly due to the Court’s divergent understanding of the NDA’s secrecy restrictions.

Expiration Dates in NDA

The proprietor of a trade secret needs to make conscious endeavours to sustain the secrecy of the information they desire to protect under both the Uniform Trade Secrets Act (approved by every state save New York) and the federal Defend Trade Secrets Act. The jury will have to evaluate whether a party took reasonable steps to secure the trade secret. The employment of an NDA that specifically spells forth the boundaries for protection is one of the most typical “reasonable steps”. When discussing information with another company, such as during a joint venture or potential merger, NDAs are very important.

While drafting NDA, the owner of the protected information must decide if the agreement should have an expiration date. Because the expiration of specific NDA requirements could jeopardise a company’s trade secrets, indefinite protection is preferable. Indeed, at least two district courts have ruled that permitting an NDA to lapse shows the trade secret owner failed to take reasonable steps to protect the information’s security. The inclusion of an expiration date, on the other hand, limits the scope of any potential trade restriction, providing some protection against a finding that an NDA is void because it is excessive or broader than necessary to protect the owner’s interests, particularly in the case of NDAs signed by employees.

As a result, the advice on whether or not to include an expiration date in a specific NDA can differ. The latest Bladeroom ruling shows what might happen when an NDA drafter attempts to have it both ways.

Bladeroom’s Ninth Circuit Decision:

The plaintiff, an English data centre design firm, drafted an NDA in August 2011 to discuss a possible sale to a competitor. The deal fell through, and the plaintiff and a competitor bid on the same data centre development project the following year. On the other hand, the plaintiff was not aware of the competition’s proposal until the competitor signed a design-build contract with the customer two and a half years after the competing companies signed the NDA.

The plaintiff subsequently filed a lawsuit in the Northern District of California against the competition and the customer, alleging that the competitor’s data centre design plagiarised the plaintiff’s technology and claimed breach of contract, trade secret misappropriation, and other claims.
The NDA’s second paragraph, controlled by English law, had a dozen subparagraphs that detailed the competitor’s secrecy responsibilities. One section prohibited the competitor from releasing information shared with the plaintiff “at any time,” while another specified that any supplied information “must remain the property of” the plaintiff and “shall not grant” “any rights or licence whatsoever” to the competitor.
The NDA’s third paragraph further stated that its secrecy restrictions did not apply to information that was in the public domain “or afterwards falls into[] the public domain, other than because of” the NDA’s breach.

Before trial, the plaintiff filed an in limine motion to prevent the competition from contending that the proviso in the NDA’s twelfth paragraph, as a matter of law, enabled the competitor to use the plaintiff’s secret information two years after signing it. The district court granted the motion because the NDA’s confidentiality obligations did not expire under paragraph twelve and remained in effect for more than two years for the following reasons: (1) the NDA’s “purpose” was to protect the information, not to allow it to be released after two years: (2) “A reasonable businessperson in either party’s position would not have envisaged the competitor’s [reading];” and (3) the competitor’s reading “would result in an illogical consequence and create some conflict with the rest of the [NDA].”

Plaintiff was awarded $30 million in damages and an equal amount in punitive damages by the trial court, based on a jury verdict. The competitor, predictably, contested the decision.

On appeal, the plaintiff agreed with the district court that the twelfth paragraph’s expiration date restriction was restricted only to the paragraph’s “discussions or negotiations” phrase. In other words, the plaintiff asserted that, under paragraph twelve, information is disclosed during the two years was secret and subject to a continuous obligation against disclosure or use. Still, that information revealed after that period was not.

On the other hand, the rival claimed that the proviso applied to all of paragraph twelve and that, as a result, the parties’ duties under the NDA expired after two years.

The main point to remember

• While crafting an NDA, the potential consequences of inserting an expiration date should be carefully addressed. The disclosure of sensitive information is required to help negotiations over a possible contract;
• Putting an expiration date on the parties’ responsibilities may not be prudent if the talks fail;
• Alternatively, if the NDA additionally clearly states that any confidentiality terms in the NDA will continue to apply regardless of whether a deal is struck, including an expiration date may be acceptable;
• These factors for establishing an NDA are by no means exhaustive, and firms with any queries or concerns regarding drafting NDAs should seek legal advice.

Disclaimer: The present article intends to provide general guidance on the subject, and you can also consult us in your specific case.