8 Issues to Look for in an NDA (Non-Disclosure Agreement) [republished]

[This NDA Playbook / Checklist is being republished, by popular demand, to bring it to the top of my feed, as it is one of the most read articles in my Newsletter/blog archive. Originally published in May, 2023. My entire archive of Newsletter blog posts can be found here: https://www.dhirubhai.net/newsletters/contract-law-tips-checklists-7199518572912476160/ ]

This handy checklist can be used help you review any Non-Disclosure Agreements or NDAs. It’s not a substitute for legal advice, but hits on certain common issues found in many NDAs.

1.?????Mutuality. Make sure it’s mutual. Even if you are mostly receiving data, you don’t want it one way only to the other party’s benefit. A common misconception in some cases where 99% of the data flow is to you (for example, in evaluating a company as an M&A target), is that you do not need the NDA to be mutual because you are only receiving data, not giving any. However, you will likely be sharing incidental data about your business and business plans just by virtue of these conversations. (Of course, if you are the party giving most of the data, it’s OK to try to make it one way).

2.?????Definition of confidential info. Be sure the definition includes a "catch all" phrase, like "...and anything a reasonable person would or should understand to be confidential or proprietary". Especially important when you are the party giving more confidential information, you want to avoid requirements that you need to mark something as “confidential” in order to have it protected. Otherwise you could inadvertently lose all confidential protection rights on a technicality simply because you forgot to mark or identify something as confidential when you disclosed it.

3.?????Exceptions. Typical carveouts to the definition of confidential info include

• Information already in public domain (through no fault of recipient),
• info received from a third party (without confidentiality obligation),
• info independently developed (without use of or access to the confidential info),
• to the extent required to be disclosed by law, court, or regulators (but if so, with efforts to redact sensitive info and/or for regulator/subsequent recipient to keep confidential)

4.?????Scope of permitted use. The recipient should only be allowed to use your confidential info solely for the purpose of evaluating a potential transaction between the parties.

5.?????Standard of care. The recipient should use at least industry standard care to protect your data, and at least as much care as they use to protect their own confidential info.

6.?????Return or Destruction. Make sure confidential info must be returned or destroyed at end of discussions. There can be exceptions for things that a party needs to retain for legal compliance or that may be difficult to scrub from back up servers. That’s ok (but see #7 below).

7.?????Time period. The term length depends on the nature of the discussions, but often, NDAs last for a year or so, and the confidentiality period may last for 1-3 years after that. Make sure any retained data (see #6 above) remains subject to confidentiality so long as it is retained (and doesn’t meet any of the exceptions in #3). As a general rule, the more info you are sharing relative to the other party, the longer you want the confidentiality period to last.

8.?????Look out for extraneous legal requirements. An NDA is simply for confidential treatment of info exchanged while contemplating a longer term more “definitive” agreement – it is not an operational definitive agreement. Certain things belong only in that later agreement if and when you enter into one.

• Avoid, for example, reps, warranties, indemnities, etc. Data should be shared "as is".
• Avoid complex IP terms re ownership of derivative works, etc. Each party owns the data it shares. If there will be joint IP, you need more than a mere NDA.
• Avoid non-solicitation or non-compete clauses.

In most cases, none of that belongs in a simple NDA. That all comes later, if at all, in a subsequent definitive agreement.

UPDATE - Sometimes there are exceptions to these general rules for NDAs used for due diligence when evaluating an M&A acquisition or investment target (private equity and VC NDAs). There, non-solicitation clauses are more common See for example, https://www.outsidegc.com/blog/5-highly-negotiated-provisions-in-private-equity-non-disclosure-agreements

If you use this checklist before sending draft NDAs to your lawyer, you will likely have caught the vast majority of potential problems, expediting the final legal review.

#NDA #Legal #Contracts

About the Author:

Brian is a tech lawyer and "deal guy". https://www.outsidegc.com/brian-heller/ Outside GC is reinventing the business model for lawyers. Outside GC is 100% virtual, so they charge 1/3 what a larger more traditional firm might charge. All their lawyers have business experience or in-house legal experience (no career-law-firm-lawyers allowed), so they understand the business realities and can work efficiently. If you need a transactional deal lawyer with great real world experience, at a fair and reasonable price, check out Brian's bio at https://www.outsidegc.com/brian-heller/