Navigating Non-Disclosure Agreements: Key Tips for Effective Review

Non-Disclosure Agreements (NDAs), commonly called confidentiality agreements, are foundational legal contracts used to protect sensitive business information, trade secrets, proprietary data, strategic plans, and other confidential knowledge, when sharing with third parties.  Despite widespread use and often seemingly standard language, signing an NDA without an understanding and careful review can expose individuals and businesses to significant legal and operational risks.  This blog post summarizes the key terms of NDAs, highlights standard provisions across different types of transactions, identifies critical watch-outs, and emphasizes crucial compliance considerations to help you protect your interests.

Understanding NDAs: NDAs create a confidential relationship between parties.  Typically, this involves a "Disclosing Party," who possesses and shares confidential information, and a "Receiving Party," who receives this information and agrees to legally binding obligations not to disclose or use it for any purpose other than what is explicitly permitted within the agreement.  NDAs are used in a wide array of business contexts, including but not limited to:

• Mergers and Acquisitions (M&A):  Facilitating the exchange of sensitive financial, operational, and strategic information during due diligence.
  
  
• Employment Relationships:  Protecting an employer's confidential information and trade secrets accessed by employees.
  
  
• Consulting and Independent Contractor Engagements:  Safeguarding proprietary information shared with external service providers.
  
  
• Potential Partnerships and Joint Ventures:  Enabling strategic and technical information exchange while exploring collaboration.
  
  
• Technology Licensing and Development:  Protecting proprietary technology, know-how, and technical specifications.
  
  
• Investment:  Sharing detailed business plans and financial information with potential investors.

Fundamental Tips for Reviewing NDAs: A diligent review process is crucial before signing any NDA.

1. Identify All Parties and Clearly Define the Purpose:  Identify the full legal names of the Disclosing Party(ies) and the Receiving Party(ies).  It is equally important to identify and understand which individuals or entities affiliated with the Receiving Party (often referred to as "Representatives," such as employees, officers, directors, legal counsel, accountants, or other advisors) will be permitted to access the confidential information and be bound by the confidentiality obligations.  The NDA should define the specific, legitimate business purpose for disclosing confidential information.  This "Permitted Use" clause is critical, as it strictly limits the Receiving Party's ability to use the information only for this stated purpose and no other.  Avoid vague or overly broad purpose descriptions, creating ambiguity and potential misuse.
   
   
2. Precisely Define Confidential Information:  This definition must be clear, specific, and carefully tailored to the business context and the shared information type.  A definition that is too broad or generic can be problematic for the Receiving Party, potentially restricting their ability to use general industry knowledge or information they already possess or could lawfully obtain independently.  Conversely, a definition that is too narrow may fail to adequately protect the Disclosing Party's valuable proprietary information and trade secrets.
   
   The definition should ideally:

• • Specify categories of information covered (e.g., technical data, formulas, algorithms, source code, business plans, marketing strategies, customer lists, financial information, personnel data).
    
    
  • Address how information disclosed in different formats (written, oral, visual, electronic) will be treated.  For oral disclosures, it is common practice to require that the Disclosing Party summarize the confidential nature of the information in a written notice to the Receiving Party within a specified period after the oral disclosure.
    
    
  • Explicitly state that information derived from or incorporating the confidential information (e.g., analyses, reports, or notes prepared by the Receiving Party) is also considered Confidential Information.

3. Examine Exclusions from Confidentiality:  The exclusions are equally crucial for the Receiving Party.  These provisions specify types of information that, even if shared, are not subject to the confidentiality obligations.  Standard and crucial exclusions typically include information that:

• • Is or becomes generally available to the public through no fault of the Receiving Party.
    
    
  • Was already in the Receiving Party's lawful possession without confidentiality restrictions before the disclosure by the Disclosing Party.
    
    
  • Is independently developed by the Receiving Party without using or referencing the Disclosing Party's confidential information.
    
    
  • Is rightfully received by the Receiving Party from a third party not known by the Receiving Party to be under a confidentiality obligation to the Disclosing Party.
    
    
  • Must be disclosed by law, regulation, or a valid court or governmental order (often with a requirement to provide prior notice to the Disclosing Party, where legally permissible).
    
    
  • Ensure these exclusions are clearly defined and provide necessary flexibility for the Receiving Party while still protecting the Disclosing Party's legitimate interests.

4. Understand the Term and Termination Provisions:  The NDA must specify the duration of the confidentiality obligations (the "term").  The appropriate length depends heavily on the nature of the confidential information and industry standards.  For general confidential business information, a fixed term (commonly ranging from one to five years from the date of disclosure or the effective date of the NDA) is typical.  However, for information that qualifies as a trade secret under applicable law or other highly confidential information, indefinite protection may be sought, as trade secret status can theoretically last as long as the information remains secret and provides a competitive advantage.
   
   While I prefer a perpetual term for projections, you need to be cautious of a perpetual term for information that is not a trade secret or will likely lose its confidential nature or value over time.  The agreement should also clearly outline the conditions under which the NDA can be terminated (e.g., by mutual written agreement, completion of the stated purpose) and specify the Receiving Party's obligations regarding the return or certified destruction of all confidential information (and copies thereof) upon termination or expiration.
   
   Pros and Cons of Indefinite Terms (primarily relevant for trade secrets or highly confidential information):

• • Pros:  Eliminates the need for periodic renewal or renegotiation of confidentiality periods for such information.
    
    
  • Cons:  May be legally challenged or deemed unreasonable by courts if applied to information that does not qualify as a trade secret or that subsequently enters the public domain.  It can create long-term administrative burdens when tracking and managing confidentiality obligations.

It must include explicit carve-outs for legally protected disclosures (see Compliance section below) to be enforceable.

5. Consider Mutual vs. Unilateral NDAs:  Determine whether the NDA is structured as a unilateral (one-way) agreement, where only one party is disclosing confidential information and the other is solely the Receiving Party, or a mutual (two-way) agreement, where both parties anticipate sharing their confidential information and each act as both a Disclosing and Receiving Party.  If both parties disclose sensitive data as part of the relationship or transaction, a mutual NDA is more appropriate and ensures balanced obligations and reciprocal protection for both parties' confidential information.
   
   
6. Specific Considerations Across Transaction Types:  While the core elements of NDAs are consistent, specific terms and considerations become particularly important depending on the context of the transaction:

• • Mergers and Acquisitions (M&A):  NDAs are critical during the initial exploration and due diligence phases. Confidential information definitions are typically comprehensive, covering financial records, operational data, intellectual property, customer and employee details, and often the potential transaction itself.  Key clauses to watch include non-solicitation provisions (restricting the Receiving Party from hiring the target company's employees or soliciting its customers/suppliers) and standstill agreements (prohibiting the Receiving Party from acquiring the target company's securities or making unsolicited proposals).  The "Purpose" clause will be narrowly defined to evaluate the potential merger, acquisition, or investment.
    
    
  • Employment:  Employee NDAs protect an employer's trade secrets, proprietary processes, customer lists, strategic information, and other confidential data that an employee will access or develop during employment.  The confidentiality obligations typically survive the termination of employment.  These agreements often include restrictive covenants such as non-compete and non-solicitation clauses.  It is critical to carefully evaluate these restrictive covenants' reasonableness and legal enforceability based on their duration, geographic scope, and the restricted activities, as enforceability varies significantly by state law.  Compliance with state-specific requirements (e.g., notice periods, consideration) is essential.
    
    
  • Technology Licensing:  NDAs in technology licensing scenarios protect proprietary technology, technical specifications, algorithms, software code, manufacturing processes, and related know-how shared for evaluation, development, manufacturing, or integration purposes.  The definition of confidential information should be precise to the technology being licensed.  Essential clauses will include strict limitations on the permitted use of the technology (e.g., for evaluation only, or use in a specific product) and explicit prohibitions on reverse engineering, decompiling, or disassembling the licensed technology.
    
    
  • Potential Partnerships and Joint Ventures:  NDAs for exploring potential collaborations protect sensitive information exchanged during discussions, such as business plans, market analyses, financial forecasts, details about proprietary processes, and intellectual property.  Given that both parties often share confidential information in these exploratory discussions, mutual NDAs are standard.  The "Purpose" clause should clearly define the scope of the potential partnership or joint venture being explored.

Critical Watch-Outs and Considerations:  Reviewing an NDA requires a crucial eye for potential pitfalls.  Be vigilant for the following:

• Overly Broad Confidentiality Definitions:  Can excessively restrict your current and future business operations based on information that may not be truly confidential or is already known to you.
  
  
• Excessively Long Terms:  Can unnecessarily impede future business activities, especially for information with a limited useful life.  Perpetual terms should be scrutinized and generally limited to information qualifying as a trade secret.
  
  
• One-Sided Obligations and Remedies:  In a mutual NDA, ensure that the obligations, restrictions, and available remedies for breach are balanced between both parties.  A heavily one-sided agreement may indicate an imbalance of bargaining power and be subject to legal challenge.
  
  
• Unreasonable Restrictive Covenants (Non-Compete/Non-Solicitation):  Evaluate these clauses critically, only appropriate in employment (sometimes) or M&A contexts, to ensure they are legally enforceable in the relevant jurisdiction and do not unduly restrict your ability to work or compete fairly.
  
  
• Absence of Legal Disclosure Carve-Outs:  A legally compliant NDA must explicitly permit disclosures required by law, regulation, or a valid court or governmental order.  An NDA cannot lawfully prevent you from complying with a legal obligation to disclose information.
  
  
• Disproportionate Remedies:  Be wary of clauses imposing excessive penalties or liquidated damages that do not represent a reasonable, good-faith estimate of the potential harm resulting from a breach.  Courts may refuse to enforce punitive liquidated damages clauses.  Remedies should be proportionate to the possible damage.
  
  
• "Residuals" Clauses:  These clauses, if broadly drafted, can be detrimental to the Disclosing Party as they may allow the Receiving Party to use information retained in the unaided memory of their personnel without confidentiality restrictions.  As a Disclosing Party, try to limit or exclude such clauses.  As a Receiving Party, understand their implications.
  
  
• Lack of Clear Return or Destruction Provisions:  The NDA should clearly outline the process, timeframe, and method for returning or destroying all copies of confidential information upon termination or expiration.
  
  
• Ambiguous Language:  Vague, imprecise, or internally inconsistent wording throughout the NDA can lead to misinterpretations, disagreements, and potential disputes down the line.  Demand clear and specific language.
  
  
• Governing Law and Jurisdiction:  Understand which state's laws will govern the interpretation and enforcement of the agreement and where any legal disputes would be resolved.  Ensure these are reasonable and practical for you.

Compliance with Federal and State Laws:  It is critical to understand that NDAs cannot be used to prevent legally protected disclosures or waive statutory rights.  NDAs must comply with federal and state laws designed to protect public interests, promote transparency, and safeguard individual rights. Key examples include:

• Defend Trade Secrets Act (DTSA) (2016):  This federal law provides immunity from civil and criminal liability under federal or state trade secret laws for individuals who disclose a trade secret in confidence to a government official (federal, state, or local) or an attorney solely to report or investigate a suspected violation of law.  An NDA cannot lawfully prohibit such disclosures.  Many NDAs now include a specific notice referencing this immunity to ensure enforceability under the DTSA.
  
  
• Speak Out Act (2022):  This federal law prohibits the judicial enforcement of pre-dispute non-disclosure and non-disparagement clauses agreed to before a dispute arises involving claims of sexual assault or sexual harassment.  This means that an NDA signed before such a claim arises cannot prevent an individual from speaking publicly about the sexual assault or harassment.
  
  
• Whistleblower Protection Laws:  Various federal and state laws protect individuals who report illegal activities, fraud, waste, abuse, or other wrongdoing to appropriate government authorities.  Examples include provisions under the Sarbanes-Oxley Act (SOX), the Dodd-Frank Act (which provides for SEC whistleblower programs), and numerous state-specific whistleblower statutes.  An NDA cannot lawfully prevent an individual from making a protected report to a government agency or cooperating with a government investigation.  NDAs should not be drafted or interpreted in a way that would silence or retaliate against individuals making such protected disclosures.
  
  
• State-Specific Laws:  Many states have laws that impact the enforceability of specific NDA provisions, particularly regarding restrictive covenants (non-competes, non-solicits), the definition of confidential information, and specific carve-outs for reporting illegal activity or harassment.  It is essential to ensure the NDA complies with the specific laws of the relevant state(s).

Carefully reviewing NDAs to ensure they contain explicit carve-outs for these legally protected disclosures and comply with all applicable federal and state laws is not just good practice; it is critical for the NDA's enforceability and to avoid potential legal challenges and penalties.  An NDA cannot compel you to break the law or violate public policy.

Non-disclosure agreements safeguard sensitive business information in complex and competitive landscapes.  They are legally binding contracts that demand careful attention, critical review, and a clear understanding of their terms and implications.  By diligently examining the definition of confidential information, the permitted use, the term and termination provisions, applicable exclusions, potential watch-outs like restrictive covenants and remedies, and ensuring compliance with relevant federal and state laws, you can significantly mitigate potential risks and effectively protect your valuable business interests.  Never treat an NDA as a mere formality.  When in doubt about any provision, its potential impact, or its compliance with applicable law, consulting with experienced legal counsel to ensure comprehensive protection and reduce the likelihood of future disputes.