Confidentiality Agreement are tricky

April 3, 2014 by

Confidentiality agreement are tricky

Signing a confidentiality agreement or non-disclosure agreement (NDA) can be a critical step in formalising a new business relationship.

Many innovative businesses spend considerable time and resources on developing new products and technologies. Most businesses, whether large or small, that engage in a business transaction will want to ensure that their valuable business information (be it technical, commercial or financial) does not fall into the wrong hands. Confidential information can include customer and supplier lists, business plans, market research, business strategies, source codes, and research processes. The best way to keep something confidential is not to disclose it in the first place.

Confidential agreement

However, taking a business to the next level often requires that at least one party discloses its confidential information to assess the viability of the proposed business venture or transaction.

For instance, prior to signing a licensing agreement, the potential buyer of logistics tracking software may wish to ensure that the technology is suitable for the buyer’s purposes. Similarly, before investing in or buying a business, an investor may wish to conduct a legal, financial, operations, and IT due diligence process to validate the value and health of the business.

During these preliminary stages of negotiations, the parties usually sign a memorandum of understanding or letters of intent and in almost all cases a confidentiality agreement or non-disclosure agreement (NDA). It is usually the first formal contract that the parties sign. Signing an effective NDA can therefore be a critical step in formalising a new business relationship.

Conventional intellectual property rights are sometimes inadequate in protecting confidential commercial or technical information despite their commercial value. A confidentiality agreement puts the recipient on notice that you are serious about protecting your confidential and proprietary information and trade secrets. Confidentiality agreements are the cheapest way of protecting your ideas and inventions.

If you disclose an inventive idea or a novel design to someone without having a NDA in place, you run the risk of losing your ability to file a patent or registered design application. This is because disclosure will destroy your novelty claim.

What to look out for

Confidentiality agreements are written contracts that record the conditions under which confidential information is disclosed. No single NDA will work in every situation. Each NDA should be customised for the facts and opportunity at hand. This means that you must think carefully about what to include in your NDA.

A good NDA will contain a careful definition of the confidential or proprietary information. If exceptions to the prohibitions on disclosure or use apply, they should be precisely and narrowly defined.

Here are my recommendations:

  • Unless you have no alternative or have decided to take the risk that others may use your ideas or information without your permission, do not disclose until the intended recipient has signed and returned an NDA to you.
  • Disclose confidential information on a need-to-know basis only.
  • Take steps to protect your own confidential information from unauthorised access from within your own organisation.
  • Differentiate between trade secrets, IP, and confidential information.
  • Always check any NDA that is provided to you, and make sure that said NDA does not unreasonably restrict your future activities.
  • Keep a record of what was disclosed at meetings or in presentations.

The only time when it is really unnecessary to use an NDA is when you talk to your solicitor for the purpose of seeking legal advice. In New Zealand and other jurisdictions, solicitors and barristers are professionally and legally obliged to keep the affairs of clients confidential even when they ultimately do not represent you. Examples of other professionals that also owe a duty of confidence are health care professionals, accountants, and company directors.

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