Confidentiality Agreements
Confidentiality Agreements: Some General Considerations.
Confidentiality Agreements, often called Non-Disclosure Agreements or NDAs, are commonly employed by both buyer and seller in exploring the possible sale of a business or a commercial real estate project. When drafting and negotiating an NDA, the party disclosing the information seeks to restrict its use to the maximum extent possible, with the strongest penalties for disclosure to others. The party receiving the information, on the other hand, is acutely sensitive to the danger of being held responsible if the information gets in into third parties’ hands through no fault of its own.
Here are some notes on the competing objectives of buyer and seller in this typical starting point in negotiations.
General Objectives:
1. Objectives of the Disclosing Party. The discloser is trying to achieve two basic objectives: (a) to protect itself against misuse of the disclosed information itself; and
(b) to prevent disclosure of the fact that acquisition discussions are being held.
2. Objectives of the Receiving Party. The receiving party should consider whether it wants to enter into an NDA at all. It may run the risk of being accused of stealing trade secrets, even if its conduct is completely (or comparatively) innocent. For example, the receiver may develop similar information in the future on its own, the information may become public knowledge, or the receiver may inadvertently disclose or use the received information.
Methods – Typical NDA Terms and the Thinking Behind Them:
1. Permitted disclosures. Ideally, the disclosing party would like to retain the exclusive right to decide what information to disclose. Failing that , disclosure should be restricted to the employees of the receiving party or contractors (who also sign an NDA). If disclosure is required by subpoena or other legal process, the disclosing party should require the recipient to give the discloser immediate notice so it has enough time to seek protection.
2. Non-Use. In addition to the non-disclosure provision, the disclosure should include a non-use provision. It should be drafted to prevent the receiving party using the information other than for a specified purpose.
3. Defining What Is Confidential. The disclosing party will seek the broadest possible definition of what is confidential. The receiver will want to limit the definition in order to avoid being tarred by an accusation that it misappropriated a trade secret. For example, the disclosing party can specifically identify the confidential information or mark certain documents as confidential.
4. Exceptions. The recipient will want broad exceptions to the definition of confidential information. Typical exceptions include (a) information publicly known or in the public domain before disclosure, (b) information publicly known and made generally available after disclosure through no action or inaction of the recipient, (c) information already in the possession of the recipient (d) information obtained by the receiver from a third party without a breach of confidentiality, and (e) information independently developed by the recipient. Note that what is in the public domain versus what is a trade secret not always easy to determine.
The drafter should keep in mind the distinction between confidential information that the recipient must disclose by requirement of law (e.g., subpoena), and exceptions to the agreement’s definition of confidential information. The former should be an exception to the duty to not disclose, not an exception to the definition of confidential information.
5. No Obligation to Enter Into Negotiations. The disclosing party will seek to avoid having any obligation to negotiate with a prospective purchaser. The idea is to attempt to negate any implied duty to negotiate in good faith.
6. Employees. The disclosing party will seek to prevent the recipient from hiring away the disclosing party’s employees after the recipient terminates discussions.
7. Remedies. The disclosing party will want to preserve the right to injunctive relief in the event that it can establish a misuse of the furnished information or the recipient’s failure to observe other obligations in the confidentiality agreement. Disclosers usually seek an acknowledgement that that money damages alone would be an inadequate remedy for the injuries and damages that the discloser would suffer and incur as a result of a breach of the confidentiality provisions of the NDA. Lock-up agreements (a promise not to pursue other targets) are tough to secure. However even without one, breaking off talks to chase another company in the same space after promising not to do or to keep information confidential will most likely be viewed as an abuse of the privilege.
8. Exclusive Reliance Clauses: Disclosing parties usually include a clause that provides that the parties have not relied on any representations other than those set out in the NDA. They are usually, but not always, enforceable.
9. Term. NDAs commonly have terms of three to five years. The length of the term depends on the strategic value of the information to the discloser and how quickly the information may become obsolete.