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Fact: business folks love NDAs. Before a deal
is ever discussed, the vendor or its customer will
usually insist on signing a NDA. The typical NDA is usually written to
cover any information disclosed between the parties in whatever form. It may
cover one party's "confidential" information disclosed to the other
(a unilateral NDA) or cover each party's "confidential" information
disclosed to the other (a reciprocal NDA). "Confidential" information
is usually broadly defined to include anything that isn't public knowledge
that was disclosed by each party to other. The NDA may require that the data
disclosed be marked CONFIDENTIAL for it to be covered by the NDA.
The medical profession has been criticized for prescribing
antibiotics needlessly, and lawyers should be criticized for the needless
preparation of NDAs. Like the overuse of antibiotics, the overuse of NDAs has
the same result: the effectiveness of the tool is reduced in situations where
its use makes good sense.
As a seller of anything, I have an inherent interest in limiting competition. The more I can do to narrow a prospective buyer’s alternatives to my product the better. And once I start selling to the buyer, the more I can do to prolong the relationship the better. A good way to do this is to prevent the buyer from shopping the competition. What better way to do that than insisting that my buyer sign a NDA that prevents disclosure of our business relationship? Having a NDA in force indefinitely will dissuade my buyer from looking for better deals on similar products from my competitors.
So, I as a savvy seller will send my buyer our company’s form NDA. I will tell the buyer that we have all of our customers routinely sign this agreement and that no one ever changes it. Don’t even bother to read it. If you do, don’t be concerned about the fact that you are agreeing to protect our “ideas, concepts, plans, and methods” even though these do not qualify as trade secrets. And don’t worry about the fact that you must protect all information that we give you even if it isn’t marked “confidential.”
The buyer may point out that the length of its non-disclosure obligations in the agreement is not specifically defined, only that the NDA states that either party may terminate the agreement at any time on advance notice. But the extent to which the buyer must protect the seller's confidential information after termination may not be specified, only that this obligation “survives” the agreement’s termination. The seller may think that its confidential information is so valuable that the buyer must protect it forever!
On the buyer side, it may intend to disclose sensitive business information to the seller about the buyer's information technology infrastructure, customer-base, or future business plans to determine if the seller's product would meet the buyer's expectations for a good return on investment. So, the NDA may require the seller to keep secret everything that buyer discloses to it related to the proposed transaction. But is this fair to the seller?
- The
confidential information to be protected is clearly and concisely defined.
To do this, the business folks should prepare an Exhibit A to the NDA that
describes the parties' confidential information in reasonable
detail.
- The
duration of the protection is limited to a reasonable time. For technology
transactions, five years is usually fair. After that period, the business
landscape will probably have changed so much that there is no reason to
further protect the confidential information.
- If
the parties proceed with the proposed deal and sign a purchase agreement
or software license, there should be confidentiality provisions in that
agreement (lawyers may call this a "definitive
agreement") that should apply to information disclosed between
the parties after the effective date of the definitive agreement. The
NDA should apply only to confidential information disclosed before the definitive
agreement is signed.
- Avoid
the situation where, instead of a reciprocal NDA, each party just signs
the other's unilateral NDA. This is always a bad idea because the two agreements are likely to conflict with each other.
- Each
party should track the NDAs they have signed, their duration, and expiration dates. It's common for an NDA to expire "X" years
from the signature date, but the confidential information must be
protected for "X" years after the NDA's expiration. If
you don't understand when your confidentiality obligations expire, find an
attorney who can read the agreement and advise you about that.
- Create a spreadsheet of all NDAs, keep it current, and send the link to all company personnel who may have occasion to confer with the other party to the NDA - or their competitor. This should help prevent your company's unintentional breach of the NDA by disclosing the other party's confidential information to their competitor.
- Even with a NDA in place, be cautious of what you disclose to the other party. You should investigate the other party to determine if it has a good business reputation. Ask for credit references and a list of the party's customers and contact them to see if they have had any problems with that party.
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