Nearly all businesses have valuable confidential information, and for many, confidential information is key asset. Companies also share, receive, and exchange confidential information with and from customers, suppliers and other parties in the ordinary course of business and in a wide variety of commercial transactions and relationships.
1.2 When is a NDA needed?
A range of commercial transactions and relationships involve either the disclosure of confidential information by one party to the other or a reciprocal exchange of information. In both cases, the parties should have a confidentiality agreement in place.
For example, confidentiality agreements may be used when evaluating or engaging a business or marketing consultant or agency, where the hiring company will necessarily disclose confidential information to enable the consultant to perform the assignment. They can also be used when soliciting proposals from vendors, software developers, or other service providers, which usually involves the exchange of pricing, strategies, personnel records, business methods, technical specifications, and other confidential information of both parties.
Finally, your company may need a confidentiality agreement when entering a co-marketing relationship, as an e-commerce business, with the operator of a complementary website or a similar type of strategic alliance. The Company's policy is to promote high standards of integrity by conducting its affairs honestly and ethically. It is the obligation of all staff to consider whether company information is confidential.
1.3 Why is it necessary to have a written NDA?
There are numerous reasons to enter into written confidentiality agreements, such as:
Avoiding confusion over what the parties consider to be confidential.
Allowing more flexibility in defining what is confidential.
Delineating expectations regarding treatment of confidential information between the parties, whether disclosing or receiving confidential information.
Enforcing written contracts is easier than oral agreements.
Memorializing confidentiality agreements is often required under upstream agreements with third parties (for example, a service provider's customer agreement may require written confidentiality agreements with subcontractors).
Maximizing protection of trade secrets, because under state law this protection can be weakened or lost (deemed waived) if disclosed without a written agreement.
Depending on the type of transaction or relationship, only one party may share its confidential information with the other, or the parties may engage in a mutual or reciprocal exchange of information.
In unilateral confidentiality agreements, the nondisclosure obligations and access and use restrictions will apply only to the party that is the recipient of confidential information, but the operative provisions can be drafted to favor either party which is why we should always push to use our own draft document.
In mutual confidentiality agreements, each party is treated as both a discloser of its—and a recipient of the other party's—confidential information (such as when two companies form a strategic marketing alliance). In these situations, both parties are subject to identical nondisclosure obligations and access and use restrictions for information disclosed by the other party.
1.5 Risks
NDAs are very useful to prevent unauthorized disclosures of information, but they have inherent limitations and risks, particularly when recipients have little intention of complying with them. These limitations include the following:
Once information is wrongfully disclosed and becomes part of the public domain, it cannot later be "undisclosed."
Proving a breach of a confidentiality agreement can be very difficult.
Damages for breach of contract (or an accounting of profits, where the recipient has made commercial use of the information) may be the only legal remedy available once the information is disclosed. However, damages may not be adequate or may be difficult to ascertain, especially when the confidential information has potential future value as opposed to present value.
Even where a recipient complies with all the confidentiality agreement's requirements, it may indirectly use the disclosed confidential information to its commercial advantage. The Company's periodic reports and other documents filed with the SEC, including all financial statements and other financial information, must comply with applicable federal securities laws and SEC rules.