NDAs areroutinely used in business but are not often thought out, resultingin a loss of confidential information, undue burden and expense,and misappropriation claims. (Photo: Shutterstock)

Nondisclosure Agreements (NDAs) are makingheadlines daily—from President Donald Trump requiring his seniorstaff to sign them, to adult film star Stormy Daniels claiming shewas coerced into signing one. Aside from these political andperhaps personal uses of NDAs, they are most commonly used inbusiness and can be critical to a business' success. However, NDAsare often given short shrift.

Ordinarily, the parties entering into an NDA are in a goodrelationship when the NDA is negotiated and signed. But,relationships sour—and a poorly drafted or performed NDA can wreak havocon a business. It is, therefore, important that NDAs are draftedand performed with care. Some common errors include:

• Being unable to locate the other party's “confidential”documents or identify persons who received them when the otherparty asks you to return or destroy them;
• Failing to draft the NDA to prevent your competitor fromaccessing your trade secrets by acquiring the other party;
• Failing to recognize that, although you have the leverage toimpose onerous requirements on the other party to protect yourconfidential information, the other party may, in turn, try toimpose the same requirements on you with regard to theirinformation;
• Forgetting to advise your employees of the NDA, resulting inthem using or disclosing the other party's “confidential”information in violation of the NDA;
• Failing to draft the NDA so you can share the other party'sinformation with your advisers (e.g., financial; legal); and
• Inadvertently granting the other party ownership of yourconfidential information by agreeing to a procedure whereby, if theother party sends you a document stamped confidential, theinformation in it is deemed that party's confidentialinformation.

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NDAs require careful drafting and follow-through in theirexecution. We offer below some general “best practices” forconsideration.

Best practices

• High-level considerations

Consider which party has leverage in the negotiations. If youhave the leverage, use it to reject the other party's onerousrequirements and to impose important requirements on the otherparty. If you don't have the leverage, pick your battles.

Consider whether “confidential” information will be flowing inboth directions and, thus, whether the obligations are mutual. Ifinformation will be flowing in both directions, remember thatadvocating for requirements to protect your information can alsoplace harsh burdens on your business to protect the other party's“confidential” information. Therefore, consider the costs andbenefits of provisions before proposing or accepting them.

• Defining the parties and theirrelationship

If the parties are exploring the possibility of an alliance, theNDA should make clear that neither party is agreeing to therelationship under consideration and, rather, the NDA simply allowsthe parties to explore the possibility of the alliance—bypreventing misuse of confidential information exchanged duringtheir exploration of the alliance.

Be very careful with provisions that allow the other side toassign the NDA to others or to disclose your confidentialinformation to the other party's affiliates. Consider thepossibility that a competitor may acquire the other party orotherwise become its affiliate after you sign the NDA. If that is aconcern, attempt to require the other party to obtain your consentbefore it can assign the NDA or disclose your information to any ofits affiliates.

• Scope of confidential information

 Do not agree to provisions that mayrequire you to protect the other party's non-confidentialinformation. Not only is it burdensome and expensive to protectinformation, but it may unnecessarily increase the scope ofmisappropriation or breach of contract claims that may be assertedagainst you.

Consider including a provision addressing what is excluded fromconfidential information that can be protected under the NDA. Forinstance, consider excluding information that is available fromother sources, that is in the public domain, or that isindependently developed.

Consider making clear that the NDA does not restrict a party'suse of its own confidential information.

Do not agree to any proposed procedures that arguably maytransfer to the other party ownership of your proprietaryinformation (e.g., a provision that a party will own theinformation in a document that they designate “confidential” andsend to the other party).  Unless the intent is otherwise,ownership of information should remain with whichever partyoriginally disclosed it. But, it is important to consider that theparties may exchange new ideas derived from the other's disclosedinformation. Careful thought should be given to who will owninformation developed in the course of the relationship (even ifthe relationship is exploratory).

• Protection measures

 Often, parties will agree that theymust use reasonable efforts to protect the other's information.But, keep in mind that “reasonable efforts” is not the same for allbusinesses. Consider that what would be “reasonable” for the otherparty (e.g., if it is small and unsophisticated) may not beadequate, in your view, to protect your information. If that is aconcern, consider expressly stating in the NDA what the protectionmeasures must include.

Consider providing for audit rights (e.g., a right to inspectthe other party's business records to determine how yourinformation is being used, disclosed, and protected). That way, ifyou suspect there is a problem, you have a means to address yourconcerns before having to commence formal legal proceedings. Auditsmay also provide you with evidence on which to base legalproceedings.

• Scope of the restrictions and theirduration

 Define clearly how the informationyou disclose to the other party may be used and to whom it may bedisclosed. Consider in advance to whom outside your company you mayneed to disclose the other party's information (e.g., financial andlegal advisers in addition to your “need to know” employees).Attempt to negotiate a provision which is consistent with thoseneeds.

Confidentiality obligations may continue after the partiesterminate their relationship. The duration of such obligationsdepends largely on the nature of the information being disclosed(e.g., it is expected to be stale after one year versus itis expected to remain a trade secret indefinitely).  Sinceunnecessarily protecting information can be expensive andburdensome (and increase the risk of misappropriation claims),careful thought should be given to the length of confidentialityobligations.

• Avoiding misappropriation claims and/or preparing todefend against them

 It is important to keepingappropriate records. Be sure to maintain:

• A copy of the NDA and all communications related thereto;and
• Documentation of the information that was designated asconfidential under the NDA, by whom it was designated, to whom itwas disclosed, how it was used, and where it is located within yoursystems. Consider what method(s) of record-keeping are best underyour particular circumstances (e.g., a restricted share-site thatrequires an electronic sign-in each time there is access; a secureroom that may require a swipe card access).

Educate your employees who will have access to the other party'sconfidential information about the NDA and its requirements.

If possible, ensure that employees who are involved with yourother projects that potentially overlap with the subject matter ofother party's confidential information memorialize how they arrivedat their conclusions. That way, if it becomes necessary, you canshow that the other party's information was not reliedupon.  In an ideal world, it is best to wall off thoseother projects from those employees who have access to the otherparty's confidential information. But, that frequently is notrealistic. Thus, the ability to demonstrate that the other party'sinformation was not misused in your other projects is all the moreimportant.

Upon termination, there should be no further use of or access tothe other party's confidential information, except to comply withtermination obligations (e.g., to return or destroy documents). Cutoff access for those who will not be involved in complying withtermination obligations.

Takes steps to ensure that you will be ready to return ordestroy the other party's confidential documents when you need to(e.g., upon termination or demand by the other party). Withoutcareful advance planning, collecting all the documents can be atime-consuming process.

• Addressing integrationprovisions 

An integration clause declares that the written contract (here,the NDA) is a complete and final agreement between the parties andsupersedes all prior negotiations. It is generally a good idea toinclude one in your NDA, but be careful that it does notinadvertently nullify existing agreements between the parties(e.g., an existing NDA relating to a similar project).

NDAs are routinely used in business but are not often thoughtout, resulting in a loss of confidential information, undue burdenand expense, and misappropriation claims. Hopefully, this articleprovides you with some ideas to address such concerns.

Rebecca Edelson is a partner in SheppardMullins' intellectual property and litigation practicegroups in Century City in Los Angeles and leads the firm's tradesecret practice. She is a co-editor and an author of the treatise,Trade Secret Litigation and Protection in California, as well asits recent supplement on the Defend Trade Secrets Act. She is aforme

Chidera Anyanwu is an associatein the firm's intellectual property practice group inWashington, D.C.