Friday June 1, 2018

NDAs: Are They Worth The Paper They’re Written On?

Authored by: Marc J. Belliveau Posted in: Business Law Employment Law Intellectual Property

Non-Disclosure Agreements (NDAs), sometimes called Confidentiality Agreements, are a type of contract which compels its parties to come under the proverbial “cone of silence.”

The recipient of the defined “confidential information” becomes legally bound not to use or disclose the information provided by the disclosing party. Sometimes both parties disclose to the other, such as the commencement of merger negotiations, licensed manufacturing arrangements or new product launches, and NDAs for those relationships are bilateral; both are bound to secrecy. Their duration can be short or long depending on the relationship created.

Clearly, NDAs document a moral, quasi-fiduciary relationship, one of trust and confidence. The parties must fundamentally trust each other. If one of them is a scoundrel, the contract will not be worth the paper it’s written on from day one. Often it is not only very difficult to prove the rogue breached the NDA but also very expensive in terms of litigation and enforcement.

Nevertheless, NDAs can still be useful and advisable for several reasons. Here are 10:

  1. The NDA starts the relationship on a clear footing and allows the parties to move forward in their negotiations knowing that everything will be kept strictly confidential. If the other side is unwilling to sign one, then it’s probably not wise to share your valuable ideas with them.
  2. For start-up companies, it’s a crucial tool to deploy both externally and internally. Investors will want to make sure the ideas, processes, inventions and so on are all locked down to minimize risks of unauthorized disclosure. It’s always a checklist item in a corporate valuation or other due diligence context to identify and manage legal risks.
  3. Under patent laws, disclosure pursuant to NDAs does not trigger the one-year window in which an inventor or owner must file a patent application or forfeit all monopoly rights to the invention. Disclosing the invention under an NDA prevents the disclosure from being deemed to have been made to the “public.”
  4. Ideas and trade secrets are very broad categories of intellectual property for which there is no federal or provincial statutory or common law regime (unlike statutory monopolies, patents, copyright, trade-marks, industrial designs, integrated circuit topographies, plant breeders’ rights, and technical protection measures.) NDAs are the only protection available for corporate or other secrets. While judicial remedies of injunction and damages may be cold comfort to the party having lost a valuable idea or trade secret to a crook, they are better than nothing.
  5. Depending on its wording, the NDA can shift the onus of proof to the recipient. In other words, confidential information may be presumed to come from the disclosing party unless the person receiving the information can prove that it was already in possession of it.
  6. Most countries do not have legislation protecting confidential information. As such, confidentiality clauses in NDAs are the only way of protecting commercially confidential information in those jurisdictions.
  7. The NDA gives the party bound by it pause before they disclose anything to make sure they are not potentially breaching its terms inadvertently. It tightens everyone’s “loose lips” to avoid sinking any ships. Some argue that NDAs are like a “pre-nup,” in that they tend to sour a relationship before it has a chance to grow, but the majority view is that they set the appropriate “tone” for a commercial relationship.
  8. The NDA is itself circumstantial evidence that the parties are in a confidential relationship. Furthermore, if the definition of “confidential information” is reasonably drafted, it will also be evidence of what the parties believe was truly confidential and eliminate any potential grey areas or misunderstandings.
  9. The NDA can stipulate certain specific processes and tailored remedies between the parties that are more favourable than normal civil procedure or arbitration rules or what a court might ultimately order in the context of enforcement.
  10. Although a somewhat rare situation, the NDA can be educational by helping the other party understand the confidential context and to do what is legally and morally required. Some people may be innocently unaware of their confidentiality obligations; however, they will obey and comply with them if they are clearly set out in the written NDA.

NDAs need to be tailored for the specific “secretive” circumstances to which they relate. It would be just as unwise to use a standard template for every situation as it would be to try to use the NDA to cover information which isn’t confidential. If used sensibly and appropriately, NDAs can be very effective in protecting valuable corporate and trade secrets.

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