Whether they call it a “Confidentiality Agreement” or a “Non-Disclosure Agreement (NDA),” many New Yorkers begin their business deals with a contract governing the sensitive information that they might exchange with one another. Employers hiring or firing employees, tech companies with trade secrets and parties exploring a potential business relationship all routinely find themselves in need of a well-drafted NDA.
Although NDAs are often only a page or two in length, they can have serious legal implications for both parties to the deal. Before you or your business signs an NDA, here are a few things you may want to consider:
If both parties are providing confidential information to the other party, a bilateral (i.e., mutual) non-disclosure agreement is appropriate.
In contrast, if the exchange of information is unilateral (i.e., one-sided), be sure to make that clear. Consider adding a provision acknowledging that (1) you do not want the other party’s confidential information, and (2) the other party is not going to give you any confidential information.
Your NDA should define with specificity the type of information that should be kept confidential. This is especially true if you or your company are obligated to protect any disclosed information. Avoid committing to an overreaching definition of “Confidential Information” that could create an unreasonable burden of secrecy or might even complicate your future business prospects.
If you are the disclosing party, the scope of the confidential information should not be too narrow. In contrast, if you are the recipient, consider insisting on a provision that excludes any information that is already in the public, disclosed through no fault of the receiving party or acquired independently through no use of the disclosing party’s confidential information.
Additionally, when contracting with a business entity, consider whether its affiliates (such as its parent company, subsidiaries, employees or contractors) will be the source of any confidential information or be otherwise subject to the confidentiality obligation. If so, this should be covered in the definition of confidential information.
Confidentiality agreements typically limit the disclosure and use of confidential information to a specified business purpose, such as to evaluate a potential transaction between the parties or to fulfill one’s obligations as an employee. A limited business purpose can also be useful as a basis for applicable access and use restrictions.
Before signing an NDA, make sure all of your obligations regarding confidentiality have clear time limits. Two important timelines to look out for are:
Typically, the confidentiality period lasts longer and can remain effective for a few years, or even perpetually after the NDA ends. The longer the confidentiality period is, the longer the receiving party will need to keep tabs on the information being exchanged. Extending such time limit can increase the administrative burden on the recipient.
Additionally, New York businesses with trade secrets should be especially mindful of the time limits in their NDAs. Courts have found that trade secrets disclosed under an NDA might not be considered trade secrets if the NDA expires, as the trade secret owner is no longer maintaining their confidentiality. To combat this risk, trade secret owners may consider including two periods for confidentiality in their NDAs: (1) one of unlimited duration for any disclosed trade secrets, and (2) a separate, specified time limit for all other Confidential Information exchanged under the agreement.
If you are the disclosing party, to protect the disclosed information, you may consider requiring the recipient to return or destroy your confidential information after a certain period of time or when the NDA ends. With regard to destruction, it is crucial to consider data transmitted by email or other digital devices. Parties that are particularly concerned about electronic data should negotiate procedures for the receiving party to receive, store, return and destroy the electronic data when the agreement term ends.
When a confidentiality agreement is breached under NY law, the discloser may have claims against the offending party for breach of contract, misappropriation of trade secrets and breach of fiduciary duty, among others. A separate cause of action for tortious interference of a contract might be appropriate if any third party played a part in the breach. As a general rule, however, New York is very protective of parties’ future employment or business opportunities.
Many NDAs include injunctive relief as a remedy for the breach of confidence – where the disclosing party can ask a court order to stop the disclosure by the other party – along with a provision that grants the prevailing party attorney fees and monetary damages for the injured party.
However, sometimes it can be very difficult to assign a dollar value to the harm that an employee, client or business partner would cause by spilling the beans. In addition to injunctive relief, you might consider including a liquidated damages clause in your NDA. Such a provision should provide a reasonable estimate of the injury that you or your business would face in the event of a breach.
Don’t be fooled by the short stature of an NDA. Discuss your confidentiality agreement with an experienced New York attorney to make sure the document is well-drafted in scope, subject matter and duration.
Our attorneys have prepared and customized NDAs for various business ventures and individual clients. We are ready to help. Contact us to speak with a member of our team.
[This blog post has been updated from a previous version, published November 21, 2014]