In the course of doing business, you will often come across non-disclosure agreements (NDA). An agreement between the two parties, it operates with the intention of keeping sensitive or confidential information private.
Often prior to entering into business, an NDA will be set in place to protect trade secrets and general business information which could affect competition in the market, or public image.
When creating an NDA, it’s of vital importance to consider the intentions of the parties, and the nature of the project and information at hand, as well as the period of time that the agreement is intended to be in effect.
Terminating vs Non-Terminating?
A terminating NDA is in effect for a set period of time, generally with a set start date and an end date or point after which it is no longer in effect and neither party bears any obligation of confidentiality for the other. This is usually used for projects of a set duration. The pitfall of this can be that the sensitivity of the information may exceed the expiry period of the NDA and thus expose one of the parties.
A non-terminating NDA allows for the fact that the obligation of confidentiality may be ongoing and exceed the duration of the relationship between the parties.
Defining Correct Terms
The use of language and correct definition of the terms used is essential in order to have an effective NDA. Often used interchangeably, the words “term” and “duration” actually may mean different things, as in – the term of the relationship of the parties and the term of the actual period of non-disclosure may be completely different. For example:
Let’s say you are a graphic designer working on a new project for a company. They are about to launch a new product and have engaged you to create work for the marketing campaign. The relationship that exists between yourself and the company will endure for the time it takes for you to deliver the work for the campaign.
The actual product may not be released to the general public until a much later date. Therefore it is important for the company that the information around the new product is kept confidential – a clear illustration that although the relationship has expired, the obligation of confidentiality should not.
What is the Nature of the Confidential Information?
In order to ensure a workable and applicable NDA, it’s important to consider the nature of the information you are trying to protect.
An indefinite term will create an ongoing obligation on the signing party to keep the confidential information private – forever. Most people will not be willing to enter into such an onerous obligation and fortunately there is rarely the need to. In general business, a lot of information will have lost most, if not all of its value in 3-5 years. However, should it be determined that the information may likely have value after that time (such as trade secrets), then several options are available:
- An agreement with a longer duration may be drafted;
- The NDA may contain provisions for the return or destruction of the confidential information; or
- The NDA may contain a “public domain” clause, wherein if the information enters the public domain (through means other than the party under obligation in the NDA) then it will cease to be confidential and the NDA will no longer be in effect.
Trade Secrets
A trade secret will retain value for an indefinite, ongoing period of time and may be vital to the business, such as KFC’s famous 11 secret herbs and spices, or Coca-Cola’s soda recipe. For these brands, protecting their recipes and methods is vital. Under a terminating NDA, if a trade secret is exposed to the signing party, and the agreement subsequently terminates, then the receiving party will no longer be bound by a duty of confidentiality under the agreement.
By contrast, should the confidential information to be shared involves a trade secret and a non-terminating NDA is drafted, then that confidentiality must be maintained by the receiving party on an ongoing basis.
To conclude, an effective NDA requires thought and attention to be paid to the nature of the information that is considered confidential, the duration of the relationship between the parties, and whether the information in question will lose value over time or remain sensitive indefinitely. These considerations will greatly impact the duration and scope of the NDA.
If you believe that your company requires non-disclosure agreements, ensure that you engage a law firm experienced in commercial law