Non-disclosure agreements and the trinity of obligations: What parties need to know

Underlying every relationship, professional or business is the commitment to share information or documents which advance the purpose for the formation of such relationships. However, a disclosing party may expect a receiving party to keep some disclosed information either in the form of proprietary information, trade secrets, financial statements, operational manuals, product formulations, or service designs among others confidential, exclusive to the parties, and not readily accessed by 3rd parties without prior consents or approvals.

The need to ensure that these commitments are observed and the availability of a protective regime for the enforcement of the rights of an affected party – in the event of a default - has increased the relevance of the execution of Non-Disclosure Agreements prior to the formation of the ensuing business and professional relationships.

An appreciation and understanding of obligations imposed by the signing of a Non-Disclosure Agreement is vital to aid the strict observation of the imposed obligations. Therefore, the intent of this article is to discuss the scope of Non-Disclosure Agreements and the resulting trinity of obligations as a way of fostering a clearer understanding and compliance with an executed NDA.

NON-DISCLOSURE AGREEMENTS (NDAs)

As the name suggests, Non-Disclosure Agreements (NDAs) are binding legal agreements that seek primarily to prevent the disclosure of a subject matter confidential information shared by one party (known as disclosing party) to another party (known as receiving party). At a minimum, the intent of a signed NDA will be to prohibit or prevent the unauthorized disclosure and use of shared confidential information – information over which some intellectual property assets or rights may have accrued.

Although sometimes referred to as Non-Circumvention Agreements, Non-Compete/Competition Agreements among others, NDAs primarily exist to protect confidential information and prevent non-authorized disclosures and uses.

The rationale for the said prohibition is that a disclosing party may have expended resources in the procurement or development of certain unique and proprietary information relating to its product or service design, content, brand, or mode of work, etc., which confidential information deserves protection against knowledge and use (and/or exploitation) other than as specified by the NDA by 3rd parties which are not parties to same.

Nonetheless, NDAs do not seek to offer blanket protection for all information disclosed by a disclosing party. The underlying presumption is that an NDA covers and protects only information which is confidential, by extension not already public, or readily available on diligent search, already available to or known by the receiving party prior to the disclosure, among others. At all times, the signing of an NDA presupposes the existence of some confidential or protected information which is not intended for disclosure beyond the parties. Further, it acknowledges the need to make available the said information for use in some related work by one or all parties. However, the subsequent disclosure of confidential information pursuant to an executed NDA is not the transfer of rights in such confidential or protected information by the disclosing party to the receiving party except such user rights pertaining to the subject matter transaction.

Essentially, an NDA must clearly distinguish a disclosing party from a receiving party in a one-sided disclosure situation or in mutual disclosure situation, provide for the shifting roles of the parties. Also, it must indicate the subject matter the intended disclosures relate to, what is confidentially (usually expressed in a negative form), impose obligations to maintain the confidentiality of disclosed information, and restrict the disclosure and use of disclosed information except on conditions of prior consent or approval.

Despite the usefulness of an NDA as a protective tool against the breach of intellectual property assets or rights, its use must be carefully assessed on a need-to-execute basis to prevent the wholesale signing of NDAs and multiple disclosures of confidential information, especially to 3rd parties whose relationships may not be valuable.

WHEN TO EXECUTE AN NDA?

Due to the advances in technology and the ease of information theft, breach, and unauthorized use by competitors, there is an increased need to protect confidential information with inherent intellectual property rights. And the signing of NDAs prior to disclosures or exposures has become imperative as they offer protections and an enforcement regime on default of imposed obligations. Being asked to sign an NDA is not a sign of mistrust; it is just part of doing business since it creates a legal framework to protect ideas and information from being disclosed or used beyond the parties or other than agreed.

The point is already made that the signing of NDAs should not become a blanket pass to the sharing or disclosure of confidential information to every person. There is a greater need to evaluate the intending relationship and its subject matter vis-à-vis the need to disclose your confidential information – which is proprietary to you. A careful balance will always ensure that, only critical and relevant 3rd parties are allowed access to the confidential information of the disclosing party through the signing of NDAs.

The caution notwithstanding, NDAs must be signed prior to the formation of the following relationships or engagements:

a. Engagement of employees – Yes, you are justified in trusting that your employees will not disclose your trade secret, product or service design, etc., or use same to compete with you. Such trust notwithstanding, note that employees are employees – just as you hired them, they may resign, retire, or be fired. And when they do, they are likely to walk away with your confidential information largely with a free pass to disclose or use same. It is appropriate to sign NDAs with your employees despite your internal confidential information procedure. It is always better to have an enforceable protective agreement than to rely on general presumptive obligations based on trust.

b. Pre-investment discussions – Even in times of need, look and sound professional. Do not commence any investment discussion involving the disclosure of confidential information about your company without the signing of an NDA. At worse, an investor who refuses to sign an NDA prior to an investment discussion will have provided you with some red flags. And where you succeed in signing one, you will have provided some confidence to the investor that you understand your trade. Therefore, manage the excitement that comes with fundraising and ensure that regardless of the outcomes, you have protections in place for your disclosed confidential information.

c. Negotiations or discussions involving the disclosure of confidential information – Not all discussions or negotiations are about investments. Some involve the establishment of business relationships, product optimization, service improvements, etc. which may result in the sharing or disclosure of one’s confidential information in the form of trade secrets, process flows, marketing/sales strategies, and financial position. Where such disclosures can be anticipated, an NDA must be signed prior to the commencement of negotiations or discussions.

d. Engagement of 3rd party service providers with access to your files, systems, and processes. – Often the operations of a company may necessitate the engagement of 3rd parties such as cleaners, security personnel, IT or network engineers, etc. with access to files, systems, and offices in general. This increases the risk of exposure by these 3rd parties to confidential information either secured or unsecured. With no obligations in place, the 3rd party could disclose information that may have come to his or her attention during access to files, systems, or office. Therefore, it is important to sign an NDA with persons with any form of access or who potentially may be exposed to your confidential information.

THE TRINITY OF OBLIGATIONS

The signing of a Non-Disclosure Agreement (NDA) just like any other contractual document imposes obligations on parties. Particularly, the receiving party will be mandated per the terms of the signed NDA to observe some obligations which include the trinity obligations to maintain, use, and not disclose the shared confidential information beyond the parties and purpose.

The nature and scope of these obligations are:

1. The obligation to maintain the shared information confidential – in all respect, although the name of the agreement suggests a focus on non-disclosure, the first obligation imposed by the signing of an NDA is the obligation to maintain the shared information confidential. The receiving party undertakes to ensure the shared information is not accessed by 3rd parties and its confidentiality is protected between the signing parties or persons permitted by the agreement or by prior approval or consent to having access to same.

The nature of this obligation will require the institutionalization of some internal access controls to limit the exposure of disclosed information to unauthorized persons. The failure by the receiving party to maintain the confidentiality of disclosed information will amount to a breach of the signed NDA and is enforceable both in equity and law.

2. The obligation not to use the disclosed information for reason(s) or purpose(s) other than agreed– central to the signing of an NDA is the position that the parties intend the disclosure of confidential information for the pursuit of a specified purpose or transaction. Therefore, where there is no intended or pending purpose, there will not be the need to sign an NDA. Flowing from this cardinal view on NDAs is the obligation to use the disclosed confidential information only in line with the purpose for which the said information was disclosed. Any other use will amount to an unauthorized use of a disclosing party’s confidential information.

This obligation is paramount, especially in an economic and competitive environment where shared information can be used to gain an economic advantage over the disclosing party. Hence, the disclosing party must closely monitor for strict compliance with this obligation to avoid providing information that could be used for purposes other than the purpose for which they were provided.

A true measure of the appropriate use of disclosed information is the clear definition of the intended purpose in the signed NDA. Where no clarity is provided as to the purpose or subject matter transaction for which the disclosure is intended, the receiving party may abuse the gap and use the disclosed information in a manner not beneficial to the disclosing party. Therefore, an effort must be made to clearly define or describe the subject matter transaction to delimit the abusive use of disclosed information and measure the performance of the obligation not to use the disclosed information other than agreed between the parties.

3. The obligation not to disclose the shared information – commonly, this is the known obligation for which NDAs are signed. The general expectation is that the signing of an NDA should impose an obligation not to disclose shared confidential information and same is true to the extent that, the non-disclosure obligation is not to disclose the shared confidential information to unauthorized persons.

What is implied in this obligation is that a receiving party is not per se prohibited or prevented from ever disclosing the shared confidential information. Rather, any intended disclosure must either be permitted by the terms of the signed NDA or approved or consented to by the disclosing party prior to such disclosures. The overall goal is to prevent unauthorized disclosures and not disclosures at all.

This obligation is fundamental and must be religiously observed at all times. At worse, if a receiving party finds no use for the disclosed confidential information, he or she must endeavor not to disclose same to unauthorized persons despite the measure of its usefulness. At all times, disclosures must be on a need-to-know basis and must reflect the terms of the signed NDA or based on prior consent or approval by the disclosing party – the failure to comply with this obligation puts the disclosing party at an election of a number of remedies.

CONCLUSION

Increasingly, professionals and businesses are adopting the use of NDAs to protect, secure and prevent unauthorized disclosure of shared confidential information in a formed relationship. The relevance of signed NDAs is reinforced in compliance with their imposed obligations. The understanding and appreciation of the trinity of the said obligations of maintaining, using, and not disclosing shared confidential information are central to the promotion of the effective use of NDAs as protective tools against breaches of intellectual property assets and rights. And this article offers some useful explanations on the nature and scope of NDAs and the trinity obligations.