Why NDAs often don’t Work when expected to Do so and what to do About it

Why NDAs often don’t Work when expected to Do so and what to do About it

All businesses have trade secrets which it is in their interest to protect. At the same time, however, there are often situations in which it is desirable or necessary to share such sensitive information with others. To this end, non-disclosure agreements (NDAs) are often utilised to provide peace of mind to the disclosing party and ensure the continued secrecy of the information. Additionally, one of the most important legal effects of an NDA is that any information disclosed under it is not considered prior art when assessing the novelty of an invention in a patent application. I have written more about that before.

What are the elements that form an NDA?

At its most basic, an NDA establishes certain information to be confidential and imposes obligations on recipients of that information to maintain its secrecy. Information that NDAs might be used to protect include trade secrets such as manufacturing processes and client lists as well as details of inventions before patent filing.

Depending on the context, the specific content of an NDA varies considerably. Key terms include:

1. Identification of the parties bound by the agreement

2. Definition of what information is considered confidential

3. Carve-outs identifying what information is not covered by the agreement (i.e. information that subsequently becomes public knowledge)

4. Scope and nature of the confidentiality obligation of the receiving party

5. The duration for which the agreement will be in force

Unidirectional NDA vs. Mutual NDA

There are two main forms of NDA. ‘One way’ NDAs are useful in situations where only one party will disclose confidential information and the other receives it. ‘Mutual’ NDAs are used in situations where both parties will both disclose and receive confidential information, the obligations of non-disclosure then being mutually imposed.

Typical contexts of an NDA

There are various contexts in which an NDA might be used, common examples are:

  • Between employers and employees where employees are likely to have access to any of the confidential information of a business.
  • Where developers and sub-contractors will have access to new product development or other sensitive areas of a business.
  • In the context of negotiations or co-operation with potential investors or collaborators during which a proposed product or business plan must be disclosed.

Specific Situations when an NDA did not work as expected

Although NDAs can be useful for some minor side-aspects, it is in practice not easy to get damages in the result of a breach. Courts in some jurisdictions have been incredibly unwilling to calculate and grant damages in this context.

In particular, I have experienced and envisaged specific situations in which a seemingly watertight NDA ultimately turned out to not be not a strong legal weapon against unauthorized disclosures. For example:

1. Where breach of the NDA cannot be proven with strong evidence,

2. Where the extent and cause of damage due to the unauthorized disclosure cannot be proven sufficiently to obtain damages,

3. Where the information is disclosed to someone not bound by the NDA, such as a freelancer wrongly representing himself as associated with the contracting receiving party, and this person then publishing the respective piece of confidential information,

4. Where the confidential information consisted of a set of partial information elements that were in the public domain, although the entire set of partial information elements as a whole was not,

5. There is also the potential for poorly drafted NDAs to be considered anti-competitive, particularly when unfocused as to which information is to be protected. I have written about similar situations with respect to license agreements earlier.

There are many potential reasons for not being able to successfully assert an NDA, and this is not only the case because the specific case is difficult from a legal or factual point of view. The mere cost risk of initiating a court case repels many from asserting their claims against a party who has infringed an NDA by unrightfully publishing protected confidential information.

The above scenarios are of course not exhaustive.

Can’t we draft our NDAs such that they cover such unclear situations?

No, you can’t. While it is always possible to improve an NDA here and there, addressing a potential gap, there is no way to address all possible error sources in such a way that the planned cooperation can still be operated in a simple way, not to speak of the danger that arises from disclosing confidential information to parties that have a malicious intent.

This is where it becomes difficult to exceed the imagination of non-IP lawyers and laymen. We are all trained at University to avoid such situations when it comes to standard contract types, such as purchase contracts and assignments of rights. Laymen even believe that our legal training is exhaustive and that it covers all areas of life.

Therefore, no NDA can be drafted to foresee every eventuality and cover all bases, and too much time is therefore invested in negotiating the minute details of such agreements. NDAs all too often have the potential to cause issues at the pre-negotiation and negotiation stages of business dealings, causing more hassle than they are worth.

This is also in some ways attributable to differing cultural attitudes to NDAs, based on the fact that different jurisdictions take very different approaches to NDAs and their enforceability.

All these challenges are difficult to tackle fully, but my advice would be to simply accept the inherent limitations of NDAs, to utilize an NDA which is straightforward rather than wasting too much time negotiating its details, and then to pair the agreement with various practical precautions to minimize risk.

Any other relevant consideration when it comes to NDAs?

Yes.

It is often forgotten that in many cases the receiving party simply refuses to sign an NDA.

Google search for “why not sign an nda” delivers about 22 Mio positive hits.

And despite that general unwillingness to sign an NDA, there are co-operations between many disclosing parties established, without any underlying NDA being in place.

Does this ring a bell?

Repeat after me: “I don’t need an NDA.”

Practical Remedies – Switch on Common Sense

Some suggestions for practical means by which the inherent risks of unwanted disclosure of confidential information can be managed are:

1. If there is an NDA, try to be very specific in defining what information is considered confidential and keep track of when and to whom that information is disclosed in order to more easily establish breach.

2. If there is an NDA, try to utilize a fixed sum payable for breach, in order to avoid difficulty in quantifying damages. Care must however be taken in some jurisdictions to avoid such clauses being seen as unenforceable.

3. Whether or not there is an NDA, use your common sense when disclosing information: disclose on a need-to-know basis only, and verify the identity of those to whom disclosure is made; clearly mark all sensitive information as ‘confidential – not intended for publication’. And try to keep records of what, when and to whom information is being disclosed.

4. Create a safe fallback position where confidential information relates to technical inventions: file for IP protection prior to disclosure.

Conclusion

NDAs are not completely useless. As mentioned above, a key benefit is in preventing information from becoming prior art in future patent applications.

The NDA can also be evidence in a tortious breach of confidence claim where there is clear evidence showing that there was a disclosure, that the info was confidential, and that the recipient was aware of this.

However, we must make clear that NDAs are not, and will never be, completely bulletproof. Minimalistic NDAs can therefore be employed alongside practical measures in order to minimize time wasted on drafting their terms and lessen the risks of disclosure in general.





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