Drafting a Better Nondisclosure Agreement

Recent changes in patent law that make business method and software patents more difficult to obtain and assert suggest diversifying intellectual property protection strategies that rely on these types of patents. If the embodying business methods or software are generally unavailable to public inspection, companies should consider relying on trade secret law as the basis for protection. Accordingly, a  strategy limiting the dissemination of company confidential information should internally focus on keeping the trade secrets secret, but there comes the delicate problem of disclosing these trade secrets or confidential information to an outside party to further mutual business interests. In those cases, protecting the “secret” part of the trade secret requires the use of a well-drafted nondisclosure agreement.

A poorly drafted nondisclosure agreement can lead to unnecessary complications in the business relationship. Poor drafting can lead to confusion – for example, a party receiving confidential information may not know the information is meant to be kept confidential, or a receiving party does not know how long to keep the information confidential. If the parties’ business relationship deteriorates, a poorly drafted agreement makes assessing the risk of litigation more difficult. This article addresses several strategies for improving a nondisclosure agreement. 

The scope and obligations of the parties to a written agreement will depend on their relative bargaining positions, goals, and sizes. To improve the effectiveness of a nondisclosure agreement, a drafter should provide clear guidance on:

1. What information is secret;
2. How long the information must remain secret;
3. How to identify the information; and
4. What uses of the information are permissible.

These contract topics provide a framework for the business relationship that involves confidential information of one or both of the parties to the agreement. The key is specificity of the terms. Improved specificity in a nondisclosure agreement should lead to greater predictability in the business relationship. Similarly, greater specificity potentially improves the likelihood that the agreement can withstand a challenge in court.

1. Define the confidential information with specificity

This first drafting tip is somewhat counterintuitive. Sometimes a party disclosing confidential information defines the scope of the protection broadly, equating broad scope with broad protection. While a broad definition more easily covers information under development that may change and grow over time, doing so can have unintended negative consequences.

A broad definition may become vague, and a vague definition may confuse participants in the business relationship. A vague definition of confidential information may result in participants to the agreement being confused on exactly what is protected information. Confusion may lead to an unintentional and uncontrolled disclosure of the protected information. Rather than providing more protection, defining the scope of a trade secret in vague, broad, or ambiguous terms can actually compromise and narrow the protection.

Defining the trade secret with specificity can make a nondisclosure agreement more effective. Specificity translates to clarity, and clarity enables better outcomes—both in compliance and in litigation. Parties are more likely to abide by a nondisclosure agreement, and keep identified information confidential, if they understand the obligation.

Further, if a party fails to comply, discovery in a resulting lawsuit may be easier and cheaper if the trade secrets are expressly identified. For example, California and several other jurisdictions require a plaintiff to specifically identify asserted trade secrets early in a case. When the agreement clearly defines the trade secrets, this requirement is easier to comply with and enforce. The parties may have fewer discovery disputes or inadvertent disclosures during discovery. In addition, a plaintiff may have an easier time convincing a jury that the defendant should have understood that information was considered confidential if the agreement itself is clear on the point. Judges and juries may feel more comfortable imposing sanctions against a party who violates a clear agreement. If the agreement is unclear, a defendant may convince a jury that the overly broad definition was not comprehensible or covers public information.

But identifying a trade secret with the requisite specificity can be difficult. A drafter may err on the side of too narrow a scope and end up excluding something, resulting in an accidental disclosure. Given the pros and cons of broad and specific definitions, a best practice calls for doing both—defining the protected information comprehensively by category and also itemizing specific, known trade secrets using a more narrow and specific definition.

2. Define the time period of protection

The parties should also agree to the duration that a party receiving confidential information must keep received information protected. The amount of time will depend on the industry and technology involved. For example, rapidly advancing technology may result in a shorter period of protection. Or technology involving information related to complex issues like national security may demand a longer protection period.

Whatever the involved technology and contemplated time-frame, a fixed protection period provides certainty to both parties. The disclosing party knows how long it must track the information, and the receiving party knows how long it must safeguard the received information.

3. Label and categorize confidential information

Most agreements use one of two methods to identify confidential information – categorization or labeling. Standing alone, each method presents problems with compliance. The first method establishes categories of protected information. This method can lead to a disagreement about whether a document’s content falls within one of the named categories. The second method labels confidential information conveyed to another with a brand or other legend. This method can be problematic because verbally conveyed information is hard to label.

A better practice is to use both methods in tandem. Combining both methods eliminates ambiguity. For example, an agreement could designate categories of confidential information before the parties exchange documents or have discussions covered by the agreement. In addition, the parties can brand each page of the exchanged documents in some form (e.g., “CONFIDENTIAL INFORMATION OF [PARTY]”). At the beginning of any meeting, the parties should discuss the applicability of the nondisclosure agreement. After the meeting, a party who disclosed confidential information could send to the receiving party a letter that specifically identifies the confidential information disclosed during the meeting. Using multiple ways to identify confidential information improves the chances that people receiving the confidential information will recognize that it is confidential.

When problems arise, the dual identification system may streamline enforcement and litigation. If the conveying party categorized and labeled the information provided as confidential contemporaneously with disclosure, the party will have an easier time rebutting a defendant ‘s argument that the information was not confidential when exchanged.

4. Clarify the permissible uses of confidential information

A drafter should also describe the purpose for exchanging confidential information, outline how the information may be used, and limit who may review the information. If not done, the recipient will not know the extent to which the recipient must maintain the confidentiality of the information. For example, identifying individuals who may review confidential information allows a company to implement information exchange barriers that prevent employees receiving confidential information from sharing that information with other employees. The precaution potentially avoids a claim that a person who saw received confidential information later used that information improperly.

Conclusion

Business relationships involving the exchange of confidential information can lead to confusion when an agreement controlling the use of confidential information is unclear.  Using an agreement that expressly addresses what information is confidential, how the information is to be used, and the duration of confidentiality can improve predictability in the parties’ relationship. Should the relationship sour, a specific agreement allows the parties to evaluate the litigation risks with more certainty and determine whether litigation is prudent.