Tuesday, August 6, 2013

Nondisclosure Agreement Do’s and Don’ts

The nondisclosure agreement (“NDA”) is perhaps the most common single agreement that a business person is likely to run across. Virtually any preliminary business conversation, either with a potential vendor or a potential customer, is likely to be prefaced with the exchange of an NDA. In general, these documents are fairly standard and innocuous. The typical business person may feel comfortable executing and NDA without consulting counsel. If you are tempted to do so, here are five tips that can help you avoid making a mistake you may later regret.

  1. Home Cooking is the Best. Have a standard form of mutual NDA that you can readily offer up. In some instances, this is a pure leverage issue, but if you are dealing with a party that does not have its own form, you can seize the initiative by providing your own.
  2. What’s Sauce for the Goose is Sauce for the Gander. Some so-called “standard” NDA’s only protect the information of one party (typically the one providing the form of agreement). It is important to make sure that any NDA that you sign is mutual. Obviously, you want your confidential information to be protected to the same degree as that of the other party. In addition, a mutual NDA tends to be more even-handed than a one-way NDA.
  3. Make sure you can live with it. The single most troublesome aspect of many NDA’s is a requirement that any information intended to be subject to the NDA be marked as such upon production, or otherwise specifically designated as confidential. This is fine if you operate in a culture where that practice is common. However, for many of my clients, it simply isn’t. As a result, I often start with a form that includes certain general categories of information being produced as confidential, whether they are marked as such or not.
  4. Beware of Overreaching Provisions. Once in a great while, a form of NDA will contain a provision restricting the ability of one party to move forward with a different vendor, or creating an exclusive negotiating window. This is almost never appropriate at the early stages of a business relationship.
  5. Choice of Law/Jurisdiction. If possible, it is highly preferable to have an NDA specify that any disputes will be resolved in your home jurisdiction under the laws of your home state. Often, a compromise is possible, designating a state that is home to neither party. It is especially critical, however, to focus on this issue if the other party is from a foreign country. It is rarely acceptable for a US based firm to consent to the application of overseas law and jurisdiction.

If you are able to focus on these five items, and avoid having a document that is unfavorable in any of these respects, you are less likely to end up with an unintended business outcome. With that said, of course, every document and every deal is different. So do not hesitate to consult with counsel. Experienced commercial counsel can help you navigate through a document very quickly, and with little or no loss of deal momentum.

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