Guide to NDA agreements and Confidentiality agreements

What is an NDA agreement – you may have heard this also referred to as a confidentiality agreement.  They are essentially the same thing.

It is an agreement between two or more people to keep certain specified information safe and secret from other people and the public generally.  This information is usually proprietary or sensitive and you want to ensure that whomever you discuss or provide the information doesn’t take that information and either tell other people or use it for themselves.  For this reason the confidentiality agreement is also an agreement not to copy or use the information for their own benefit.

What is considered confidential information?

Confidential information is information that is not publicly available and not known to other people.  In order for the information to be confidential it is important ensure that the other person who you’re giving the information to knows it’s information given in confidence and that they have to keep that information confidential.  You should ordinarily want to let the other person know that by breaching or letting the information that you’re giving them become known to other people, you might suffer damage as a result.  For example, someone could use the financial information about your business to influence either the sale of your business or your purchase of another business resulting in loss for you.  It’s not necessary that you suffer loss for the agreement to work but it is possible for them to breach the confidentiality agreement even if you haven’t suffered loss. 

Confidential information comes in many forms; it may be written words, images, pictures, a software formula, an idea concept, plan, oral, machine readable form.

When do you use a confidentiality agreement?

You need to protect your ideas, business or personal information when discussing it with others.  If you have a confidentiality agreement in place, whether it’s formal or less formal, you can freely discuss your ideas with other people without worrying about it becoming public, without you having any recourse.  With a confidentiality agreement you can employ contractors, consultants, service providers to help you work on your online business or website.  You can discuss a new idea, business, opportunity, project, you can discuss financial information and projections, without worrying about it affecting your personal business transactions.  You can negotiate the sale of your business or that of another and reveal trade secrets or financial information, knowing you have the security of a confidentiality arrangement.

What can you protect?

You can protect most things, whether pictures, words, documented ideas, images and other tangible items; however, they cannot already be known to others or in the public domain.  This means they must be things or information known only to you or others that know to keep the information confidential.  With a confidentiality agreement in place, you can protect so many things; for example, business plans or marketing strategies, customer or price lists and information, financial and accounting information, invention ideas, designs and innovations, and even job and salary discussions.  You can feel more comfortable dealing with others when you have an NDA agreement in place.

Which NDA agreement?

There are various types of Nda or confidentiality agreements.  A short straightforward letter might be suitable when starting initial discussions.  This may be followed up by a more formal agreement when discussions develop further.  There are two main categories of NDA agreement: a one-way agreement protecting your ideas when shared with others, where the obligations to keep these items confidential rests with the other party/ies; the other is a mutual nda agreement where both or all parties agree to keep confidential information that they receive concerning the other(s); this might be relevant where perhaps two or more business are looking to merge, requiring each party to disclose sensitive and confidential information with each of the others, but within a safe and secure framework.  This is what an NDA agreement or confidentiality agreement, signed by each relevant party, provides, allowing a means of recourse in the event that someone breaches its terms or generally misuses any of the relevant information in such a way that might cause damage to the information owner.

Thinking of disclosing my idea to others - what if I don't have an NDA ageement?

A question many inventors have: if I disclose this invention to my patent lawyer, will they steal my idea?!  Do I need my patent lawyer to sign an NDA agreement before I disclose information to him or her?  And what about disclosing to potential business partners or technical experts?

A patent lawyer is a professional, governed by rules of confidentiality under their profession's codes of conduct, and will therefore have no interest in copying your idea - this is not their business.

A patent lawyer will also provide you with a comprehensive engagement letter, setting out the obligations and the nature of the relationship between you.

What you do need to consider, however, is circumstances where you might look to disclose your idea before pursuing protection, as above.  This may be from discussions with potential investors, where you are looking for initial seed capital or further funding to allow your idea to become a reality.  Here, you are dealing with investors who are often experienced entrepreneurs; as with patent lawyers, sophisticated investors are unlikely to want to 'steal' your idea; however, it may at this stage be good practice to enter in an NDA agreement, ensuring protection of your idea.

A more relevant scenario (as you need to consider that an experienced entrepreneur may be offended by being asked to sign an NDA agreement) will be where you are looking for help to develop your idea, as opposed to funding.  A potential investor is likely only interested in your business plan and whether their investment will be safe and provide a lucrative return; by contrast, where you are looking for a developer, or joint venture partner, with complementary skills to yours, their much closer relationship with the technical aspects of your invention and the wider industry as a whole, might increase the risk of them being able, unfairly, to benefit from your idea, if the commercial relationship between you breaks down.  Here, an NDA agreement setting out what information can be disclosed and, importantly, how that information can be used, is likely to be a sounds investment in protecting your fledgling business.

At what stage should I consider an NDA Agreement?

Let's say you have a brilliant idea for a revolutionary idea or service - you want to attract potential investors and partners but still protect your lightbulb moment from being stolen away - no problem you think, I'll just get myself an NDA agreement. 

Well, stop right there; NDAs serve a purpose, they protect confidential information and trade secrets but take a closer look at the situation - these are people you've never worked with before - isn't it a little too early to disclose your trade secrets?  You don't want to demonstrate your technology and in doing so, disclose your secret sauce.  If a demonstration gives it away then show them something else - perhaps the problem you are trying to solve.

Once you're more confident about your partners and ready to get serious, that's the time to consider an NDA.  Here are the three most important things to keep in mind when considering/preparing an NDA agreement:

1. Never rely on a form NDA - they're trickier than you think.  We've seen NDAs that prohibit the disclosure of your trade secret but don't limit the usage of the confidential information; so you think you're protected but really you're not.

2. Distinguish trade secrets from confidential information - they're not the same thing.  Trade secrets are the most valuable confidential information of your business - usually restrictions on using confidential information have an expiration date but trade secrets, on the other hand, need to be kept secret forever.  Trade secrets are usually those things that have an economic value to your company and that your company takes reasonable steps to protect - think of the formula to Coca Cola! 

3. Lastly whenever possible avoid revealing your trade secrets because when they're out they're out.  You can't put the toothpaste back in to the tube. 

Your commercial partner breaches your NDA - what can you do?

Let's say you're contemplating a commercial deal with another organisation - you may choose to sign a mutual NDA or non-disclosure agreement designed to protect and safeguard the value commercial information that you provide. If negotiations go well, there is less chance of there being a problem, but if they break down, the risk of the misuse of your information is likely to be of greater concern. In Vercoe v Rutland Fund Management Ltd (read full case: http://www.bailii.org/ew/cases/EWHC/Ch/2010/424.html) the High Court considered the remedies available to claimants seeking redress for breach of an NDA. V lost out on a valuable acquisition that was ultimately completed by RFM without V's involvement, despite V introducing the opportunity to RFM in the first place. Instead of the usual claim in damages, instead V sought entitlement to an account of profits made by RFM; recovery of damages would have been much less significant. The judge found that, in the circumstances, an account of profits was not an appropriate remedy for V - the parties were simply in a contractual relationship in relation to the opportunity which had been identified by V - there was no fiduciary relationship between the two companies. As such, the judge found damages was appropriate in the circumstances. Whether or not an NDA should be signed and the specific terms which are to apply should be high on the priority list and given adequate consideration where confidential information or valuable trade secrets may be at stake. (c) Hamilton Mackintosh, 2012