Guide To Negotiating Your Own Non-Disclosure Agreement

Whole books have been written about how to negotiate business confidentiality agreements. Since you have a company to run, here is a quick guide to the six most important negotiation points of a non-disclosure agreement (“NDA”). We also offer NDA negotiation services.

Negotiation Point 1: Who is bound by the NDA?

“Disclosing Party” or a similar term is used to describe the party disclosing information. “Receiving Party” or “Recipient” is used to describe the party receiving information. Sometimes both parties will be disclosing information, in which case each party to the NDA is both a Disclosing Party and a Receiving Party.

The Receiving Party will often want to share information with its employees, related companies (“affiliates”), and any banks, accountants, or lawyers helping it analyze the information (“advisors”). These and additional parties are usually referred to as “Representatives.”

Responsibility for Representatives’ actions: The Disclosing Party will want the Receiving Party to be responsible for any misuse of the information by its Representatives, including employees, affiliates, and advisors. The Receiving Party will resist this. In practice, the Receiving Party usually only assumes liability for misuse by its employees.

Separate NDAs: It would be ideal for the Disclosing Party if every Receiving Party Representative had to sign a separate NDA. The Receiving Party will resist this. In practice, usually none of the Representatives will sign the NDA or a separate NDA.

Negotiation Point 2: What is the “Confidential Information” protected by the NDA?

The Disclosing Party will want to define everything shared with the Receiving Party as Confidential Information. The Receiving Party will prefer to specifically list the types of information that will be shared and required to be kept confidential.

    The Receiving Party will additionally request four standard exclusions from the definition of Confidential Information:
  1. Information that is already public or becomes public through no fault of the Receiving Party
  2. Information received from a source that is not breaching an obligation to keep it confidential
  3. Information already in the Receiving Party’s possession and not subject to a confidentiality obligation
  4. Information that is independently developed without use of the Confidential Information

Most form NDAs will already have these four standard carve-outs included, and anyone who objects to including them probably has never negotiated an NDA before.

Often the very fact that the parties are talking to each other is itself sensitive information. The Disclosing Party might be concerned that word will get out it is for sale. The Receiving Party might not want its interest used by the Disclosing Party to shop for a better deal. It is therefore normal to include in the definition of Confidential Information the fact that discussions are taking place between the parties.

Although this isn't a negotiation point and may be included in the form NDA being used, the Disclosing Party should make sure that the NDA defines the "Purpose" for which the Confidential Information is being shared and limits the Receiving Party to only using the Confidential Information for that Purpose.

Negotiation Point 3: Should the Receiving Party be prohibited from contacting and soliciting the Disclosing Party’s employees, customers, and suppliers?

The Disclosing Party will normally want to prevent the Receiving Party and its affiliates and advisors from even inadvertently taking away any of the Disclosing Party’s employees, customers, or suppliers. Additionally, the Disclosing Party should be concerned that the Receiving Party might tip-off these employees, customers, and suppliers to a potential deal by contacting them for information. The Disclosing Party will therefore normally seek to prohibit the Receiving Party and its affiliates and advisors from contacting or soliciting its employees, customers, and suppliers. The Receiving Party will normally resist these provisions, especially if it is in the same industry or could explore deals with other companies in the industry. Whether there is a no-contact provision depends on the negotiating leverage of the parties. If the Receiving Party agrees to a non-solicit, it will usually only prevent hiring of management-level employees of the Disclosing Party.

Negotiation Point 4: Should the Receiving Party be bound by a non-compete provision?

The Disclosing Party will prefer that the Receiving Party be prohibited from developing any businesses or product lines related to the information received from the Disclosing Party. Although this is something that is natural for the Disclosing Party to be concerned about and ask for, in practice it is not normal for the Receiving Party to agree to any kind of non-compete provision.

Negotiation Point 5: What law should apply and where would a lawsuit take place?

If either party ever has to sue because of a serious breach of the NDA, it will make a big difference where the parties have to file suit and which state’s law applies. A party will generally prefer that its own state’s law applies and that any lawsuit must be heard by courts in the county where its business is located. There is no normal outcome here; it depends purely on which party has more leverage.

Negotiation Point 6: When does the NDA end?

One of the most contentious issues is how long the NDA lasts.

The Receiving Party will be concerned about how long it has to keep the disclosed information confidential and any potential liability from the NDA. It will usually ask for a shorter term of six months to two years.

The Disclosing Party will be concerned about the NDA expiring before the disclosed information has ceased to be sensitive and important. It will usually ask for a longer term of three years to indefinitely.

Usually the two sides meet in the middle on a term of two or three years.

If you are the Receiving Party, something to watch out for here is the Disclosing Party trying to sneak by you a form that doesn’t have any language describing when the NDA ends. When the NDA doesn’t have an explicit expiration date, the implication is that the Receiving Party has to keep everything confidential indefinitely.

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