When buying or selling a business, considering a joint venture, or even evaluating a vendor, supplier, or contractor, you should always be aware of the risks of disclosing and receiving intellectual property and other proprietary or confidential information, such as customer information, marketing strategies, pricing information, trade secrets, knowhow, and vendor/supplier information prior to the proposed transaction. A nondisclosure agreement (an “NDA”) should be one of the first documents executed by the parties before any sharing of confidential and proprietary information or intellectual property. A properly drafted NDA can serve to protect such exchanged information while both sides further evaluate the proposed transaction.
While even the best-drafted NDA cannot guarantee that confidential or proprietary information and intellectual property will not be improperly used or disseminated, it can serve as both a powerful deterrent to improper use of the information and, equally important, as a powerful tool should litigation ensue regarding the unauthorized use of the information.
One of the key components of an NDA involves clearly and thoroughly defining the confidential or proprietary information, and it should include any information that may have been provided prior to executing the NDA. In defining the protected information, the disclosing party will typically seek a broader definition that would include any notes, analyses, or studies prepared by the receiving party or its agent using the protected information. Typically, information that is in the public domain is not protected under the NDA.
Consistent with the adage that “less is often more,” an effective NDA should strictly limit the parties to whom the intellectual property and confidential information can be disclosed. In most circumstances, the intellectual property and confidential information should be disclosed only to the executives of the receiving party and others, including any agents (e.g., attorneys, CPAs, financial advisors, etc. of the receiving party), on a “need to know” basis and only under the condition that any person receiving such information be bound to the same terms, conditions, and obligations as the receiving party.
In the case of highly sensitive intellectual property or other proprietary and confidential information, the disclosing party may consider limiting, controlling, and monitoring the release of the information. This may be accomplished by providing one physical copy of the data and requiring that it be reviewed only under the direct supervision of the providing party, by strictly prohibiting the copying of the material, or by using an electronic means of disclosing and controlling the information.
One of the most important features of a well-drafted NDA is that it will serve to strictly limit the receiving party’s ability to use the information provided under the NDA. In most cases, the intellectual property or confidential information provided may only be utilized to evaluate the proposed transaction and may not be used or disclosed for any other reason, whether for the receiving party’s gain or otherwise. This is the critical and primary function of the NDA—to ensure that the receiving party does not use the information provided other than for the permitted purposes.
Eric R. Thiergood, Sr.
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