When Did NDA’s Get So Complicated?

It used to be that nondisclosure agreements were simple, and boring, documents: Party A gives information to Party B, and Party B promises not to give the information to anyone else or use the information for any reason other than for a specific, discreet, project.

Sure, NDAs have a lot of other language jammed into them: disclaimers of the reliability of the disclosed information, categorization of the confidential information, identification of which state’s laws apply, etc.

There are plenty of reasonable things over which to negotiate. Ultimately, however, the NDA serves a singular and focused purpose: to stop the recipient from using or sharing the confidential information. Simple, right?

Recently, however, new terms have been popping up in NDAs. These troublesome provisions degrade, and arguably eliminate, the protection of the NDA. In addition, the provisions may eliminate significant trade secret protection that some statutes provide in situations outside of the scope of the NDA. In other words, an NDA signed with Party B may strip the trade secret protection you have against people that are not a party to the NDA.

One of those frustrating new provisions allows the recipient of the confidential information to use any “residual” information for its own benefit. “Residuals” or “residual information” is often defined as “non-tangible information” or information retained by the recipient unaided by documents provided by the disclosing party. In other words, a “residual” is confidential information – the information that the NDA otherwise protects. The only distinction is that the “residual” is confidential information that the recipient happens to memorize.

If an NDA allows the recipient to use residuals, then an NDA is only as good as the recipient’s bad memory. If the counterparty to the NDA has a Benedict Cumberbatch-version-of-Sherlock-Holmes-like memory palace, you might as well not have an NDA. The best option is to delete any “residuals” provisions that show up in an NDA.

Another odd provision is the recipient’s right to keep a copy of all the disclosed materials, even if the parties decide to not move forward with the deal they were contemplating. The rationale? If there is a lawsuit, the recipient can prove that the great ideas it made a ton of money on didn’t come from the documents the disclosing party sent it.

The argument, of course, doesn’t really solve anything: a plaintiff is going to insist that certain documents were disclosed to a defendant, even if the defendant argues the documents aren’t in its retained copy. Sometimes these clauses say that only the recipient’s legal department will have access to the retained copy. The problem is that the members of a recipient’s legal department are all employees of the recipient.

A better solution? Delete any provisions that deal with retaining copies. The same goes for language that permits the recipient to keep copies of the confidential information in its backup files. That is another invitation for misuse. The only credible solution to this overwrought concern would be to have a third party hold the disclosed documents as an “escrow agent”.

That would require drafting an escrow agreement, paying a third party, etc. NDA’s serve a simple purpose and should be kept as simple as possible. There is no need for any sort of retention clause.

A final dangerous provision is an expiration date. Is it possible that your trade secrets will become stale? Sure – your top secret business plan will, hopefully, get executed at some point. And when it does, it won’t be a secret anymore. But one of the essential elements of proving something is a trade secret is that you treat it like a trade secret. That means you need to take steps to prevent its disclosure.

One court has said that a company must maintain “eternal vigilance” over its trade secrets. Another court has said that 10 years is not an eternity when it comes to the company’s obligations to safeguard its secrets.

When you acknowledge in a document that your trade secrets can be disclosed in two years, however, you’re arguably admitting that you don’t plan to prevent its disclosure. In other words, you may be admitting it is not a trade secret. It’s bad news that the party that signed the NDA will start sharing and using your trade secrets in two years.

Worse news, however, is that your disgruntled employee who quits may be able to start using your trade secrets tomorrow. Why? The NDA is probably explicit about which documents are restricted from disclosure for two years: all documents delivered by you to the other party, information that is typically considered a trade secret or confidential information, documents designated as confidential, etc.

But your employees’ confidentiality agreements may not be as explicit (assuming they even signed one). You may be relying on your state’s trade secrets act (if it has adopted one) or the relatively new federal trade secrets act. Those statutes (and most employee confidentiality agreements), unlike an NDA, do not define a discrete set of documents that are subject to the NDA. Rather, they restrict the disclosure of “trade secrets”.

If you are allowing a third party to disclose “trade secrets” after two years, however, that information was not “trade secrets” after all, because you are not meeting one of the key criteria for trade secrets: adequately protecting them from disclosure. That means your ex-employee, arguably, might not be restricted from using them to start his own, competing, company.

Be careful if you see these provisions in a confidentiality or nondisclosure agreement if you are the party that is disclosing documents. NDA’s aren’t as simple as they used to be. The consequences to agreeing to these terms can spread far beyond the NDA itself.