Tom and his team have been working 80 hour weeks for several months now to eliminate bugs from their brilliant new virtual reality technology for mobile apps. Now they are ready to license the technology out to mobile manufacturers.

Tom knows that he has to take steps to protect its company’s proprietary technology while being able to reveal enough information about its potential in order to entice these manufacturers to license this technology from him.

Tom wants to allow these potential licensees to use his technology for a defined period of time but not for them to share or develop any competing technology based on his invention.

After receiving some advice from mentors, Tom chooses to draft a non-disclosure agreement to protect any confidential information that he might reveal during discussions with these potential licensees.

So, what’s an NDA?

Basically, it’s a contract between parties that legally requires them to keep specified information confidential for a defined period of time.

It’s up to the parties to decide what would be considered confidential and what is not.

Confidentiality can extend to documents, designs, sketches, analyses, source codes, marketing plans, manufacturing processes and technical procedures as evidenced in this extensive list of confidential items in Accuride Corp’s Confidentiality and Non-Disclosure Agreement:

Definition of Confidential Information in Accuride Corporation

NDAs can be one-way where only one party is disclosing confidential information (“Disclosing Party”) to the other (“Receiving Party” or “Recipient Part”) or it can be mutual, where both parties intend to make disclosures and both parties are bound to keep each other’s disclosures secure, unless given permission to do otherwise by the other.

If Tom is the only one making the disclosures of confidential information to the potential licensees, then he would sign a one-way NDA with these licensees but if the licensees discovered that they needed to reveal financial, trade or other secrets in their discussion with Tom, then they would probably insist that both parties enter into a mutual NDA.

Benefits for licensing discussions

NDAs are a common tool used for initiating negotiations and discussions in business settings with potential parties whom you want to develop a relationship with, when you have something to offer of proprietary value.

It’s especially useful for inventors and entrepreneurs to use NDAs to keep trade secrets, technological innovations and protect other confidential information while entering into discussions with potential licensees to discuss their inventions and technology.

Without these legal agreements, these initial discussions would be almost too difficult, in that you have to delicately balance the information that you provide so that enough is revealed so that these potential licensees can review your product or service but not too much that they would be able to steal your technology.

As an example, here’s a “Statement of Limited Purpose” from Microsoft in one its Confidentiality Agreements for Licensing Discussions:

Statement of Limited Purpose from Microsoft NDA on licensing

The NDA normally has clauses that bind not only the person who is signing the the agreement to secrecy but also their employees, consultants, successors and other representatives such as accountants and attorneys they are affiliated with.

You could even specify that the Recipient/Receiving Party should only disclose information to his or her affiliates on a “need to know” basis and ensure that any information stored is kept securely.

You can specify how long the confidentiality is meant to last for and confidentiality periods can vary greatly from a few months to many years.

Also, after the Receiving Party has been permitted to review your disclosures, you may wish to specify what you wish to happen to the confidential information you’ve just disclosed.

You could require that the other party returns all originals and copies of the information back to you or destroy them within a certain period of time and retain no other records or copies.

An example of this kind of clause can be found in Thoughtbot’s Mutual Non-Disclosure Agreement, called “Return of Materials“:

Return of Materials clause in Thoughtbot Mutual NDA

Of course, even if they have destroyed all physical copies of the information, you want to specify that they’re still required to keep all knowledge of the disclosures confidential and not talk about them with anyone for the agreed period of confidentiality.

If there are exceptions where confidentiality is not expected of the other party, then these exceptions should be included in the NDA.

Normally, the common exceptions are:

  • The confidential information is already or has become public knowledge, with no breach or fault on the part of the other party
  • The other party already had prior knowledge of the confidential information prior to your disclosure
  • The other party had managed to develop the confidential information independently.

An example of a well-written clause can be found in Microsoft’s Confidentiality Agreement for Licensing Discussions:

Which information if excluded from Confidential Information

You may also want to consider another exception in the event of the Receiving Party being summoned by a court order to reveal your confidential information.

This incident happened in 2011 during the U.S. Government’s investigation of WikiLeaks and one of its volunteers Jacob Appelbaum. The U.S. Government not only secretly obtained a court order to require Google and internet service provider Sonic to hand over Appelbaum’s emails, the court order also required this to be done without Appelbaum’s knowledge.

Although the other party can try to fight the subpoena or court order, most ordinary parties would chose to break a contract rather than disobey a court order.

You can try to limit the potential of any such damaging court order by including a clause in your NDA that requires the other party to give you notice immediately if they received a summons or court order that would result in them having to break the NDA and also, to co-operate with you if you wanted to apply for legal protection to limit the extent of the disclosure that occurs.

It’s also important to specify what jurisdiction will apply to the NDA in the event of the need for court intervention. As you can imagine, different jurisdictions may deliver very different outcomes. If no jurisdiction is provided for and there is a dispute as to which jurisdiction applies, then you’ll be looking at extra legal costs in order to determine this issue.

Limitations of NDAs

An NDA does have certain limitations.

Normally, the agreement provides for monetary damages in the event of a breach but as it’s often difficult to quantify or justify the monetary value of a product or service that has yet to be introduced to the market or even if it has, its potential for expansion and profit, most agreements also include clauses including equitable remedies such as temporary restraining orders and injunctions to stop further breaches on top of monetary damages.

An NDA agreement also does not inherently stop the other party from refusing to develop a relationship with you after the discussions and after getting to know your team, focus instead on poaching your employees.

To prevent this, you may wish to include a covenant along with this agreement that prevents the other party from doing this.

What can you do if half-way through the initial discussions, your relationship with the potential licensee turns sour and you don’t want to proceed with discussions any further?

Can you terminate discussions prematurely and if so, would the NDA still apply? It most certainly can – especially if you make a provision for such termination.

A good example of a clause is found again in Microsoft’s Confidentiality for Licensing Discussions agreement which provides that parties may terminate the agreement with 90 days prior written notice but the NDA will still apply to all previously disclosed information prior to the termination:

Termination clause in Microsoft NDA

After all, even when you are armed with a powerful non-disclosure agreement, it’s wiser to refrain from entering into discussions with potential licensees that you do not trust.

After you have completed the initial discussions, you can then decide whether you’ll part ways (the terms of the agreement will still apply to the Receiving Party) or whether you’ll enter into a formal licensing agreement which can provide for additional protections such as terms of use, sublicenses and control of patents.

In Tom’s case, it would be wise for him to create a powerful agreement, then carefully choose which mobile manufacturers he wants to work with, based on their business practices and integrity.

Credits: Icon Document by from the Noun Project.