Startup Legal Corner: The Non-Disclosure Agreement (Guest Author)

Editor's Note: This is a guest post by Dan Unter, attorney at Cleantech Law Partners, a law firm that serves the unique legal needs of renewable energy and cleantech companies in the United States and around the world. Mr. Unter can be contacted at dunter [at] cleantechlawpartners.com

You can read prior article from Dan in the Startup Legal Corner series on Green VC here.


THE NON-DISCLOSURE AGREEMENT

The non-disclosure agreement (NDA) is such an often-used agreement that it’s surprising how misunderstood it is. It is even more surprising how often this type of legal document is exploited to gain advantage over another party. Hopefully this article will give you some insight into the basic purpose of an NDA, when it is used, and what I consider the easiest version to work with.

The Intended Purpose of an NDA

The only reason you exchange an NDA with another party is so that both parties have protection from the disclosure of anything that is either discussed or given over in the form of a document, display, file, or anything else. Each party is essentially giving their word in a mutual NDA that they won’t improperly disclose or use any relevant information, ideas, etc. that is passed between them. A NDA is not always needed, but is used often over discussions around potential partnerships, new clients, investments, and anything else where confidential information is passing hands.

This seems pretty simple, right? Yet I continually see clauses that have to do with non-compete, intellectual property transfer, or license and work for hire, to name a few. If you see an NDA with anything like this hidden amongst the terms, DO NOT sign it. It is enforceable (to a degree), so you don’t want to be caught arguing against a contract that you signed. In the end, it is evidence that the other party should be dealt with caution.

The Perfect NDA

The NDA that I always use is broad-based and mutual. It is broad-based in that it covers any and all discussions between the parties. I do this because over the course of any series of meetings, people tend to digress and should be able to do so without fear that they are off-topic and thus not protected. It is mutual because it does not matter what type of discussion you are having, both sides should be protected. That is what I consider fair.

In terms of time of confidentiality, usually five years is appropriate, if not on the long side.  

I do not require that documents be marked as “confidential.” I feel this is unnecessary and counter-intuitive to normal business dealings. 

There is also no better state for the "choice of law" referenced in the NDA then the state you reside in. If you are on the receiving end of an NDA, any state is fine, but keep in mind that any jurisdiction requirement will require you to hire counsel there to enforce it if necessary.

Is it Enforceable?

The short answer is yes. There are other complexities in regards to enforceability of different types of NDAs and the people that try to enforce them, but if you are dealing with a standard NDA document then use it with the expectation that it can be enforced against a person or company that breaches it in the form of an injunction, damages, or both.

I am purposely leaving this area brief because there is some of grey area in the realm of effectiveness and enforceability which is better answered by a business attorney.

What If I’m Given an NDA That Looks Bad?

I see a lot of bad NDAs from large enterprises that don’t expect pushback from individuals. To combat this, I would first try to remove those terms that don’t make sense based on your potential relationship. For example, a blanket license for your idea, a transfer of ownership, an ability to discuss or use your idea with anyone of their choosing are all what I consider “bad” terms. If removing them is not possible, then I would weigh the loss of theft of my idea versus the benefit I may gain from access to this company.

Where do I find an NDA to use?

From a lawyer!  You can also download all types of NDAs from the Internet for a small fee or free from sites like DocStoc and Nolo, but be aware that these contracts may not always fit your specific needs and that you may benefit from an attorney's review of your proposed NDA.


Disclaimer: Legal information is not the same as legal advice — the application of law to an individual's specific circumstances. Consult a lawyer if you want professional assurance that any information, and your interpretation of it, is appropriate to your particular situation.