NDA’s Explained – What You Need to Know (Part 2)

1. Introduction

Let’s dive deeper in the details of NDAs. After explaining the basics and different kinds of Confidentiality Agreements (NDAs) in the previous article, we will now zoom in on four key elements that are part of NDAs: Parties, Definitions of ‘Purpose’ & ‘Confidential Information’ and the Term of the NDA.

In part 1 of our series ‘NDA’s Explained’, we explained what NDAs are and which different kinds of NDAs exist (link to article: https://amstlegal.com/ndas-explained-what-you-need-to-know-part-1/). Also see this great practical article on NDA’s by Ironclad.

In this article, we will take a closer look at Four Key Elements of NDAs that are crucial:

• Parties
• Definition of Purpose
• Definition of Confidential Information
• Term of the NDA

Whether you are just starting or experienced in drafting, negotiating and signing NDAs, this article ‘What You Need to Know (Part 2)’ will help you understand the Four Key Elements of NDAs for keeping sensitive information safe in business deals.

2. Parties

Why is this important?

As with other contracts, it is often overlooked and easy to forget to add the correct parties in the NDA. When there is only one company in the group of the parties to the NDA this is simple, but when you are dealing with parties that are parts of larger groups this is important. With large companies like Nvidia, Siemens, Google, Nike, etc. this is obvious but when you are dealing with smaller groups, take a moment to consider which entity of the group is actually sharing the Confidential Information.

Most common parties

When in doubt, or when multiple companies in the group are sharing the Confidential Information, it is advisable that the parent / holding company enters into the NDA. The reason for this is that NDAs typically contain wording entitles the Receiving Party to share Confidential Information with affiliates. It is advisable to also add a well-defined ‘affiliates’ definition in the NDA which will extend the rights and obligations in the NDA to the affiliates of the parties of the NDA.

Specific wording

Example of specific Party wording that needs to be completed: [Add Exact full name of the Company including Ltd., Inc., BV, AB, etc.], a company registered under the laws of [add country/state], with registered office at [add full address] and company registration number [add number].

3. Definition of Purpose

Standards ways of defining Purpose

Most commonly, parties add the following purpose to NDA’s:

• ‘discuss the possibilities of a commercial relationship’ or

• ‘exploring potential partnerships or collaborations between Parties’.

More specific ways of defining Purpose

However, these is not the only purposes that we encounter. Other example are purposes relating to: (i) investors in your company, (ii) research and development, (iii) legal proceedings or (iv) visits to companies or factories, etc.

Key aspects for the Purpose

To identify the purpose of your NDA, ensure that its objectives align with your business goals. Typically, the essence of an NDA’s purpose revolves around two key aspects:

• Evaluating Business Relationship Viability: Assessing the feasibility and benefits of a partnership or collaboration by sharing confidential information to make informed decisions.
• Negotiating Relationship Terms: Engaging in discussions and negotiations to define terms, obligations, and parameters, aiming for mutually beneficial agreements through transparent exchanges of confidential information.

Why is it important?

Clearly articulating the purpose within an NDA is crucial for ensuring alignment between sharing confidential information and business objectives. It prevents misuse or unintended handling of information, enhancing trust and enforceability. In other words, the “purpose” is your tool to limit how and when the receiving party uses and shares your confidential information. This clarity not only enhances understanding and fosters trust between the parties involved but also reinforces the enforceability of the agreement by providing a clear reference point for evaluating compliance and addressing any potential breaches.

4. Definition of Confidential Information

Confidential Information refers to sensitive or proprietary data, disclosed by one party (the Disclosing Party) to another (the Receiving Party) during their business relationship. This information is confidential to protect the Disclosing Party’s competitive position, financial interests, intellectual property rights or reputation.

What should be included?

Confidential Information includes a wide variety of information a wide range of materials, for example:

• Trade secrets
• Business plans and strategies
• Financial data and projections
• Customer lists and contact information
• Product designs and specifications
• Intellectual property, such as patents, trademarks, and copyrights
• Marketing plans and sales data
• Technology, Software code and algorithms
• Research and development projects
• Any other information that is not publicly available and is treated as confidential by the Disclosing Party.

When you enter into a NDA relating to very sensitive information, ensure that you add any relevant confidential information that is typically not included in the definition of Confidential Information.

Specify which confidential information needs to be protected

The definition of confidential information in an NDA is crucial and should strike a balance between specificity and generality. Specific enough to ensure the protection of intended confidential information, yet general enough to cover unexpected but related information.

For instance, parties may opt for narrow definitions to protect only specified information, or broader ones to encompass all information exchanged during their business relationship.

Specific wording

A well-drafted NDA should also clearly state what Confidential Information is understood to be and how the confidential information is communicated. In our view a NDA should have a definition for Confidential Information similar to:

“Confidential Information” means any (non-public) information of and all written, visual or oral disclosed by or on behalf of one party or its Affiliates (“Disclosing Party”) to the other party (“Receiving Party”), identified as confidential or that reasonably should be understood to be confidential, including but not limited to information about their business, trade secrets, etc.

5. Term & Non-disclosure period

Standard Term

NDAs typically have a specified term after which they terminate. There is no standard, generally accepted limit, but the length should be reasonable, considering factors like the lifespan of the confidential information and industry specifics. Commonly, parties agree to a 2 or 3-year term for the NDA, with a further term that the confidentiality will be applicable after termination or end of the NDA.

Exceptions

For NDA’s that relate to intellectual property (IP) and Research and Development (R&D) projects, the confidentiality period is often longer – up to 5 years.

Confidentiality Term after NDA termination

After termination, the disclosing party may require the receiving party to uphold confidentiality obligations for additional years (typically also 2-3 years). When parties enter into a specific agreement relating to the purpose in the NDA, the confidentiality provisions in the specific agreement should replace the wording in the NDA. Even though this is not common, it is a possibility to add such wording specifically in the NDA.

6. Conclusion

Hopefully, this article ‘What You Need to Know (Part 2)’ helped you understand the Four Key Elements of NDAs for keeping sensitive information safe in business deals. Please reach out to us via +31650608964 or lowa@amstlegal.com if you need more information or advice about this subject.