Don’t Sign That NDA Yet! Understand Your Obligations First

Introduction

Ready to dive deeper into Non-Disclosure Agreements (NDAs)? We covered the basics and key elements of NDA’s in part 1 here and in part 2 here we covered four common clauses like Parties, Definitions and the Purpose of NDA’s . Now, let’s explore the crucial confidentiality obligations for the receiving party in an NDA.

Learn how to safeguard your sensitive information during business partnerships with this Article ‘Don’t Sign That NDA Yet! Understand Your Obligations First’.

Quick Facts

Under NDAs, also called confidentiality agreements, parties agree the following:

• Confidentiality Obligations: keep information secret, use it only for the purpose mentioned in the NDA and don’t disclose it to unauthorized parties.
• Maintain Information Security: implement reasonable security measures to safeguard the confidentiality of the information.
• Exclusions: in certain circumstances the confidentiality doesn’t apply, such as publicly available information or disclosures required by law.
• Destruction of Information: when to return or delete confidential information once the purpose is fulfilled.

Although NDAs generally take precedence over the law, specific laws & regulations may apply. Think specific secrecy laws, the GDPR, employment laws and Trade Secret Regulations.

Confidentiality Obligations of Receiving Party

Limited Usage of the Confidential Information

In an NDA, the receiving party has the main confidentiality responsibilities.

This generally includes using confidential information exclusively for the designated “purpose” in the NDA. See our previous article here where we explain why this is important and how to cover the purpose correctly. Doing so ensures safety of keeping the confidential information secret, and makes the recipient refrain from disclosing it to any third parties.

A well-drafted NDA should explicitly restrict the receiving party from not only directly and deliberately misusing or disclosing confidential information but also from doing so indirectly, negligently, or unintentionally.

Extension of allowed recipients

One of the most important parts of the NDA to pay particular attention to is:

‘Who is able to received the Confidential Information’?

As it will often not only be the parties to the NDA itself who need to receive the confidential information, it is important to extend these confidentiality obligations beyond the receiving party itself.

Most common examples of third parties:

• professional advisor like accountants, consultants or lawyers,
• agents, directors, employees, and
• affiliates

Therefore, ensure that you include very clear definitions of third parties that may receive the Confidential Information and under which circumstances.

Usually these circumstances are that these third parties can only receive the confidential information if they have:

• a need to know in connection with the Purpose (as defined in the NDA), and
• the legal obligations of confidentiality and non-use with respect to the Confidential Information substantially similar to the obligations of the Receiving Party under this Agreement.

Maintain Information Security

Realizing that it is important to also protect the security of the confidential information shared is crucial.

If you receive confidential information it is important to understand and agree that it is are required to implement reasonable security measures. This includes technical, physical and organizational measures safeguarding the confidentiality of the information and prevent unauthorized access or disclosure.

Exceptions from confidentiality obligations 

Typically, NDAs include certain exceptions to the confidentiality obligations imposed on the receiving party.

Public Knowledge

If the information becomes publicly available (without breach of the NDA), the confidentiality obligations cease to bind the recipient and their affiliates.

Prior Knowledge

The entry of the information into the public domain (without a breach of the NDA) also releases the recipient and their affiliates from confidentiality obligation

Third-Party Disclosure (Including Affiliates)

When the recipient receives information from a third party who has the legal right to disclose it, they no longer need to maintain its confidentiality.

Legal Requirements

An important exception allows the recipient, affiliates, or third parties to disclose the confidential information through a court order or governmental request. Typically, the discloser should be notified before the information is disclosed to comply with the legal process.

Return/destruction of information 

When the purpose of sharing confidential information is achieved, the disclosing party may request the return of the disclosed confidential information or the deletion/destruction of the confidential information if it remains in the possession of the receiving party.

For example, the disclosing party can request the receiving party to return copies, samples, and any other tangible materials containing confidential information; and to delete/destroy digital data containing confidential information.

In the current complicated IT setup of most companies, completely eliminating data can be either highly challenging or cost-prohibitive. For this reason, we advise to add wording similar to: parties agree

Specific laws might apply

Although NDAs generally cover confidentiality obligations, it is important o realize that specific laws and regulations may override or complement them in certain situations.

Examples are: secrecy laws, the GDPR, employment laws, and Trade Secret Regulations.

These laws & regulations can impose additional requirements or exceptions so do consider these obligations when agreeing or interpreting an NDA to ensure full compliance. Also see this article from Hogan Lovells on this subject.

Conclusion

While the title of this article ‘Don’t Sign That NDA Yet! Understand Your Obligations First’ might be a bit dramatic, it underscores an important point: NDAs are often underestimated.

Understanding confidentiality obligations under NDAs, particularly for the receiving party, is crucial.

It’s essential not to jump into signing these agreements without fully understanding the potential impact on your business and your ability to operate freely.

By carefully reviewing and understanding your obligations, you can protect your interests, avoid costly legal disputes, and ensure a successful partnership.

Please reach out to us via +31650608964 or lowa@amstlegal.com if you need more information or advice about this subject.