Non-Disclosure Agreements (NDAs) protect a company’s confidential information and should be a standard document curated by both California and Idaho startups.
Startups should understand the key components of NDAs to best protect their confidential information.
There are generally two types of NDAs: a one-sided NDA and a mutual NDA. This blog post will discuss contractual provisions of a mutual NDA. If presented with a one-sided NDA, a startup should consider requesting a mutual NDA in order to receive the same contractual protections being demanded.
Here are the seven most important clauses of an NDA
The first section of a mutual NDA should define the scope of what could be considered confidential information. The scope should define confidential information as either 1) content labeled “confidential” or any other information would be reasonably understood to be confidential. Starting with this broad definition allows the agreement to protect any possible confidential information regardless of whether it has been properly labeled confidential.
Use and disclosure of confidential information
The next section will identify the purpose of disclosing confidential information and will limit the use of the confidential only to achieve the defined purpose. Here, the purpose should be to evaluate a potential business opportunity. Therefore, the party receiving the confidential information may only use it to evaluate the potential of doing business with the disclosing party. Identifying the purpose further protects the disclosing party. A standard of care should also be identified in this section. Its best to at least require that the receiving party to use reasonable care when handling the confidential information.
Now that confidential information has been broadly defined and its use is limited to evaluating a potential business opportunity, the mutual NDA should carve out exceptions which will allow the receiving party to disclose the confidential information when disclosure is justified. Both parties should allow disclosure of the confidential information to company employees and as required by law. Its also common to allow disclosure of confidential information to contractors and professional consultants, but to require that these third parties agree to be bound by the same restrictions contained in the mutual NDA. Finally, parties should require that the receiving party notify the disclosing party if the receiving party is being compelled to disclose the confidential information as required by law (example: responding to a subpoena or court order).
Restrictions and limitations
The restrictions and limitations further sets out what conduct is prohibited by the mutual NDA. Although the receiving party should already be limited on using the information to evaluate a potential business relationship, the disclosing party should also required specific guarantees the the receiving party will not use the confidential information to gain a competitive advantage against the disclosing party or in other ways that may diminish the proprietary value of the information. Setting out this restrictions protects startups from being negatively affected by the disclosure.
Return or Destruction of Confidential Information
Mutual NDAs should require return or destruction of confidential information disclosed upon any of the following: 1) request by the disclosing party2) after the agreement is terminated; or 3) upon expiration of a set time period. Normally, mutually NDAs will require return or destruction of confidential information three years after execution of the agreement.
Disclaimer of any representations or warranties
To prevent a recipient of confidential information from claiming they suffered damages due to an alleged misrepresentation contained in the confidential information, California and Idaho startups should include an express disclaimer of any representations and warranties in their NDAs. Because parties are entering into NDAs to evaluate business opportunities, ensuring no warranties are made as to the veracity of the information shared is paramount to protecting a startup against litigation.
California and Idaho startups should be sure to explicitly state that equitable remedies will be available if the NDA is breached. Specifically, the NDA should state that all legal and equitable remedies, including injunctive relief, be made available.