Not All Secrecy Agreements are Created Equal

December 29, 1999

Introduction. Frequently, you may disclose secrets to various recipients (e.g. customers, consultants). But a recipient may also be a competitor or friendly with a competitor. Thus, it is wise to have a written non-disclosure agreement ("NDA") with the recipient to ensure conditions of the disclosure are clearly understood, plus continued protection of secrets under state law.
 
Occasionally, we discover a client using the same "inherited" NDA for all types of transactions, without considering various options or shortcomings. But not all NDAs are created equal. A different type of NDA may be appropriate for your particular transaction.
 
Options. One key issue is whether the transaction involves a one-way disclosure of secrets from your company to another or, instead, a two-way exchange of secrets between your company and another. If one-way, you may wish to enhance the recipient’s secrecy obligations. If two-way, you may wish to diminish secrecy obligations, because the obligations are likely to be identical in both directions.
 
Secrecy can be imposed for a short time period (e.g. 1 year) which might be appropriate for information about impending product announcements, or perhaps forever which might be appropriate for a secret ingredient. In the 1-year example, a recipient could legally publish the secret after waiting 1 year. Also, during the secrecy period, an NDA can merely require commercially reasonable efforts to preserve secrecy or, alternatively, require absolute preservation of secrecy at all costs.
 
Thus, a particular NDA is not necessarily appropriate for all types of secrets. For example, if information is not easily memorized (e.g. huge volumes of numerical data), the NDA could relax secrecy obligations to the extent information is retained in the recipient’s mind. Conversely, for information such as a formula, the NDA could impose secrecy notwithstanding retention in the recipient’s mind.
 
Administration. We suggest consulting your attorney to discuss an NDA’s features and administration. Labeling and record keeping are some of the biggest shortcomings we observe in clients’ administration of NDAs. For example, it is important to maintain a record of all secrets exchanged, including dates, because an NDA usually fails to protect information that a recipient already knew.
 
Notably, many NDAs protect only information prominently labeled as "confidential." Such labeling notifies a recipient about the information’s "secret" status. Thus, unlabeled information might not be protected.
 
Also evaluate the practical impact of other restrictions. For example, an NDA can prohibit a recipient from reproducing information. Moreover, an NDA can prohibit use of information by a recipient’s other projects, even if such projects are secret.
 
Beware. After consulting your attorney in a few test cases, you can generally administer NDAs by yourself, unless an unfamiliar situation or language appears in a particular transaction. For example, most "form" NDAs are inadequate to cover all issues in jointly developing technology. Also, when disclosing object code, it is normally important to prohibit reverse assembly, so beware that many "form" NDAs fail to prohibit reverse assembly!
 
Moreover, an NDA will usually permit the recipient to share your secret with the recipient’s employees having a need to know, but proceed cautiously if an NDA permits the recipient to share your secret with a "consultant." The consultant may be a competitor or friendly with a competitor. Normally, we suggest identifying the consultant, or at least a permissible type of consultant.
 
Finally, almost every NDA will include "standard" exceptions, such as eliminating secrecy obligations when information rightfully becomes publicly known. But carefully review the exceptions. We have seen a few NDAs that omitted an exception or "gutted" it with other legalese.

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