EXPLANATION FOR BASIC NONDISCLOSURE Agreement

Below we provide a non-legalese explanation for each of the provisions in the Basic Non Disclosure Agreement.

1.    Who Is Disclosing? Who Is Receiving?

In the sample agreement, the "Disclosing Party" is the person disclosing secrets, and the "Receiving Party" is the person or company who receives the confidential information and is obligated to keep it secret. The terms are capitalized to indicate they are defined within the agreement. The sample agreement is a "one-way" (or in legalese, "unilateral") agreement-that is, only one party is disclosing secrets.

The Mutual Agreement

If both sides are disclosing secrets to each other you should modify the agreement to make it a mutual (or "bilateral") nondisclosure agreement. To do that, substitute the following paragraph for the first paragraph in the agreement.

This Nondisclosure agreement (the "Agreement") is entered into by and between ____ [insert your name, business form and address] and ____ [insert name, business form and address of other person or company with whom you are exchanging information] collectively referred to as the "parties" for the purpose of preventing the unauthorized disclosure of Confidential Information as defined below. The parties agree to enter into a confidential relationship with respect to the disclosure by one or each (the "Disclosing Party") to the other (the "Receiving Party") of certain proprietary and confidential information (the "Confidential Information").

2.    Defining the Trade Secrets

Every nondisclosure agreement defines its trade secrets, often referred to as "confidential information." This definition establishes the subject matter of the disclosure. There are three common approaches to defining confidential information: (1) using a system to mark all confidential information; (2) listing trade secret categories; or (3) specifically identifying the confidential information.

What's best for your company? That depends on your secrets and how you disclose them. If your company is built around one or two secrets-for example, a famous recipe or formula-you can specifically identify the materials. You can also use that approach if you are disclosing one or two secrets to a contractor. If your company focuses on several categories of secret information, for example, computer code, sales information and marketing plans, a list approach will work with employees and contractors. If your company has a wide variety of secrets and is constantly developing new ones, you should specifically identify secrets.

Here's an example of the list approach, taken from the Employee Nondisclosure Agreement .

EXAMPLE: Definition of Confidential Information

"Confidential Information" means information or material that is commercially valuable to the Disclosing Party and not generally known or readily ascertainable in the industry. This includes, but is not limited to:

(a) technical information concerning the Disclosing Party's products and services, including product know-how, formula, designs, devices, diagrams, software code, test results, processes, inventions, research projects and product development, technical memoranda and correspondence;

(b) information concerning the Disclosing Party's business, including cost information, profits, sales information, accounting and unpublished financial information, business plans, markets and marketing methods, customer lists and customer information, purchasing techniques, supplier lists and supplier information and advertising strategies;

(c) information concerning the Disclosing Party's employees, including salaries, strengths, weaknesses and skills;

(d) information submitted by the Disclosing Party's customers, suppliers, employees, consultants or co-venture partners with the Disclosing Party for study, evaluation or use; and

(e) any other information not generally known to the public that, if misused or disclosed, could reasonably be expected to adversely affect the Disclosing Party's business.

Using a list approach is fine, provided that you can find something on the list that fits your disclosure. For example, if you are disclosing a confidential software program, your nondisclosure agreement should include a category such as "programming code" or "software code" that accurately reflects your secret material. Although the final paragraph in the example, above, includes "any other information," you will be better off not relying solely on this statement. Courts that interpret NDAs often prefer specificity.

If confidential information is fairly specific-for example, a unique method of preparing income tax statements-define it specifically.

EXAMPLE: Definition of Confidential Information

The following constitutes Confidential Information: business method for preparing income tax statements and related algorithms and software code.

Another approach to identifying trade secrets is to state that the disclosing party will certify what is and what is not confidential. For example, physical disclosures such as written materials or software will be clearly marked "Confidential." In the case of oral disclosures, the disclosing party provides written confirmation that a trade secret was disclosed. Here is an appropriate provision taken from the sample NDA in the previous section.

EXAMPLE: Definition of Confidential Information

(Written or Oral). For purposes of this Agreement, "Confidential Information" includes all information or material that has or could have commercial value or other utility in the business in which Disclosing Party is engaged. If Confidential Information is in written form, the Disclosing Party shall label or stamp the materials with the word "Confidential" or some similar warning. If Confidential Information is transmitted orally, the Disclosing Party shall promptly provide a writing indicating that such oral communication constituted Confidential Information.

When confirming an oral disclosure, avoid disclosing the content of the trade secret. An email or letter is acceptable, but the parties should keep copies of all such correspondence. A sample letter is shown below.

Letter Confirming Oral Disclosure

Dear Sam

Today at lunch, I disclosed information to you about my kaleidoscopic projection system-specifically, the manner in which I have configured and wired the bulbs in the device. That information is confidential (as described in our nondisclosure agreement) and this letter is intended to confirm the disclosure.

3.    Excluding Information That Is Not Confidential

You cannot prohibit the receiving party from disclosing information that is publicly known, legitimately acquired from another source or developed by the receiving party before meeting you. Similarly, it is not unlawful if the receiving party discloses your secret with your permission. These legal exceptions exist with or without an agreement, but they are commonly included in a contract to make it clear to everyone that such information is not considered a trade secret.

EXAMPLE: Exclusions of Confidential Information

Receiving Party's obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure under this Agreement or subsequently becomes publicly known through no fault of the Receiving Party; (b) discovered or created by the Receiving Party prior to disclosure by Disclosing Party; (c) otherwise learned by the Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party's representatives; or (d) is disclosed by Receiving Party with Disclosing Party's prior written approval.

In some cases, a business presented with your nondisclosure agreement may request the right to exclude information that is independently developed after the disclosure. In other words, the business might want to change subsection (b) to read, "(b) discovered or independently created by Receiving Party prior to or after disclosure by Disclosing Party."

By making this change, the other company can create new products after exposure to your secret, provided that your secret is not used to develop them. You may wonder how it is possible for a company once exposed to your secret to develop a new product without using that trade secret. One possibility is that one division of a large company could invent something without any contact with the division that has been exposed to your secret. Some companies even establish clean room methods.

Although it is possible for a company to independently develop products or information without using your disclosed secret, we recommend avoiding this modification if possible.

4.    Duty to Keep Information Secret

The heart of a nondisclosure agreement is a statement establishing a confidential relationship between the parties. The statement sets out the duty of the Receiving Party to maintain the information in confidence and to limit its use. Often, this duty is established by one sentence: "The Receiving Party shall hold and maintain the Confidential Information of the other party in strictest confidence for the sole and exclusive benefit of the Disclosing Party." In other cases, the provision may be more detailed and may include obligations to return information. A detailed provision is provided below.

The simpler provision is usually suitable when entering into an NDA with an individual such as an independent contractor. Use the more detailed one if your secrets may be used by more than one individual within a business. The detailed provision provides that the receiving party has to restrict access to persons within the company who are also bound by this agreement.

EXAMPLE: Provision Establishing a Duty of Nondisclosure

Receiving Party shall hold and maintain the Confidential Information of the Disclosing Party in strictest confidence for the sole and exclusive benefit of the Disclosing Party. Receiving Party shall carefully restrict access to Confidential Information to employees, contractors and third parties as is reasonably required and only to persons subject to nondisclosure restrictions at least as protective as those set forth in this Agreement. Receiving Party shall not, without prior written approval of Disclosing Party, use for Receiving Party's own benefit, publish, copy, or otherwise disclose to others, or permit the use by others for their benefit or to the detriment of Disclosing Party, any Confidential Information.

In some cases, you may want to impose additional requirements. For example, the Beta Tester Nondisclosure Agreement contains a prohibition against reverse engineering, decompiling or disassembling the software. This prohibits the receiving party (the user of licensed software) from learning more about the trade secrets.

You may also insist on the return of all trade secret materials that you furnished under the agreement. In that case, add the following language to the receiving party's obligations.

EXAMPLE: Return of Materials

Receiving Party shall return to Disclosing Party any and all records, notes, and other written, printed, or tangible materials in its possession pertaining to Confidential Information immediately if Disclosing Party requests it in writing.

5.    Duration of the Agreement

How long does the duty of confidentiality last? The sample agreement offers three alternative approaches: an indefinite period that terminates when the information is no longer a trade secret; a fixed period of time; or a combination of the two.

EXAMPLE: Unlimited Time Period

This Agreement and Receiving Party's duty to hold Disclosing Party's Confidential Information in confidence shall remain in effect until the Confidential Information no longer qualifies as a trade secret or until Disclosing Party sends Receiving Party written notice releasing Receiving Party from this Agreement, whichever occurs first.

EXAMPLE: Fixed Time Period

This Agreement and Receiving Party's duty to hold Disclosing Party's Confidential Information in confidence shall remain in effect until __________.

EXAMPLE: Fixed Time Period With Exceptions

This Agreement and Receiving Party's duty to hold Disclosing Party's Confidential Information in confidence shall remain in effect until __________ or until one of the following occurs:

(a) the Disclosing Party sends the Receiving Party written notice releasing it from this Agreement, or

(b) the information disclosed under this Agreement ceases to be a trade secret.

The time period is often an issue of negotiation. You, as the disclosing party, will usually want an open period with no limits; receiving parties want a short period. For employee and contractor agreements, the term is often unlimited or ends only when the trade secret becomes public knowledge. Five years is a common length in nondisclosure agreements that involve business negotiations and product submissions although many companies insist on two or three years.

We recommend that you seek as long a time as possible, preferably unlimited. But realize that some businesses want a fixed period of time and some courts, when interpreting NDAs, require that the time period be reasonable. Determining "reasonableness" is subjective and depends on the confidential material and the nature of the industry. For example, some trade secrets within the software or Internet industries may be short-lived. Other trade secrets-for example, the Coca-Cola formula-have been preserved as a secret for over a century. If it is likely, for example, that others will stumble upon the same secret or innovation or that it will be reverse engineered within a few years, then you are unlikely to be damaged by a two- or three-year period. Keep in mind that once the time period is over, the disclosing party is free to reveal your secrets.

Click for information about the Miscellaneous Provisions included at the end of the nondisclosure agreement.

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