Non-Disclosure Agreement (NDA) & Confidentiality Agreements
Everything You Need to Know to Create, Manage and Stay Protected.
Imagine this. You receive a lead from your website, and you call the individual who provided their information. You really hit it off. They love your product, and you establish a great rapport. You agree to a follow-up meeting to continue discussions so you can dive into the finer points of your solution and your prospect’s requirements.
But wait. Before you can resume discussions, internal protocols mandate that an NDA must be in place. This seems totally counterintuitive to a prospect-friendly sales (and buying) process. But the information that will be discussed—both orally and in written format—is considered confidential to your respective organizations. If this information ever entered the public realm, it could adversely affect both you and your prospect. So, what do you do?
This is where confidentiality or non-disclosure agreements become an integral part of the buying and selling process. Confidential information can and should be discussed and exchanged—but only with the proper protections in place. The best and most expeditious way to navigate this process is to understand:
- Why do you need confidentiality or non-disclosure agreements?
- What makes confidentiality or non-disclosure agreements different?
- What’s included in confidentiality and non-disclosure agreements?
- How can you calculate the cost of confidentiality and non-disclosure agreements?
- When should you automate confidentiality and non-disclosure agreements?
- How do you automate confidentiality and non-disclosure agreements?
Why do you need confidentiality or non-disclosure agreements?
Confidentiality or non-disclosure agreements have become one of the most common types of business contracts. In addition to being a key element of many employment agreements, they also serve as a stand-alone agreement and predecessor to many other types of agreements. Confidentiality and non-disclosure agreements are frequently used during the “discovery” phase of a business relationship—a contract has not yet been put into place to govern the business relationship, though the party or parties are exchanging key or confidential information as part of the sales or buying process.
What makes confidentiality or non-disclosure agreements different?
In their stand-alone form, these agreements are frequently referred to as confidentiality agreements or non-disclosure agreements. They are essentially the same thing—with many different names and one important difference.
- MNDA – When the agreements are mutual, that is both parties are exchanging confidential information, they may be referred to as Mutual Non-Disclosure Agreements or MNDAs.
- UNDA – When only one party is sharing confidential information, they are termed a UNDA or Unilateral Non-Disclosure Agreement.
- NDA – Most often, these agreements are simply referred to as Non-Disclosure Agreements, NDAs.
- CDA – In the life sciences industry, non-disclosure agreements are always referred to as Confidentiality Agreements, or CDAs, because the acronym “NDA” in life sciences is exclusively reserved for references to New Drug Applications.
A helpful real-life example of NDA vs. Confidentiality Agreement
At Contracts 365®, we’re a cloud-based contract management software vendor. We frequently sign NDAs with prospects during our sales process. As part of this process, our prospects may provide us access to their company’s confidential contract and business process information. Similarly, we provide access to our confidential information including our pricing, in-depth product details, and our product roadmap.
An MNDA is employed to ensure that the confidential information which has been exchanged is protected—that is, kept secret—and treated with the same care and regard as a company would treat its own confidential information. When we move forward with the relationship, the confidentiality agreement or NDA is then superseded by a License, SaaS Agreement, Services Agreement, or another type of agreement—depending on the industry. The items disclosed under the confidentiality agreement or NDA continue to be protected by that NDA for the period specified within the confidentiality agreement. (See Term and Termination below for more info on this point.)
What’s included in confidentiality and non-disclosure agreements?
While the volume of confidentiality agreements and NDAs tends to be high for many companies, the level of complexity for these agreements tends to be low to moderate. The terms and conditions which appear in most confidentiality agreements or NDAs are fairly consistent, with slight nuances based on company preference, industry, etc.
There are ten terms and conditions that are included in most confidentiality and non-disclosure agreements (NDAs):
- Confidential Information Defined
- Permitted Purpose & Restriction on Use and Disclosure
- Ownership, License & Warranty
- Term & Termination
- Return or Destruction of Confidential Information
- Remedies & Injunctive Relief
- Additional Provisions
As with most agreements, a confidentiality agreement or NDA will begin with the recitals which outline the legal names and addresses of the parties. They may or may not include the state of incorporation, though it is important to document this information to help properly identify the parties and to allow them to obtain certain key information should an official legal notice need to be served.
In addition to the preamble, a confidentiality agreement may include several recitals. These generally state the purpose of the agreement—for example, to evaluate a business relationship between the parties. As part of this evaluation, the parties may disclose Confidential Information which will later be defined in the Agreement. A specific definition is given to both the Discloser and Recipient. The Discloser is the party sharing the confidential information and the Recipient is the party receiving the confidential information.
Confidential Information Defined
The information to be disclosed should be clearly defined to ensure there is no confusion around the information intended to be protected. This definition frequently references such terms as proprietary information—that is, information to which the owner or Discloser claims a protectable interest under the law.
The method of disclosure is generally also noted. Is the information to be protected only that information which has the term “confidential” written on it? Or is it any information that is disclosed orally, visually, or in a tangible form? Many confidentiality agreements will broaden the definition to include any information apparent to a reasonable person under the circumstances of disclosure as warranting confidential treatment. Some confidentiality agreements will note that anything disclosed orally which requires protection must be followed by a written notification containing a summary of the disclosure.
Types of information that require protection generally include technical, financial, personnel, marketing, pricing, sales, and/or commercial or the business information of the Discloser related to their business.
To remove any confusion, a definition of confidential information may include any information that is marked as being of a confidential or proprietary nature. By including such a clause in our NDAs and adding “Company Confidential” to the footer of everything we consider confidential, we try to make it abundantly clear what information should be protected.
Information not needing to be protected under an NDA is also documented. Most NDAs will note that information that is already publicly known will not be considered confidential. These carveouts will also often exclude information that was in the Recipient’s possession prior to the disclosure or was developed independently by the Recipient.
These carveouts can, at times, be a little tricky, especially in the case of competitors disclosing confidential information to each other. Protections given to oral disclosures can also create complications for parties seeking to enforce their NDAs due to difficulties in satisfying their burden of proof in court—hence the additional process step regarding following these oral disclosures with a written confidentiality notice.
Permitted Purpose & Restriction on Use and Disclosure
Confidentiality and non-disclosure agreements will also stipulate the permitted purpose of disclosing confidential information. In the scenario we are discussing here, a sales discussion, the purpose is to evaluate a potential business relationship. The Recipient can only use the confidential information for this purpose. Other permitted purposes may include the evaluation of a joint partnership, a potential acquisition, an investment, or any other types of business transactions.
Agreements further state that the Recipient cannot disclose the information to third parties other than their “Authorized Representatives”. Authorized Representatives are defined and usually include employees, advisors, and independent contractors of the Recipient. The disclosure is protected by stipulating that this information can pass to these individuals, but only in the event that they need to know the information for the permitted purpose, and they are bound by a written agreement, similar in nature to the confidentiality agreement, itself, which requires their confidentiality. A strong NDA will also require that the Recipient is responsible for the actions of its Authorized Representatives and must protect the Discloser’s confidential information with at least a reasonable level of care— and the same level of care that it protects its own confidential information.
The only situation under which the Recipient is allowed to share the Discloser’s Confidential Information with anyone else besides its Authorized Representative is in the event of a judicial order which compels the Recipient to share this information. Before sharing, however, Confidentiality Agreements will note that the Recipient should inform the Discloser of this order (if allowed by law), and shall reasonably cooperate with the Discloser to prevent or limit the sharing of their Confidential Information. If the Discloser is not successful in disputing the judicial order, the Recipient should only share the Confidential Information required by law to be shared.
Ownership, License & Warranty
Because the confidentiality agreement or NDA is often used at a preliminary stage to evaluate rather than consummate a potential business relationship, most of these agreements will specifically outline that sharing information does not confer any ownership rights or provide a license to any of the Discloser’s proprietary rights.
The Discloser generally makes no warranty around the Confidential Information, including non-infringement or merchantability. And most confidentiality agreements or NDAs specifically ask that the materials are not copied, proprietary legends are not removed, and in our case, as a cloud-based contract management vendor, we ask that nothing be reverse-engineered, disassembled, or decompiled.
Term & Termination
The term of the agreement begins on the Effective Date, which is either specifically noted in the agreement or is tied to the date of the last signature. Some confidentiality agreements or NDAs will have a defined term; others will continue until one of the parties terminates the agreement.
Often, when the agreement terminates, the protections put in place around the Confidential Information survive for some period of time. A specific time period for protection is stipulated, as many jurisdictions will not allow an obligation of confidentiality to go forever—although many make an exception for trade secrets.
Return or Destruction of Confidential Information
It is very common to include a provision stating that the Discloser is permitted to request that the Recipient returns or destroys any Confidential Information which was disclosed. An NDA will usually provide that, upon termination, the receiving party must automatically return or destroy the Discloser’s confidential information.
If no instruction is provided, it’s important to note that the Recipient may or may not return or destroy the information. So, if it is important to get the information back (e.g. if it is a physical prototype), an NDA should provide that the return or destruction is at the election of the Discloser.
Given backup routines, it also makes sense to note that the Confidential Information may be retained in the Company’s electronic backups, but only for so long as mandated by the Company’s IT and compliance guidance, that it is accessed only by IT professionals for the purpose of backups and data restoration, and that it is not used or accessed for any other purpose.
Remedies & Injunctive Relief
At the time of signature, the parties often agree that a breach of the agreement would result in irreparable harm. Given the importance of the information disclosed—trade secrets, competitive info, etc.—some companies seek to further that the Discloser will be entitled to injunctive relief. While injunctive relief clauses may be helpful, they do not guarantee that injunctive relief will be given, as the decision lies with the court and not the parties themselves.
As the information being disclosed is to evaluate a potential business relationship between two parties, many confidentiality agreements or NDAs do not allow for the agreement to be assigned or transferred. The parties do not want to find out that they are dealing with someone else or provide a way that a party might avoid liability for a breach.
Several other provisions frequently appear in an NDA, including Severability, Amendments and Waivers, Further Purchase Obligations, Governing Law & Jurisdiction, and Headings. As they tend to be fairly straightforward and consistent from agreement to agreement, we won’t do an in-depth assessment.
As you can see, while confidentiality agreements and NDAs are not complex in nature, they do contain important provisions, and they do require review prior to signature. This brings us to the next topic, the cost of processing these confidentiality agreements and NDAs.
How can you calculate the cost of confidentiality and non-disclosure agreements?
By determining the hard and hidden costs. It can be hard to find estimates of the millions of NDAs processed annually. But some quick math done in the context of your own organization can yield some fairly accurate results.
- Assume that the average hourly cost for your legal is $200 to $400 per hour.
- Consider the number of net new transactions done per year by each member of your organization. While not every transaction will require a confidentiality agreement or NDA, they have become common. For ease of math, let’s assume your organization signs 100 NDAs—as part of your buying or selling process.
- Your attorney and/or contract managers are quick and can readily prepare the agreement, view the redline changes, or review counterparty papers in 30 minutes. Under this scenario, your annual cost—assuming no additional redline exchanges or direct conversations between the parties, and a mid-point hourly rate—is $15,000.
- Let’s further assume that each signature process—whether done digitally or via wet signature—takes an additional 15 minutes. To our conservative $15,000 number, let’s add another $5,000 for a total annual cost of $20,000.
Replace these numbers with whatever makes the most amount of sense for your organization. In almost all cases, the numbers are much higher than one would ever expect.
But what about hidden costs that are less quantifiable, but no less real—like time, energy, and goodwill?
- Joe sent the agreement to Mary via email, but she didn’t receive it or have time to prepare the agreement, so he asked again.
- Mary is super busy and hasn’t had time to review it yet—so, Joe’s frequent follow-up emails are resulting in lost time and frustration for both.
- The individual responsible for signing the agreement missed the signature request or is not available—so a second individual with signature authorization needs to be tracked down.
- Your sales rep or buyer is frustrated as is your signer, and your legal resources are spending time processing NDAs as opposed to negotiating new deals.
- On the other side of all of this is your buyer, who simply wants to buy something from you.
When should you automate confidentiality and non-disclosure agreements?
Confidentiality agreements or NDAs are excellent candidates for automation. Automation simplifies the process by removing manual steps, automatically creating agreements, readily redlining and comparing versions, signing the agreement via electronic signature, and storing the agreement, by default, in a centralized, searchable, and reportable repository. To ensure that confidential information received under the agreement is, in fact, returned or destroyed upon termination, automation can assist in scheduling tasks and obligations to manage these activities.
So, how do you automate your confidentiality and NDA process?
Confidentiality agreements or NDAs are excellent candidates for automation through contract management software, also referred to as contract lifecycle management software. Given the rising importance of contract management, there are many vendors to choose from—most cloud-based in nature. Some focus on pre-execution agreements, others focus on post-execution agreements, and some do both. Certain vendors have stronger affiliations towards certain industries; others towards certain integrations including CRM integrations.
Over the years, we’ve found that automating your confidentiality or NDA process is a great way to “kick the tires” on a CLM initiative. It’s a fairly simple and straightforward process—unlike some of your other agreement types which may require heavy negotiations, several approvals, and in-depth post-execution management.
The good news is, Contracts 365 can be readily deployed to automate your confidentiality agreement and NDA process—and it’s built for Microsoft 365, so you likely have much of the needed IT infrastructure and protocols already in place.
Automating your confidentiality agreements and NDAs can be done through a 6-step process.
- Document creation or submission can occur through an easy-to-use, intuitive wizard-like interface. For your Sales Teams, this can occur directly from within MS Dynamics or Salesforce.
- Standard agreements with no changes can be sent right from the system for electronic signature. Once signed, they are stored automatically in your central repository for management.
- For agreements under negotiation, changes can be tracked through automatic redlines and versioning. Once finalized, approvals can easily take place.
- Status updates, alerts, and escalations can be configured directly within the system so that everyone who needs to know is in the know—without the need for time-consuming and frustrating manual follow-up.
- Electronic signatures can be leveraged for a seamless signature process.
- Once executed, your confidentiality agreements and NDAs are stored directly within a centralized, secure, and permissioned repository for management, reporting, and compliance.
With the right tools, the process which governs the review and execution of your confidentiality and NDA agreements can be easy to understand, easy to manage, and easy to use. It can facilitate your sales and buying process while protecting your and your prospects’ confidential information.
If you’d like to learn more about Contracts 365, the leading contract management software for Microsoft 365 customers, please don’t hesitate to reach out to us, or even better, request a demo, and we can show you how it works real-time. And, when we need to put in place a confidentiality agreement or NDA, we promise the experience will be a good one!