Startup and video game law, from a Canadian and U.S. perspective
Non-Disclosure Agreements (NDAs) are a critical part of a technology company’s legal arsenal but are often relegated to a standard template without much thought. Too often, I’ve seen NDAs sent by sophisticated companies that contain a number of pitfalls that often negate some of the protections that NDAs are relied upon for. While there are numerous pitfalls to be watched for when drafting and reviewing NDAs, I wanted to highlight a few pitfalls that I frequently encounter that are often missed by both disclosing and receiving parties:
While it may seem obvious it bears repeating: the duration of a NDA matters. Often the NDAs I receive specify a relatively brief duration: usually between 2 and 5 years. Problematically, after the time-period expires the protections provided by the NDA lapse and the previously confidential information can be disclosed at will. While you may not believe that confidential information would be valuable 5 years into the future, this could be a costly assumption – image if the Coca-Cola recipe was treated the same?
NDAs should specify a perpetual duration unless you have a specific reason for limiting the duration. Regardless, if the NDA duration has a limit you should be very careful to disclose only information that you’re comfortable becoming public information in the future.
2. Who Can be Disclosed to
I often encounter NDAs that classify the NDA itself as confidential information that can only be disclosed with permission from the other party. While seemingly innocuous, this treatment of the NDA can become a massive headache when it comes time to sell your company or its technology. For example, you could be prohibited from disclosing the mere existence of the NDA to the purchaser or its legal counsel.
NDAs should permit disclosure of the NDA itself to your professional service providers, third parties proposing to engage in transactions with your company and their professional service providers.
3. Scope of Protection
Do not neglect the scope of the NDA’s protection. Obviously the NDA should protect information physically disclosed or spoken to the other party but there may be certain things disclosed to the other party that don’t fall within the typical scope of “information”. For example, you may want the NDA to protect things that are visually perceived by the other party when on-site or sounds heard by the other party (this could matter if the sound of a machine could be used to determine a key design feature).
Always consider what you are disclosing under the NDA and be sure that the scope of the NDA’s protection matches the scope of disclosure as well as inadvertent, passive, disclosures that may take place.
Ultimately, the pitfalls with a NDA, as with any legal document, originate from the treatment of the NDA as a standard templated agreement. The NDA is a powerful document that should be carefully crafted to reflect your particular business needs and to avoid the above pitfalls.