As a business owner, your craft is your worth. And as lawyers, we would recommend cautious handling before making it available in the public domain. In our series, we discussed the legal process of raising funds as a startup and the nuances of a co-founder’s agreement. In this piece, we are going a step further to help your business flourish by explaining how you can safeguard your confidential information legally.
A Non-Disclosure Agreement (“NDA”), simply put, is a legal document wherein parties agree to keep specific privileged information confidential or secret. NDA can be unilateral – restricting one of the parties, bi-lateral – involving two parties, or multi-lateral restricting 3 or more parties involved.
The agenda of executing NDA is to protect information or trade secrets critical to a company’s success.
There are seven essential clauses of NDA to ensure it is an effective and enforceable agreement –
1. Definition of “Confidential Information”
To ensure NDA is enforceable, there must be a clear understanding of the scope, i.e., what is confidential and privileged information, and when will a leak be regarded as a breach of NDA.
A clearly defined clause will help identify any misses quickly instead of being discredited by courts of law for being ambiguous. A clear example of confidential and privileged information is Trade Secrets. These are vital for a business’ success and hold exceptional value for the startup’s valuation. Covering Trade Secrets in NDA will ensure the broadest protection of shared information.
We also recommend covering all modes of distribution of information, viz., documents, emails, oral conversations, chats, hand-written notes, etc., to make the definition all-inclusive in a tech-savvy world.
2. The Parties to NDA
It is imperative to disclose the parties bound by the executed NDA. Generally, the Disclosing Party and Recipient Party (“RP”), along with the third parties engaged by RP for performing due diligence, are covered under this clause. However, you may also include any contractors hired by RP for any relevant business activity.
3. Tenure of NDA
While you may want to protect your trade secrets forever, you cannot have an open-ended term for NDA. Most courts of law require a realistic tenure to be defined in the agreement.
Our recommendation for a situation like this is that you define the term as necessary, specific to the trade secret. For instance, if a technology developed by the startup is not popular currently but has scope for growth 10 years from now, the term for this technology can be 10 years, but if there’s another trade secret that won’t be as valuable after 10 years, you may keep a shorter term for it.
4. The legal obligation to disclose
A necessary clause in NDA is the exemption from the breach for disclosure of confidential information by RP because of a legal obligation. The legal obligation for disclosure may arise due to a request from a government agency, administrative entity, or courts of law.
To protect the startup’s interest, a requirement to inform Disclosing Party on receipt of such a request can be added.
Disclosure on account of legal obligations is limited to a Need to Know basis, and this must be specified in NDA for RP’s accountability.
5. Not Binding
Like everything else, NDA must come to an end too. If signed as a preliminary step for a transaction, parties must have an option to end the requirement too. This clause will allow parties to preserve their right to withdraw from the requirements per the relevant law and other clauses of NDA.
6. Jurisdiction
There is always a chance of conflict, and hence, like all agreements, NDA must include a clause to specify the jurisdiction in which courts of law shall be entitled to hear the matters and which jurisdictional laws shall apply to NDA.
7. Remedies
Where there’s a conflict or a breach, there must be a remedy!
It can get challenging to calculate the recovery costs, and hence, including a description of an appropriate remedy will prove to be an efficient insertion. It is business-effective to have a mutually agreeable remedy for the breach included in the NDA to protect the interests of all parties.
The most sought remedies for breach of provisions of NDA is an injunction to prevent immediate damage and seeking punitive damages. This could entail a lengthy legal battle and a hefty legal fee, affecting the smooth business operations.
Another option would be to include Mediation or Arbitration clauses in NDA. This can significantly reduce legal costs and save time invested in resolving conflicts.
Lastly, at the end of the term of NDA, the information shared must be returned or destroyed as per the agreed method. This also means that if some information cannot be destroyed for reasonable cause, the same will not be used in any manner after the term has concluded.
A loosely drafted NDA would yield no worth. While this looks like a benign document, it can be potent when formulated and developed in alignment with the business requirements.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.