Recognizing Non-Disclosure and Non-Circumvention Agreements

What is a Non-Disclosure Agreement?

A Non-Disclosure Agreement (NDA) is a legally binding contract that outlines confidential material, knowledge, or information that the parties involved wish to share with one another for certain purposes, but which they wish to restrict from use by third parties. NDAs are used in a wide variety of contexts and can generally be considered to be restricted to either a unilateral or mutual agreement.
A unilateral agreement (or one-way agreement) establishes a confidential relationship between two or more parties, thereby restricting the information shared with third parties. Therefore, a unilateral NDA is commonly used to protect one party’s secret information, such as a patent.
On the other hand, a mutual agreement (or reciprocal agreement or bilateral agreement) is defined as an exchange of confidential information between the parties. Under this mutual agreement , both parties are restricted to only externally using the information only as agreed upon.
Both the "Scope of Confidentiality" and the "Scope of Harm" apply to the two different types of agreements. Both provisions prohibit disclosure or misappropriation of the information and define various exceptions from such prohibited acts.
The NDA is enforced by the jurisdiction of a judge, who may force the NDA under the compliance of the law.
Taking into consideration the mutual agreement, there are two forms in which NDAs are typically drafted – to cover an existing relationship or in contemplation of a future relationship.
The purpose of an NDA is to not disclose information shared between the parties, but at times, certain information may be disclosed by the expressly defined exceptions, including:
As with any contract, parties may opt to negotiate certain terms before finalizing an NDA. For example, parties may:
NDAs are common in many different business transactions:

Recognizing Non-Circumvention Agreements

When a business is for sale, the buyer may be given access to confidential information or trade secrets of the seller’s business. This could include information on the seller’s customer and vendor lists. Obviously, customers and vendors are a great asset of a business, and one way of devaluing the business is to have the buyers contact the customers and/or vendors directly. Likewise, a buyer of a business may be selling goods or services that compete with the seller’s existing business. In such a case, the seller would not want a buyer to use trade secrets obtained during the transaction to better compete against the seller and gain unfair advantages.
Therefore, when one company is contemplating a sale or acquisition from another company, the seller should insist upon the execution of a Non-Circumvention Agreement ("NCA"). An NCA is a contract in which parties promise to not use, or not disclose, information to competing companies. Often, the sales agreement between the buyer and seller will supersede the NCA, thereby rendering the NCA obsolete at closing. However, it is a useful tool to protect all parties during the sales process.
An NCA is usually executed prior to the sale of a business and is in effect during the due diligence period, while the parties are contemplating a transaction. If a deal is never finalized, the NCA terminates. But if the deal moves forward and is completed, then the NCA would terminate at the closing or the NCA can continue as part of the sales agreement.
A NCA is different than a Non-Disclosure Agreement ("NDA"). An NDA is an agreement that provides protection to companies who share confidential information with other companies. The parties agree to not disclose, use or publish information that they received from one another.
Non-Disclosure Agreements (also called confidentiality agreements) are not typically used in a business sale. However, an NDA is useful for a company that hires an independent contractor or consultant who will be given access to confidential information of the company.

Essential Provisions in Non-Disclosure and Non-Circumvention Agreements

NDAs and Non-Circumvention Agreements will typically feature the following key clauses:

1. Purpose of the NDA or Non-Circumvention Agreement.

The purpose clause is often included to educate the parties as to why they are signing the NDA or Non-Circumvention Agreement. In so doing, the parties virtually assure that the agreement adequately covers the appropriate scope of protection for the confidential information and non-circumvention provisions.

2. Definition of Confidential Information.

This is one of the most important clauses. It is recommended that a definition of confidential information be included. To be sure that the confidential information is adequately identified, the clause should include both a broad description of the type of information intended to be protected and also a specific list of confidential information if available.

3. Exclusions from Confidentiality.

A definition of confidential information should also include a list of items that will not fall within the definition. Common exclusions include:

4. Representations and Warranties.

This clause is an unnecessary portion of an NDA or Non-Circumvention Agreement. It is typical in a stand-alone agreement. However, the inclusion of a representation and warranty clause not only adds nothing, but also signifies to the court the reliance by one party on the representation made by another. For this reason, the offending party will use the misrepresentation to lessen its damages for breach of the NDA or Non-Circumvention Agreement. In journaling your diary, as every lawyer should, remember to delete any reference to representations made by the other party.

5. Limitations.

Limitations may be imposed on the duration of the NDA or Non-Circumvention Agreement, the scope of information covered, and the territory in which the NDA or Non-Circumvention Agreement is operative.

6. Term.

An item that is often overlooked is to define the term of the NDA or Non-Circumvention Agreement. Sometimes the parties are at odds as to how long the NDA or Non-Circumvention Agreement should last. This could lead to litigation. It is best to have the parties agree to a reasonable length of time.

7. Termination.

Either party should have the right to terminate the NDA or Non-Circumvention Agreement at any time. This clause should also provide that the confidential information will remain confidential for the duration of the agreement and thereafter in accordance with the definition of confidential information.

8. Injunctive Relief.

It is wise to clearly state in the NDA or Non-Circumvention Agreement that an injunction will be available as a remedy for a violation of the NDA or Non-Circumvention Agreement. This tends to insure that the violation will cease quickly and the damage will be minimized.

Circumstances for Non-Disclosure and Non-Circumvention Agreements

When approaching a situation that requires an NDA and/or a Non-Circumvention Agreement, the best thing to do is be prepared before you get involved or actually start talking with a prospective partner to do business with. This will allow you to essentially eliminate the risk of someone misusing your confidential information.
NDAs are very common in:
• Disclosing business sale or merger information
• Starting a new venture with one or more new partners
• Hiring employees with special information
• Going into joint ventures with other businesses
• Manufacturer, distribution, suppliers, franchisors, etc.
• Business consultants
• Computer and technology projects
• Credit and real estate transactions
• Trade shows
• Manufacturing
• Entertainment industry
• Manufacturing
• Real Estate Industry
• And many other situations.
Situations where a Non-Circumvention Agreement is used by businesses include: Franchise Registration, Technology Transfer Agreement, Licensing and/or Joint Venture, Production Improvements, Product Design, Credit & Additional Financing, Inventory Purchases, Chemical Purchases, Electronic Purchases, Import & Export of Machinery, Equipment and All Types of Materials, Real Estate Projects, Construction Projects, Factory & Equipment Purchases, Shipping and Vehicle Purchases, Intellectual Property Purchases, Music Distribution, Video Distribution, Retail & Wholesale Opportunities, Video or Media Libraries, Distribution – Internet & Traditional, Safe Harbor for Making Transitions in Foreign Markets etc.
The risks include someone you do business with using information you have shared with them, or in the case of a Non-Circumvention Agreement, circumventing you from completing a deal, where otherwise they might have included you.

Legality of Non-Disclosure and Non-Circumvention Agreements

The legal enforceability of non-disclosure agreements and non-circumvention agreements is determined on a case-by-case basis in the courts. There are, however, a number of factors affecting the legal enforceability of NDAs and Non-Circumvention Agreements, a selection of which is considered below:
A NDAs and Non-Circumvention Agreements should contain appropriate and reasonable limitations on its scope. When we refer to "scope" we mean the subject-matter of the information to which the NDA or NCA relates. Specificity is key. The NDA or NCA should identify the information that is protected. The best way of doing this is to clearly and specifically describe the information covered by the NDA or NCA. If, however, it is considered that the scope of protected information is indefinite (as in back-door NDAs/NCAs) , there should at least be a proprietary list of examples.
There should also be limitations on the use of the information protected under the NDA/NCA. Recipients of confidential information should be restricted to only using the information for the intended purpose. Restrictions as to the use of confidential information should be limited to as short a time as possible. It is important that they are limited to an appropriate period of time only.
The scope of the NDA/NCA may also refer to the identity of the persons that may have access to the confidential information. When determining the enforceability of the NDA/NCA, a court is likely to consider whether any exceptions are reasonable. For example, the NDA/NCA might exclude the parties to it from the definition of "receiving party". A court would not consider reasonable an NDA/ NCA that applied to anyone who may come across the information. NDAs / NCAs are more likely to be acceptable when they are limited to the parties that will have actual access to the information being protected and those closely associated with them.
An NDA/NCA should identify the term during which it is in effect. If it is indefinite this may undermine its enforceability. NDAs/NCAs may contain provisions for review after a specified period of time.

Common Pitfalls

One of the most common mistakes is to find a one-size-fits-all agreement on the internet or in a friend’s files and use that as they currently are. Every business and every relationship is different, so we recommend you review each agreement with as much attention to detail as you would with a brand new one. Some internet templates are useful, but many are not. Even seemingly small differences between NDAs and Non-Circumvention Agreements can be significant in important ways.
Make sure your agreement is enforceable in every jurisdiction where your business, customers, competitors, and the other party are located. This is particularly important for Non-Circumvention Agreements, which need to be recognized in every state and country where the parties may do business.
Be wary of NDAs saying that the agreement will last indefinitely or in perpetuity. Under California law, for instance, NDAs only apply to confidential information that is proprietary and not publicly known, and must expire after a "reasonable period." The same is true in many other states. There’s no need to go into detail on what happens at the end of the term (a topic better suited to a Non-Circumvention) but it’s best to make it clear that after the expiration date, the obligations of the NDA end.
The IPO and M&A processes have an informal standard NDA. Know what this is. It’s looked down upon when someone flips an unsolicited offering memorandum and includes a copy of the NDA. If they sue you for it, they’ll win. You don’t have to use this NDA, and many companies don’t.
Your NDAs and Non-Circumvention agreements should not require extreme punishments for breaking the agreement, even if the punishment is limited to a reasonable period of time. Unless an egregious violation is extremely likely to occur, we don’t recommend including those types of clauses. They essentially kill the incentive to enter into the agreement in the first place.

The Importance of Legal Counsel

It is crucial to involve a legal professional at the earliest stages of drafting NDAs on behalf of clients. An experienced attorney can effectively draft an NDA relating to an employment agreement or an agreement with an active investor or shareholder. Your legal counsel will request from the client any and all such documents that they have signed, and will help determine how to proceed. They may suggest renouncing your rights to enforce an NDA outside of China if there is no viable means to do so . An NDA can be incorporated into any contract or be a stand-alone agreement, as per your goals and requirements. A legal professional may even suggest including enforceability provisions in NDAs if the scope of work is limited and of short duration. They can also advise and assist when formulating non-circumvention agreements. Table 1 clearly presents the components that they need to define and elaborate upon. The time spent in required communication with the client concerning all of these provisions justifies costs that may be incurred.