Nondisclosure and Non-Circumvention Agreements Defined
Non-Disclosure Agreements (NDAs) and Non-Circumvention Agreements (NCAs) are written contracts that are intended to preserve confidential information for parties involved in potentially lucrative business transactions. One of the defining characteristics of these agreements is the expectation that a "need-to-know" environment is created for any confidential information that is disclosed between two or more parties. Both parties generally have the right to use confidential information contained within the agreement for certain specified objectives.
While it may seem intuitive to most , NDAs and NCAs can be confusing in that there are both similarities and key differences between the two types of agreements. NDAs are typically about protecting confidential information whereas NCAs are normally about preventing a party from using information to circumvent an agreement or gain a better advantage. Both NDAs and NCAs protect proprietary information; however, an NCA is oriented towards preventing the circumvention of the business arrangement between the parties.
Typical Provisions Found in a Nondisclosure Agreement
Non-disclosure agreements generally include the following clauses:
A. Confidentiality Obligations. This clause describes the information the parties have agreed will be treated as "confidential," and then the parties’ obligations with respect to the confidential information (e.g., that the parties have agreed to keep the information confidential, restrict disclosure of the same to authorized persons, use the information received solely for the purpose described in the agreement, etc.).
B. Duration of Obligations. A non-disclosure agreement should specifically provide a duration of the Parties’ obligations to maintain the confidentiality of Confidential Information. Agreements should also provide a duration for the time period during which a disclosing party must provide notice of a claimed breach.
C. Exclusions from Obligations. Non-disclosure agreements also typically contain an exclusions clause – i.e., what will not be considered confidential information. For example, this clause would exclude disclosures received on a non-confidential basis from a third party who does not owe that party a duty to maintain confidentiality and info that is generally available to the public through no wrongful act of your receiving party, among others.
Standard Clauses in a Non-Circumvention Agreement
A comprehensive non-circumvention agreement will contain several standard clauses. This Part of the agreement should set out the applicable non-circumvention and confidentiality obligations. Non-circumvention obligations require the parties to not circumvent one another in their respective dealings with third parties. The agreement should also include specific penalties for breach of the non-circumvention obligations, such as the payment of liquidated damages to the aggrieved party, an injunction against the offending party, or both.
It is important that the agreement contain terms regarding the enforcement of the various obligations, including resolution of disputes. This Part will find it unnecessary to specifically refer to these particular clauses, as they will be dealt with as part of the definitions and interpretation of the agreement, or within the various clauses dealing with enforcement. The terms of enforcement will typically stipulate that all disputes, including any enforcement, be decided by binding arbitration as opposed to litigation.
There are times when all of these clauses may not all form a part of the same non-circumvention agreement. For example, the parties may fully negotiate the terms of all clauses except those dealing with enforcement, in which case the parties will likely agree that the enforcement terms will be agreed to at a later stage. Alternatively, the parties may fully negotiate the terms of the enforcement clauses prior to the rest of the agreement. The parties can very quickly and effectively draft a deed of non-circumvention to be executed while negotiations relating to other clauses continue.
When to Employ Nondisclosure and Non-Circumvention Agreements
Non-Disclosure and Non-Circumvention Agreements should be used in any situation where one company will be using proprietary information of another in a manner that will benefit the acquiring company, with or without the business relationship continuing. Typically, this will apply to business transactions between companies in the same industry or related industries. For instance, if Company A has a technology that Company B would like to use to enhance their product offering, but Company B needs to look at the entire technology before the rest of the relationship can be contemplated, then a Non-Disclosure Agreement would be a necessary step in the negotiation. The technology is the property of Company A and by looking at and using it without the previous agreement Company B could potentially violate the trade secrets laws and face injunctions and damages.
An example of an industry where these types of agreements are routinely used are technology companies, especially those that employ engineers and other professionals that may be working with cutting edge technologies and processes. These companies need to protect their investments in research by realistically retaining the rights to the information that they have developed or acquired from third parties and that they share this information with their personnel that may be working on a project.
Legal Implications of Violating Nondisclosure or Non-Restriction Agreements
Consequences of Breaching Agreements
Non-disclosure and non-circumvention agreements can be waived or breached without consequence by either party whenever: A non-circumvention or non-disclosure or joint venture agreement can also be unilaterally discharged or mutually rescinded as agreed by the parties. It is important to note that the waiver, discharge and/or mutual rescission of an agreement does not absolve the discharging or disqualifying party from liability for any non-disclosure, non-circumvention or other breaches of that agreement to the waiving, discharging and/or superseding party. A non-disclosure or non-circumvention agreement does not terminate until its period of limitation lapses or is placed into abate or mute under Court order. Such changes do not erase the consequences of your act in breaching a non-disclosure, non-circumvention or joint venture agreement to another. Breaching any standard or existing non-disclosure or non-circumvent agreement subjects you to strict civil obligations. These civil obligations comprise damages, injunctions and specific performance. Damages It is customary that civil actions arising from breach of such agreements solicit damages, which are monetary sums directed to the party for the gravity of the offense, plus the aggravation of the offense to the liable party. Such damages include actual damages, aggravated damages or punitive damages. Breach of a non-disclosure or non-circumvention clause for example may bring you under obligation to recover actual money lost to a plaintiff by demonstrating the extent of financial loss that the plaintiff suffered as a result of the breach. Injunctions A breach of a non-disclosure or non-circumvent agreement can result in a plaintiff applying for an injunction to restrain the defendant from disclosing or profiting from any misappropriated non-disclosed or non-circumvent content . Such contents could include information, manufacturing plans, formulas or client/contacts lists. An injunction is a court order to a party to refrain from performing specific acts for a specified period of time. Injunctions for breach of a non-disclosure or non-circumvent agreement can be temporary restraining orders, preliminary injunctions or permanent injunctions. A temporary restraining order remains in effect only until the Court has the opportunity to consider a defendant’s application for a preliminary injunction. A preliminary injunction is a temporary remedy that prevents a party from acting or the other parties to act. The purpose of a preliminary injunction is to maintain the status quo between the parties while the case progresses. The final type of injunction, the permanent injunction, acts as a final judgment. It permanently aligns the rights between the parties. Specific Performance Specific performance (not to be confused with consequential damages) is an order given or made by a judge to a defaulting party to comply with a contract or a standard duty of compliance. Specific performance can be ordered or installed against a party who has manipulated or manipulated the provisions of a non-circumvent or non-disclosure agreement between the parties. Specific performance in a non-disclosure or non-circumvent agreement first considers whether an agreement is enforceable, then it determines if the party who is seeking to invoke the remedy has suffered an irreparable harm if the defendant is not obligated to abide by the contract. Specific performance can be ordered by a Court to a party to comply with a non-disclosure agreement to safeguard the privacy of client lists, pricing, manufacturing plans, formulas or other proprietary, trade secret or confidential information.
Tips for Drafting Nondisclosure and Non-Circumvention Agreements
As with many legally-enforceable contracts, finding the appropriate balance to protect one’s business, while avoiding ambiguities, is difficult. These types of agreements are usually looked at only when legal dispute arises, so proper drafting is essential. Clearly defined terms such as what constitutes Confidential Information, what is considered a Circumvention Event, the binding effect of the Agreement, and clear rights and limitations for non-disclosure, are critical to avoid the possibility of an ill-defined area of liability. Consulting with a properly qualified attorney at the outset can be the difference whether its possible to enforce the Agreement. We often see pro forma Agreements copied from the internet, but neither party understands the significance of terms in the Agreement, which can subject even the most seasoned business person to unexpected liabilities.
Common Misunderstandings and Frequently Asked Questions
Numerous myths and misconceptions surround Non-Disclosure and Non-Circumvention Agreements. This section identifies and answers some of the more popular questions and common misconceptions.
Q: Why is it important to use a Non-Disclosure and Non-Circumvention Agreement?
A: Both non-disclosure and non-circumvention are extremely important. Non-disclosure is virtually universal and non-circumvention is not universally used. It is necessary to protect the company or investor from the following:
Q: Can I use just any non-disclosure agreement?
A: In order to adequately protect your business and ideas, the use of a vetted non-disclosure and non-circumvention is critical. One must understand the importance of an attorney drafting and administering these agreements to ensure protection from competitors.
Q: Are non-disclosure and non-circumvention agreements one in the same?
A: No, they are different. A non-disclosure agreement is designed to keep competitors from learning about your business model and trade secrets . A non-circumvention agreement is designed to prohibit someone from using the information they learned during the start up in order to circumvent your start up to their own business or get funding for their own business rather than investing in yours.
Q: Are non-disclosure agreements only necessary at the beginning of a business?
A: While they are recommended at the beginning of a project, they can also be secured after the business has started. They can also be renewed periodically.
Q: Is a non-disclosure or non-circumvention agreement enforceable without a patent or copyright?
A: Yes.
Q: My company is well-known. Isn’t everyone already aware of the things I have created or developed? Why do I need a non-disclosure agreement?
A: If it is not protected by patent or copyright, it is not likely anyone is aware of that information. Licenses and copyrights are additional layers of protection.
Q: Isn’t the process more complicated than just signing a non-disclosure agreement?
A: This is actually really simple, but following these steps allows you to get from point A to point B.