Like most businesses, you will probably need to protect confidential information in one way or another. In this case you will probably need to use an NDA (non-disclosure agreement), a contract placing an obligation of secrecy on one or both parties regarding non-public information shared over the course of their dealings. NDAs are commonly used with independent contractors, business partners, and employees and are a great way to inform a person that the information they are about to receive must be handled with the utmost care. To actually be produced in a court of law, however, NDAs must comply with certain formalities enabling you to find the source of a potential leak and put an end to it. You also want to ensure that your NDA is working for, and not against you.
Should you protect confidential information with a one-way or two-way NDA?
As a first step, careful attention should be put into choosing the type of NDA (one-way or two-way). A one-way NDA means that one party recognizes s/he is receiving confidential information and agrees to keep it confidential. Two-way, both parties recognize that the information they will share needs to be kept secret.
A one-way NDA is a good way protect confidential information and avoid undertaking unnecessary confidentiality obligations, especially if you are simply receiving a quote for services. More often than not, the information a potential contractor will be sharing with you may already be publicly available, making a two-way NDA unnecessary. There is no need to bind both parties and burden you or your company with confidentiality obligations that could end up providing grounds for the other party to move against you.
There may, however, be specific reasons why a potential business partner is asking for a two-way NDA. For instance, if you wanted to assess the overall quality of a potential contractor’s work prior to hiring his/her services, you would ask for a prototype or a sample. But potential contractors may be worried that such disclosure can allow you to have access to the underlying technology. In those cases, two-way NDAs may be justified and provision reserving all rights in samples and prototypes until actual hiring, and in all cases in the underlying technology, will reassure potential bidders that your company is not trying to get a free ride.
In other cases, the very fact that your company is having discussions with another a company (a potential acquirer or investor) constitutes a sensitive information in itself. Rendering it public too soon may harm the project. In those instance, both parties have an interest in keeping their dialog secret and a two-way NDA would then also be warranted. It may even provide for a particular date or condition upon which a mutual announcement regarding the relationship will be made.
But whether you plan on signing a two-way NDA with a potential contractor or business partner, the following steps will always be helpful:
First, identify the information your potential business partner will be providing to you. Second, inform the other party if you believe those are already publicly available. Third, ensure the information you do recognize as confidential or proprietary to the other party does not include work product that you may provide or that you may receive in the future.
Last but not least, unless you are compensated for the time during which you are not allowed to expand your business, never sign an NDA which says that you can’t disclose your own information to third parties. In effect, such obligation would amount to restraining your options to expand your business. To spot those and have them removed from templates provided by potential partners, look out for the following terms or expressions: “exclusive,” “competitors,” “passive or active solicitation,” “non-solicit,” “silent period.” If you can’t have the non-solicit removed, then try to narrow its scope by asking for a precise list of companies you won’t be permitted to talk to during the silent or non-solicit period.
In another post we will look at the steps you need to take to ensure your NDA can be enforced.