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The purpose of this article is to describe some of the most common mistakes businesses make when creating a non disclosure agreement template.
Defining Confidential Information. One big mistake you can make is to try and define which information you are disclosing is confidential, and which is not. The truth of the matter is that it is extremely difficult to define exactly what confidential information consists of in a contract. This is because usually your company’s employees have not taken the time to determine, out of all the information you might be revealing to a contracting party, which information is absolutely vital to your continued commercial success and is not available to your competitors, and which information is routinely available (either in public or easily obtained from someone else).
Protecting Trade Secrets. Frankly, usually the only information you should absolutely care about calling out in a confidentiality deal consists of your key trade secrets. Your trade secrets are incredibly valuable information that no one else has and that substantially drive your profits. The best example of a great trade secret is the formula to Coca Cola, which no one knows outside of the company, who keeps the special recipe locked up in a vault in Atlanta, their headquarters city. Now, you may from time to time need to unveil one of your trade secrets to an expert consultant who can provide you with a skill set none of your employees offer which can take your business to the next level. In that rare situation, you definitely want to define the confidential information in your non disclosure agreement to specifically cover your trade secret.
The Wide Ranging Definition Error. But, let’s face it, those situations are few and far between. In my experience, the vast majority of confidentiality arrangements pertain to less valuable commercial data, which might have some limited benefit for a short period of time. Usually, because companies allow consultants rather free ranging access to their operations, they try to insist on a wide ranging definition of their confidential information. The problem with this approach is that the definition is so overly broad it’s likely to include information of no commercial value, which undermines the integrity of the agreement and makes it more likely to not be enforced by a judge in the event of a dispute. This also gives your employees a false sense of comfort, who assume that they can blithely share anything with the outside consultant, even prized trade secrets, without worrying about the risk of further disclosures.
The Survival Time Limit Error. One of the weirdest aspects of non disclosure agreements is that the parties usually include a clause entitled “Survival” which says that the parties only have to protect disclosed information as confidential for a certain amount of time (often five years). After that, the parties are free to disclose the confidential information to anyone and everyone. But what if the disclosed information is still confidential after five years, is still commercially valuable, and still not publicly known or in the hands of your competitors? Why would you want to allow a consultant or advisor to share your confidential data with other companies who could then turn around and use it to take away market share from your own business? Despite these looming concerns, parties routinely select a blanket, one-size-fits-all five year limitation on the confidentiality obligation. You definitely want to make sure you don’t make a similar mistake. At the end of the day, all confidential information you disclose to a consultant should be returned or destroyed at the end of the engagement, and any information the consultant retains in her head should never be disclosed. Of course, you can include exceptions for information that becomes publicly available, is rightfully received from a third party, or developed by the consultant’s company independently without reference to your own information. Otherwise, you should ensure that your information is properly protected for the life of its commercial value.
Hopefully, by following these warnings you can avoid such typical errors in your own non disclosure agreement template.
Jason Mark Anderman is President of WhichDraft.com, where a Q&A wizard allows users to create, collaborate, and customize contracts and legal documents simply and easily.
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