What an NDA Is (and Is Not) Good For

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I often get the question: “Isn’t disclosing my confidential information OK as long as I use an NDA?”  My answer is always: “An NDA doesn’t really protect you.  You should probably use one, but you should only disclose confidential information to people on a need-to-know basis.”  For my other bottom line recommendations re: NDA use, see the end of this post.  For a full discussion, read on.

If you’re going to be disclosing confidential information, using an NDA has many benefits:

  • NDA use protects the trade secret status of the information.  The law requires that you take reasonable measures to maintain the confidentiality of trade secrets.  NDA use is one of those measures.
  • If you want to disclose an invention on which you’ll be filing a patent application, failing to use an NDA prior to filing will destroy patent rights in certain foreign jurisdictions.
  • The NDA will give you legal rights that you can assert in court if the recipient discloses or improperly uses your confidential information.
  • The NDA puts the recipient on notice that you’re serious about protecting your confidential information.

While these are very real benefits, the fact remains that, if you want to enforce the rights your NDA gives you, it will cost you significant time and money.  If you’re a startup with limited resources, a recipient of your confidential information may (rightfully) believe that he or she can disclose or improperly use your information with impunity, since there’s no way you would sue them.  So your real protection is to be very careful about what, and to whom, you disclose.

The other limitation of NDAs is that they usually require that, in the case of oral disclosures, you send the recipient a followup letter stating that your disclosures contained confidential information that are subject to the NDA.  In my experience, the latter requirement is seldom met because people don’t know it exists or they simply forget to do it.

NDAs also require that any written disclosures bear an “[XYZ Company] Confidential” legend.  People usually meet this requirement, but often jeopardize the trade secret status of their information by putting a legend on ALL of their written disclosures, even if they contain publicly available information.

So here are my recommendations:

  1. At the outset, ask yourself: “What’s the information about my business that I wouldn’t want a competitor or others outside my company to know?  And what are the inventions for which I may file patent applications?”  This is your “confidential information.”
  2. Disclose your confidential information only on a need-to-know basis, and use an NDA.  If it’s in the other party’s interest to disclose or use the information in a way that will harm your business, you should assume that they might do so, even if they sign an NDA.
  3. Mark your written disclosures of confidential information with a confidentiality legend, but DON’T use a legend for information that’s publicly available or that you don’t consider confidential.
  4. Follow up all oral disclosures with a letter stating that you consider the disclosure to be confidential information subject to the NDA.  Most NDAs require that this letter be sent within 30 days.
  5. Calendar the expiration date of your NDAs, and renew them (or sign new ones) if there will be further disclosures after that date.
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  • John - Great advice, I really enjoyed this article. I've been looking around to see what other sites have to say about NDA use (I blogged a bit ago on NDAs and wanted to compare). So much one-sided guidance or misinformation. I'm adding you to my RSS feeder. I recently started my own IP practice in Phoenix, and I'll definitely be checking back to read some of your practical advice. Thanks!

  • johnhorn5

    Thanks for the feedback, Tom. Good luck in your new IP practice!

    Regards,

    John

  • Deepti Sahu

    Full form of NDA

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