Confidentiality agreements have become so routine that they often are simply signed without a second thought. We often see clients sign non-disclosure agreements without reading them, and then come to us when a problem arises. However, confidentiality agreements are very important and must be carefully reviewed to avoid potential problems.
Issues We Watch For
Some of the key issues we look for in confidentiality agreements include:
- How confidential information is defined
- Whether the agreement contains a “residuals” clause
- What restrictions there are on the use of confidential information
- Whether there are any unusual provisions in the confidentiality agreement like a non-circumvent or non-compete clause that could restrict future business activities
We recently had a client come to us to review a confidentiality agreement that contained a provision restricting them from purchasing competing products from the disclosing party that were similar to products about which confidential information was disclosed. Other times, confidentiality agreements will limit the definition of confidential information to information that is specifically marked as confidential. If confidential information is provided under such a Non-Disclosure Agreement (NDA) and is not marked, it will not be protected.
The Big Impact of a Residuals Clause in an NDA
So called “residuals” clauses in NDAs can also have a big impact. A residuals clause permits the recipient of confidential information to continue to use any information retained in the unaided memory of the recipient’s employees after they return any tangible confidential information to the discloser. Unless the residuals clause is removed or significantly modified, it could be devastating to the disclosing party’s business. Just think about providing “I know it when I see it” type of trade secret information to a party under an NDA that has a broad residuals clause. You will have just given away your key trade secret.
We routinely and efficiently draft and negotiate confidentiality agreements for our clients and can provide comments on most agreements in an hour or less. We also train them on how to spot issue themselves. When it comes to confidentiality agreements, an ounce of prevention is worth a pound of cure.