Technology NZ A Practical Guide to Non-Disclosure Agreements
Technology New Zealand Page 2
A Practical Guide to Joint Venturing
30 June 1998
A Practical Guide to Non-Disclosure Agreements Page 2
A Practical Guide to Non-Disclosure Agreements
When I was a child, my mother would often say, "The only thing you can’t keep is a secret!" She
was right too. Now I’m an adult, rushing head long into old age. Yet I still struggle with keeping se-
crets, and this confession from a lawyer no less!
Welcome to the human race! To a greater or lesser extent, we all share this common struggle,
keeping secrets. The temptation to share a secret is often irresistible. The act of sharing is one way
for two individuals to bond with each other.
So the next time you exchange gossip, think of it in loftier terms as an act of sharing. The fact that
the subject matter being shared is at someone else’s expense is inconsequential (that is, unless you
In keeping secrets or, the flip side, telling secrets, we are no better, or worse, than our forefathers.
Indeed, history churns up enough examples to prove that this struggle is as old as the human race
In The Devil’s Dictionary (1906), Ambrose Bierce defined a “confidant” as: “One entrusted by A
with the secrets of B confided to himself by C”. Pretty cynical, huh?
On the subject of secrets, Dr. Johnson observed in The Rambler (1750-1752): “Secrets are so
seldom kept, that it may be with some reason doubted whether a secret has not some subtle volatility
by which it escapes, imperceptibly, at the smallest vent; or some power of fermentation, by which it
expands itself, as to burst the heart that will not give it way”.
Given mankind’s eternal struggle with keeping secrets, I suppose my mother had it right after all.
She would say, "Neither give nor receive secrets”.
Of course, life would be awfully boring if I followed my mother’s advice. You should only know
what else she had to say!
Anyway, we in the legal profession are charged with responsibility for protecting our clients when
they disclose their secrets. That’s one tall order.
I’ve been practicing law for more that 30 years. I have yet to see a legal document that can alter
human nature. I certainly have never created one.
We are what we are. No contract, law or regulation will make us more moral, more ethical or, yes,
more honest. In other words, Mom was right.
All of which is to say, if you plan to disclose a secret, do so with your eyes wide open. We lawyers
are not miracle makers (although we charge as if we were!). We can’t pull rabbits out of a hat. Sure,
we can draft up fancy non-disclosure agreements. If the truth were ever revealed, these non-
disclosure agreements afford much less protection than our clients would ever imagine.
Therefore, if you truly want to protect your intellectual property, your best safeguard is not to dis-
close it in the first place.
It’s a whole different story if the recipient of your confidential information is prepared to pay for it.
In that case, by all means, go ahead and tell all. If a recipient simply wants a “look see”, I would be
very circumspect in what I gave him.
You may be thinking, “C’mon Auerbach. You’re supposed to bring a commercial perspective to
the practice of law. You’re beginning to sound as cautious as the lawyers on Shortland Street!”
I acknowledge that, to transfer technology, the transferee must know what he is buying. He’s not
going to fork over good money for a pig in a poke (whatever that aphorism means).
Suffice it to say, there will always be dynamic tension between a trade secret owner’s desire to
reveal as little as possible and a recipient’s desire to know as much as possible before making a com-
mitment. It is in this context that disclosers and recipients play out the ritual of negotiating non-
In this guide, I shall share with you some of my tricks of the trade in negotiating non-disclosure
agreements. If you are a neophyte, I will show you how to play the ritual to full advantage. If you are
an old pro at the game, I will share with you some strategies that work for me. They may help lift your
It took me a long time to write this guide. Since I wrote it for the largest possible audience, some
of the concepts, strategies and ideas mentioned will fit your needs to a “T”. Others may be, to a
greater or lesser extent, unhelpful.
Only you know your needs. Only you can make the determination, which advice fits and which
doesn’t. Exercise your judgement wisely. Be selective.
This guide contains more than 60 pages. The ideal length of a non-disclosure agreement is just a
few pages, if that.
Only select the most important points in this guide that address your needs. Ignore the rest. Don’t
be afraid to take on commercial risk.
I have written this guide from the perspective of a discloser of confidential information. In fact, I
shall use the term “discloser” often to describe a person that discloses confidential information to an-
other person. Incidentally, I shall refer to that “other person” as the “recipient”. Okay, I know this isn’t
rocket science but it is important to define my terms at the outset.
So why did I write this guide from the discloser’s perspective? I did so for a few reasons. First,
my client for this project is Technology New Zealand, an organisation that looks after the interests of
technology developers. These are the guys who are likely to be at the disclosing end rather than the
receiving end of confidential information.
For you recipients out there, fear not. If I had written this guide from the perspective of the recipi-
ent, the issues and concepts would be the same. My strategies and tactics would, of course, be dif-
If you are a recipient, I still feel that you will derive considerable benefit from reading this guide. A
person of average intelligence should be able to figure out how to turn a strategy or tactic from the
discloser’s advantage to the recipient’s advantage.
If all else fails, just do the opposite of whatever I say. My wife says that it works for her. Perhaps
it will work for you.
Okay, folks. Enough of this introduction. Fasten your seatbelts. We’re ready for lift off.
What is a Non-Disclosure Agreement
A non-disclosure agreement goes under different rubrics. It may be referred to as a confidentiality
agreement or secrecy agreement. Whatever you call it, it’s the agreement that you use if you want to
disclose ideas or information that, in some sense, belong to you.
This notion of “belonging to you” is pretty slippery. I shall have more to say about it later.
Information and ideas may be market related or technology related. Market related information is
sometimes referred to as “commercially sensitive” information. It may concern your pricing strategy,
margins, costs and the like.
Technology related information would include your intellectual property, know-how and trade se-
A non-disclosure agreement gives a discloser a sense of security when it discloses confidential
information to a recipient. Arguably, that sense of security is more imagined than real.
A non-disclosure agreement may also serve the interests of a recipient. A non-disclosure agree-
ment clearly delineates a recipient’s rights and obligations in respect to confidential information.
The recipient does not have to wonder what his rights and obligations are. The recipient does not
have to face the uncertainties of common law, including the commission of torts such as industrial
espionage and theft of trade secrets.
Do not place inordinate reliance upon a non-disclosure agreement. Only use it if you absolutely
must. As with any good medicine, over use can have detrimental side effects.
A Practical Guide to Non-Disclosure Agreements Page 2
Not so long ago, a client came into my office and tossed across my desk a schedule of all out-
standing non-disclosure agreements to which his company was a signatory. He was pretty proud of
himself, this guy, keeping that schedule and all.
All I could think was, my gosh, look at all these companies, competitors too, who have acquired
access to his company’s most privileged information on the strength of a promise not to disclose. By
the law of averages, it is almost guaranteed that one or more recipients will not keep their promises.
My poor client was about to learn a costly lesson.
Be selective. Do not use a non-disclosure agreement as a crutch. Do a thorough due diligence
on the recipient.
Negotiating a non-disclosure agreement may cause delays. In case you didn’t know, delays can
be very costly. Each project has its own momentum. Break that momentum and it may be impossible
One of the weirdest things I’ve found with new technologies is how people can love them one day
and virtually lose all interest in them the next day. That reminds me of a couple of dates I had back in
my university days but I shall not digress!
The point that I am trying to make is this. There are many promising technologies out there. Each
technology has its own exciting story.
It’s easy to sell technology. It’s tough as nails to maintain a buyer’s interest. This is what I refer to
as the “fickleness of technology”.
Logically, this shouldn’t happen. A promising technology one day should not lose its promise a
Look at it this way. We are barraged by so many exciting new technologies that we can’t keep
track of our assessments. We have become afflicted with a form of attention deficit disorder!
So ask yourself: Do I really need a non-disclosure agreement at this stage? If the answer is no,
don’t bother with one. Don’t break the momentum. As I said, once you break the momentum, it’s aw-
fully hard to regain.
Besides, it’s not so easy to get large corporations to sign non-disclosure agreements. In fact,
some large corporations simply won’t sign a non-disclosure agreement (no exceptions tolerated) as a
matter of corporate policy. Don’t even bother trying. You will not get to first base.
I am not unsympathetic to their concerns. Some are even clients of mine.
These companies are just too fearful of compromising their own research and development activi-
Companies with this policy may nonetheless give fair consideration to your proposal. It would be
unwise to rule them out simply because of that policy. However, it pays to be more circumspect with
them particularly during the early stages.
Their hesitancy to sign a non-disclosure agreement stems from their concern about restricting their
own R & D activities. Even if they don’t already possess the confidential information you propose to
give them, they may be about to embark upon a parallel line of R & D that might well be compromised
by a non-disclosure agreement with you.
Even if you manage to get a large corporation to sign a non-disclosure agreement, don’t uncork
the champagne. Don’t expect the corporate recipient to throw down the welcome mat for you. Pre-
pare yourself for rejection. You may learn what countless others have learned before you. It’s called
the “not invented here syndrome”. It’s prevalent in many corporate cultures. Let me explain how it
You make a dynamite presentation to the Director of Marketing and the Director of Research and
Development. You knock the socks off the Director of Marketing. He’s ready to sign a licence and
dispense with the formalities of a non-disclosure agreement let alone a due diligence.
Meanwhile, the Director of Research and Development is noticeably underwhelmed.
What’s wrong with this picture? It’s easy to figure out.
A Practical Guide to Non-Disclosure Agreements Page 3
It’s hard as nails to get a fair hearing from anyone involved in the recipient’s R & D department.
The Director of Research and Development will see your exciting technology as a reflection of his
Here’s a man on a fat salary with a big R & D budget. His colleagues expect him to deliver. You
come along and rain on his parade. You upstage him. You make him feel like the “house of no
It boils down to a turf battle. The Director of Research and Development wants to protect his fat
salary, his fat budget, his sense of security, his exaggerated sense of self-importance. You represent
a challenge to him, you who glibly believe that you have invented a better mousetrap. How dare you!
That’s why it is hard to arouse much enthusiasm from a company’s internal R & D people. They
may feign keen interest while plotting how to knife you in the back!
I am sorry to say that there is no perfect antidote to the “not invented here syndrome”. There are
antidotes, to be sure, but the harmful side effects may be worse than the disease.
I have seen clients try to by-pass research and development and put on a full court press with the
marketing people. There is some logic to this approach. The marketing people are usually higher in
the pecking order.
Unfortunately, such a strategy fails as often as it works. Like it or not, your project must ultimately
be driven by a company’s research and development people. As with any entrenched bureaucracy,
the R & D people will find ways to derail your project. The marketing people will lack the intellectual
capacity to prevent this from happening.
If you ask me, a more promising strategy is to do the opposite. Instead of bypassing R & D, get
them involved in your project early on.
Each case depends upon its unique circumstances. There are no hard and fast rules.
When you speak with the R & D people, ask a lot of questions. Find out how their department is
structured. Understand the method by which they create new products and technologies. Be politi-
cal. Learn about the expectations of others within their organisation to research and development.
If you are lucky, and careful listening improves your luck, you may devise a strategy that will con-
vert a potential adversary into a true champion of your cause. Whatever that strategy turns out to be,
don’t bother trying it somewhere else. It probably won’t work.
As I said, this is one particular area where there are no uniform strategies. Each company has a
unique culture. If you crack it, you will succeed.
Enforcement of Non-Disclosure Agreements
Psst! Here’s a “trade secret” among lawyers. Non-disclosure agreements are notoriously difficult
to enforce. Here’s why.
If someone steals your car, you report the theft to the police. The police will look for your car. If
they’re lucky, they will even find your car along with the person who stole it. Car theft is a relatively
easy case to prove, assuming that you catch the thief red-handed.
Now let’s say that you give a recipient confidential information pursuant to a non-disclosure agree-
ment. Unlike a car, confidential information is intangible. It does not appeal to any of the five senses.
You can’t see it, feel it, touch it, smell it or hear it (but can you ever love it!).
Let’s say that the recipient misuses your confidential information. You claim that the recipient has
breached the non-disclosure agreement.
You must overcome three hurdles.
First, you must prove that you disclosed the confidential information to the recipient in the first
place. This is not an easy thing to prove given the intangible nature of confidential information.
Second, you must prove that the recipient misused your confidential information in breach of the
non-disclosure agreement. The distinction between “use” and “misuse” can be awfully fuzzy. If you
don’t think so, have a gander at any non-disclosure agreement. You will see enough fishhooks, ex-
ceptions and qualifications to drive a Sherman Tank through.
A Practical Guide to Non-Disclosure Agreements Page 4
Third, you must prove that you sustained actual damages. Civil courts have only limited authority
to mete out punishment. I’ve never seen a punitive damages award for breach of a non-disclosure
If the recipient wants to do something naughty, he may examine the printed terms of the non-
disclosure agreement for a loophole. Chances are he will find one.
It gets worse still. In the unlikely event that a naughty recipient can’t find a loophole, he will not be
deterred. Remember what I said, “Legal contracts can’t change human nature”.
Forgive me for sounding overbearingly cynical. The bottom line is this. A non-disclosure agree-
ment serves more as an ethical restraint than it does as a legal restraint. For a non-disclosure agree-
ment to serve as an ethical restraint, you must start off with an ethical recipient.
For these reasons, and others not worth mentioning, it is next to impossible to obtain meaningful
relief for breach of a non-disclosure agreement. Pretty depressing, huh.
A few years back, my client presented evidence of a flagrant violation of a non-disclosure agree-
ment by the recipient. His evidence was conclusive, in my judgment. Take it from me, my client
really had the goods on the recipient.
I would love to mention the recipient’s name but the libel laws constrain me. It annoys me to no
end how this guy could get away with his misdeed without being punished. If the recipient happens to
be reading this guide, he will certainly know that I am referring to him. He’d better pray that I never
get elected to Parliament!
Three years later, my poor client continues to suffer. To add insult to injury, the patent lawyers for
my client are having a field day!
I am not aware of any published statistics concerning damage awards for breach of a non-
disclosure agreement. I am not aware of any published statistics concerning the granting of equitable
relief for breach of a non-disclosure agreement. All I have to go on is anecdotal evidence, my col-
leagues’ and mine.
It’s not a pretty picture. Except in the case of a most flagrant breach, most defendants get off with
a rap on the knuckles, if not scot-free.
Courts are loathe to award significant monetary damages for breach of a non-disclosure agree-
Reflect upon this if you will. How many times can you recall reading about a court granting a
multi-million dollar verdict to the plaintiff as compensation for the defendant’s breach of a non-
disclosure agreement? No such case comes to my mind. I keep fairly close tabs on these matters
As hard as it is to prove breach of a non-disclosure agreement, harder still is it to prove damages
sustained from such breach.
Don’t fool yourself. There is no such thing as an air tight non-disclosure agreement. The sad truth
is that even the strongest legal contract will not prevent an unethical and dishonourable person from
ultimately revealing his true colours. That’s why it is so vitally important to know as much as possible
about the person with whom you are dealing.
Get business references. Check with his suppliers.
Here’s a good idea. Ask the recipient whether he has ever signed a non-disclosure agreement
before. If the answer is yes, contact the person who disclosed confidential information to him.
In other words, do your homework. Don’t rely upon a non-disclosure agreement to rescue you
from an indiscretion. Your best safeguard is to deal with a person in whom you can trust. A non-
disclosure agreement provides backstop protection, at best.
Just because a non-disclosure agreement is so hard to enforce, it still serves a useful purpose.
Yes, it is true that unethical recipients may simply ignore or circumvent their non-disclosure undertak-
ings. Fortunately, unethical recipients are a very small minority of all recipients.
A Practical Guide to Non-Disclosure Agreements Page 5
I do not wish to sound like Dr. Pangloss in Voltaire’s Candide. But I believe that most people try to
live honestly and ethically. A non-disclosure agreement imposes a powerful psychological restraint
upon decent folk.
Voila! We have finally identified the true benefit of a non-disclosure agreement. If you start with
the premise that most people try to live honestly and ethically, then it follows that they will make a
good faith attempt to honour their contractual undertakings. A non-disclosure agreement may well
serve a useful purpose after all!
A Case of Form over Substance
Now here’s an interesting observation. My experience has shown that the specific wording of a
non-disclosure agreement is not very important. Right away, you’re thinking, great, in that case, I
don’t have to read the rest of this guide!
In my judgement, it matters little whether you hire the best intellectual property lawyer in town to
draft up your non-disclosure agreement or you use a corner shop lawyer. I say this with all sincerity.
It is not so much what the non-disclosure agreement says as what the non-disclosure agreement
does. Reflect on that before reading on. Let it sink in.
What a non-disclosure agreement does is convey to both discloser and recipient that they are en-
tering into a relationship that involves a significant degree of trust. Only rarely do the discloser and
recipient understand the full legal import of what they are signing.
You know what? It doesn’t matter!
The discloser and recipient both know that they are dealing with secret stuff. They have dealt with
other types of secret stuff since they were little children on the playground. They have an innate
sense of how the ritual is played. They don’t need a lawyer to explain the ritual to them.
Even a poorly drafted non-disclosure agreement is morally coercive on an honest recipient. Yet a
well-drafted non-disclosure agreement is of little coercive value with a dishonest recipient.
So go ahead. Pay big legal fees to those Shortland Street lawyers. See if I care! It won’t do you
much good if you’re dealing with a dishonest recipient.
At this point, you may well be scratching your head in wonderment: “Okay, Auerbach. If what you
say is true, why should I even bother reading the rest of your practical guide. What difference does it
Hang in there, reader! Patience is a virtue. Let’s move on.
The Purpose of a Non-Disclosure Agreement
A non-disclosure agreement has three purposes.
• It defines what information is “confidential”.
• It limits the disclosure of that information.
• It imposes restrictions upon the recipient’s use of that information.
Really, that’s all there is to it. Try as I may, I can’t think of any other purpose that a non-disclosure
agreement serves. If you can, drop me an e-mail.
Why is it important to know these purposes? Because if none of the purposes is of any great con-
cern to you, don’t bother with a non-disclosure agreement. Don’t feel guilty about your decision ei-
Many a client has asked me, “Do I really need a non-disclosure agreement?” In many cases, the
information a client proposes to disclose is not truly confidential. This is particularly so in the case of
early disclosures. Later disclosures tend to be meatier. Well, if what you are disclosing isn’t truly
confidential, a non-disclosure agreement is, at best, a waste of time.
Therefore, do not have a knee jerk reaction that whenever you share information with someone
else, you must do so under the cloak of a non-disclosure agreement. That’s simply not so.
A Practical Guide to Non-Disclosure Agreements Page 6
Particularly with a new relationship, sharing information is critical. It’s the means by which two
parties establish a rapport. The premature discussion of non-disclosure agreements may have the
same “chilling” effect on a budding business relationship as the discussion of pre-nuptial agreements
has on a budding romantic relationship.
Unilateral vs. Bilateral
A non-disclosure agreement may be either “unilateral” or “bilateral”. Let me define my terms.
With a unilateral non-disclosure agreement, one party is doing all the disclosing. The other party
is doing all the receiving.
With a bilateral non-disclosure agreement, each party is both disclosing and receiving.
It’s kind of like the difference between DC and AC current. Each type has its pros and cons.
With a unilateral agreement, you can really sock it to the recipient. To illustrate what I mean, refer
back to the three purposes of a non-disclosure agreement.
With a unilateral agreement, the discloser will define the information that is “confidential” as
broadly as possible. He will impose the strictest possible limitations upon the recipient’s use and dis-
closure of such information.
You can’t get away with this with a bilateral agreement. That’s because everything is reciprocal.
For this reason, bilateral agreements tend to be tamer.
As the saying goes, “What’s good for the goose is good for the gander”. You can’t go overboard
with restrictions. They may come back to haunt you when you are at the receiving end of confidential
Sometimes, instead of a bilateral agreement, each party will opt for its own form of unilateral
agreement. There’s nothing wrong with this other than having to look at two unilateral agreements
instead of one bilateral agreement.
You might assume from what I have said that a unilateral agreement is preferable to a bilateral
agreement. That’s not always the case. It all depends upon the circumstances.
To really promote a relationship, you want the recipient to do more than passively receive your
information. You really want the recipient to share its information. Not only does this ensure that the
recipient is genuinely pro-active, it gives you information that you may need to evaluate whether the
recipient is a good candidate.
In many instances, a discloser will not be able to provide relevant information without obtaining
information from the recipient. For example, if you have some unique type of manufacturing technol-
ogy, you might need to know about the recipient’s manufacturing process to determine whether there
is a good fit.
Thus, even though a unilateral agreement may afford greater legal protection, in most situations it
is commercially unrealistic.
If the recipient is satisfied with a unilateral agreement, meaning that the recipient does not intend
to tell anything in confidence to you, the discloser, that should set off alarm bells. It is suggestive of a
recipient who is not genuinely motivated. Otherwise, the recipient would see the exchange of confi-
dential information more as a collaborative affair.
Considerations of Format
What I am about to say next is certain to make technically oriented lawyers cringe. The format of
a non-disclosure agreement is more important than its substance. You heard me. For anyone too
dense to fully grasp the import of what I just said, let me say it another way.
How the agreement looks is more important than what the agreement says! Let me explain my
A Practical Guide to Non-Disclosure Agreements Page 7
We start with a fundamental truism. All people have difficulty keeping secrets. Next, we overlay
on this truism the fact that all non-disclosure agreements are inherently subjective and difficult to en-
force. Although a non-disclosure agreement affords little in the way of legal protection, it imposes a
powerful moral imperative upon an otherwise honest recipient. We’ve discussed this already.
Most people who sign non-disclosure agreements stick them in a file cabinet, never to see the light
of day again.
If quizzed about the contents of the agreement, do you think the average person would remember
how, for example, the agreement defined confidential information? Do you think the average person
would recall the restrictions upon use and disclosure?
Perhaps I just represent a bunch of dumb clients but I can assure you that mine wouldn’t have a
clue. It’s a case of “out of sight, out of mind”.
Here’s the key. Even dumb clients know when they have signed a non-disclosure agreement. It’s
the act of signing the agreement, not the agreement itself, which creates what I refer to as a powerful
Were it not for this powerful moral imperative, I wouldn’t even bother with non-disclosure agree-
ments. Thanks to this powerful moral imperative, it is well worth the effort and expense.
A non-disclosure agreement reinforces a person’s good intentions and discourages a person from
acting out his evil intentions.
Yes, we all have a shadow side. Only lawyers cast longer shadows!
Whoever coined the phrase “it’s the thought that counts” must have been thinking of non-
disclosure agreements. In no other area of the law is the difference between a good agreement and
a bad agreement of less consequence!
In the old days, when I charged my clients by the page, my non-disclosure agreements tended to
be very long-winded and cumbersome. Not so today. Most of my non-disclosure agreements can fit
on one sheet of paper. (Granted, you may need a magnifying glass to read the 8-point font!)
I have found that the more traditional form of non-disclosure agreement tends to get shunted to
the recipient’s legal department. The recipient knows that anything that looks like a legal contract
must be approved by the legal department. That’s standard corporate policy.
My non-disclosure agreements do not look like legal contracts. They look more like the small print
one finds on the back of a purchase order or invoice.
When was the last time your buying decision was affected by the seller’s conditions of sale?
When was the last time a seller of goods rejected your purchase order because he didn’t like your
purchase order conditions on the reverse side?
For better or worse, printed legal forms are a fact of life.
If I take my boys white water rafting, I sign a declaration form on the dotted line. If I rent a car from
Hertz, I sign a rental form on the dotted line. Forms have de-sensitised us to their legal implications.
Ditto for a one-page non-disclosure agreement.
The proof is in the pudding. I have a much higher batting average with a simple one-page form
than I do with a formal looking non-disclosure agreement.
Accepting Commercial Risk
Remember what I said about delays, and how costly they can be. Remember what I said about
the fickleness of technology and how easy it is for your champion to love you and leave you.
Do yourself a favour. Take some commercial risk. Do not allow a non-disclosure agreement to
break the momentum. Enthusiasm for your project may be a case of “here today, gone tomorrow”.
I’m a strong advocate of taking heaps of commercial risk. I know that coming from a lawyer, this is
blasphemy. My more conservative brethren would cringe in disbelief. After all, aren’t lawyers paid to
reduce risk? Often, I find myself advocating to my clients that they take on greater risk.
A Practical Guide to Non-Disclosure Agreements Page 8
Yet I strongly believe that a considerable amount of disclosure, (preferably bilateral but unilateral
is okay), should take place even before the parties consider a non-disclosure agreement.
Some of my clients are absolutely horrified at the thought of disclosing anything without the protec-
tion of a non-disclosure agreement. To them, the whole world is out to steal their trade secrets.
These clients can be extremely paranoiac. Their paranoia stems from their naivety.
One Foot Head Start in a One Mile Race
Be reckless. Lay out everything to the recipient on a silver platter. What do you think will happen?
I bet you think that the recipient will steal your technology and leave you out in the cold. Well, there’s
no denying that can happen. But it happens far less often than you may think.
Most people underestimate the sheer complexity of adopting a new technology. It baffles me why
this is so. One would think that people would be more streetwise. After all, everyone knows the high
failure rate of new technologies.
So if you give everything away (and I am not suggesting that you should try this in your own
home!) do you know what will probably happen? In most cases, absolutely nothing!
It takes more than information about your technology to induce a company to commercially exploit
it. Believe me, it’s far more complicated than that.
Before a company commercially exploits a new technology, it will employ a fairly rigorous method-
• First, it will determine whether commercial exploitation conforms with
its strategic plan.
• Next, it will undertake market research to see whether the commercial
potential is truly there.
• Next, it will develop a business plan for commercially exploiting the
• Finally, someone will have to prepare a detailed proposal for capital
Each of these steps takes lots of time and money. That’s why I say that handing over your tech-
nology on a silver platter may give the lucky recipient a one foot head start in a one mile race. Think
about that the next time that you feel reticent about disclosing confidential information.
Sell the “sizzle” not the steak
A non-disclosure agreement can be a real time waster. You enter into one with high expectations.
All too often, the recipient dashes those expectations.
At the signing ceremony, the parties pledge ever-lasting cooperation. They toast each other’s
good fortune. They predict a win-win relationship.
No sooner have they cleared away the cocktail napkins, things begin to grind into slow gear.
Somehow the momentum is lost. The relationship languishes. Nothing happens. What went wrong?
No matter how many other people have looked at your technology, you are convinced that suc-
cess lies just around the corner. Hope springs eternal.
I am an advocate of a rather novel approach. Forget about a non-disclosure agreement. Disclose
as much as you can without giving away the store. But only disclose the “sizzle”, not the steak.
Then, proceed directly to a technology evaluation agreement.
Technology Evaluation Agreements vs. Non-Disclosure Agreements
A technology evaluation agreement is a totally different kettle of fish. The title alone speaks vol-
A Practical Guide to Non-Disclosure Agreements Page 9
A non-disclosure agreement defines what’s confidential. It then imposes conditions upon the re-
cipient’s use and disclosure.
Implicit in a technology evaluation agreement is that the recipient, if not also the discloser, shall be
undertaking pro-active steps to evaluate your technology. Those steps are spelled out, chapter and
verse, in the technology evaluation agreement.
There is usually a schedule of milestones. This is to make sure that the recipient actively evalu-
ates the technology. Otherwise, the recipient may just sit with the information, as often happens with
a non-disclosure agreement.
A technology evaluation agreement is definitely the way to go. However, a certain amount of dis-
closure must precede such an agreement. You may be unable or unwilling to make those disclo-
sures. You may not wish to wear the commercial risk. In that case, you will need to proceed by the
more traditional route of a non-disclosure agreement.
There is definitely an art to selling technology. Marketing skills are required. I have seen more
budding relationships get off on the wrong foot because of lawyers’ insistence on non-disclosure
From my experience, the number one, worst turn off to a party that may have an interest in your
technology is your standard form non-disclosure agreement. You just can’t toss a form across a desk
or even worse fax a form and demand that the other party sign it. That’s no way to treat a potential
Actually, I find non-disclosure agreements rather distasteful.
They’re turgid, legalistic prose is enough to turn anyone off. I would urge all marketeers of intel-
lectual property to reconsider their approach.
Whereas a non-disclosure agreement is usually a “take it or leave it” form, a technology evaluation
agreement is a negotiated instrument that sets out specific goals and milestones for both parties to
Whereas the standard form non-disclosure agreement puts the recipient in the role of a passive
assessor of your technology, a good technology evaluation agreement will make him feel like an ac-
tive participant in an exciting new venture.
In marketing, as in courtship, the key is always to get the other party psychologically committed.
This is achieved by slowly and inexorably wearing down the other party’s resistance to the point
where the other party has invested so much in the project that he has reached the point of no return.
He can’t back out. That’s when you’ve hooked him.
A technology evaluation agreement gets you there faster than a non-disclosure agreement.
Don’t Worry. Be Happy.
It is not the end of the world if you make disclosures before you have the protection of either a
non-disclosure agreement or a technology evaluation agreement. Information is passed back and
forth all the time through electronic and print media and through speech.
I dare say that we act upon a scintilla of all the information that we receive. The rest constitutes
the background noise of our human existence.
In other words, don’t worry be happy!
“Black Box Disclosures”
You are not persuaded. You still feel that your information is just too sensitive for words. That’s
okay. I have no problem with that. Remember, I am writing this guide for a diverse audience. You
may well be the exception to the rule.
For those of you in this camp, consider the feasibility of making “black box disclosures” to the re-
A Practical Guide to Non-Disclosure Agreements Page 10
With black box disclosures, you do not reveal the specifics of the confidential matter. Instead, you
provide the recipient with sufficient information upon which to decide whether to proceed further. If
the recipient decides to proceed further, you may by-pass a non-disclosure agreement and sign a
technology evaluation agreement instead.
With black box disclosures, you describe what the technology does but not how the technology
works. Usually, however, you avoid disclosures concerning the technology altogether. You focus
instead on its commercial benefits. You may, for example, describe the costs, results and other perti-
nent economic data that will allow the recipient to make a superficial business analysis.
For example, let’s say that you have developed a new process for manufacturing a product. The
product is not proprietary. However, you wish to safeguard the details of your new process. This is
an ideal situation for black box disclosures.
The recipient already has his own process. The recipient is probably an expert in manufacturing
the product. He probably subscribes to all the relevant trade journals. He attends major international
conferences at which people present papers on the product.
You, on the other hand, have come out of left field claiming that you know how to make the prod-
uct better or cheaper.
A knowledgable recipient may well be content with black box disclosures. This is more likely to be
the case during the initial stages of communication. Indeed, he may actually prefer black box disclo-
sures since he will not be bound by any non-disclosure obligations.
A knowledgable recipient is likely to tell you what he needs to know to make a threshold decision
whether it’s worth going to the next stage. Nine times out of ten, the recipient’s immediate needs will
concern the economic aspects of your technology. Later, the recipient can learn about the nuts and
bolts of how your technology works.
A sophisticated recipient cares less how your technology works than how much it costs. The re-
cipient might say, for example, “Here’s what I need to know: plant costs and capacity; input costs;
utility costs, manpower requirements; production yields and storage requirements.”
You can supply the recipient that information without a non-disclosure agreement. They are all
black box disclosures. You are telling the recipient, “My black box can do this but I am not going to
tell you what’s inside”.
With such information, a recipient can make a threshold decision whether it’s worth taking a look
inside your black box. To do that, the recipient will need to give you ironclad protection in the form of
a non-disclosure agreement or technology evaluation agreement.
In a rare situation, the recipient might even bypass those steps. The recipient may proceed di-
rectly with a licence agreement or joint venture purely on the strength of your black box disclosures.
I should perhaps mention one significant drawback of black box disclosures. Obviously, at the
time that you make black box disclosures, the recipient has no way of verifying them. He is taking
them at face value. Since he is basing his decision to proceed on the veracity of your disclosures, it
should not surprise you if, later on, he demands representations and warranties concerning the accu-
Therefore, be very careful with black box disclosures. Do not exaggerate. If possible, attach
qualifications to your black box disclosures. State that the results achievable are subject to variation
depending upon the recipient’s unique circumstances over which you have no knowledge or control.
You might also state that you are making the black box disclosures solely for the purpose of allow-
ing the recipient to make a threshold evaluation whether to proceed. The recipient must still under-
take a thorough due diligence and independently verify the information so disclosed.
Black box disclosures are not always appropriate. The commercial data may contain trade se-
crets. You may not want the recipient to know about your capital costs, operating costs and sources
of supply. Your technology may not be sufficiently advanced. It is hard to commercially evaluate
early stage technologies through black box disclosures.
The black box approach has drawbacks. Yet it remains one of the best ways to develop a mean-
ingful dialogue without undue risk to either party. Where the facts and circumstances warrant its use,
it can serve well the interests of both parties.
A Practical Guide to Non-Disclosure Agreements Page 11
The discloser retains secrecy and control over his technology. The recipient is at liberty to do
what it likes with the information disclosed. There are no non-disclosure agreements to sign.
Be careful. The line between a black box disclosure and the disclosure of something more reveal-
ing can be quite fuzzy. Obtain competent advice. If you don’t listen to your lawyers, accountants and
operational experts, a black box disclosure may be a one way ticket to an undesirable location!
Generally, non-disclosure agreements are entered into between two mindless, sightless, legal fic-
tions, a corporate discloser and a corporate recipient. They have no eyes, ears or any other sensory
perceptions save for their own employees and advisers.
For this reason, a non-disclosure agreement must specify the warm-blooded individuals that will
receive confidential information. As a corollary to that, it should also specify the circumstances under
which such warm-blooded individuals shall receive confidential information. There are several ways
to do this.
One way is to attach a schedule of individuals who may receive confidential information. The
agreement would then restrict access only to those persons identified in such schedule.
This is a good approach where you are dealing with a limited number of people who will receive
and evaluate your information. This approach may be impractical in a large corporation. It may be
too much of a burden for the recipient to identify each staff member that may potentially receive or
evaluate your information.
Whether or not you name specific individuals, it is a fundamental element of principal/agency law
that the recipient is responsible for the acts and omissions of its employees. In this case, the principal
is the corporate recipient and the agents are its employees.
Most non-disclosure agreements impose obligations upon just one corporate recipient. Some
non-disclosure agreements go one step further. These agreements require the individuals who actu-
ally receive the information to sign a statement agreeing to be bound by the terms and conditions that
apply to the corporate recipient.
The key benefit of such a statement is that it gives you a direct right of action against an individual
who breaches the non-disclosure agreement.
There is a secondary benefit too. You probably have no intention of proceeding against an indi-
vidual for breach of a non-disclosure agreement. That’s beside the point. What’s important is that the
individual will take his obligations more seriously if he signs a non-disclosure agreement than if he
In fact, statistics show that an individual takes his obligations more seriously to an independent
third party than he does to his own employer!
Remember what I said before. With non-disclosure agreements, it’s the thought that counts. If an
individual thinks he is bound by a non-disclosure agreement, he will act accordingly. This is so even
if you have no intention of enforcing your rights against that individual.
Thus, by insisting that key individuals sign the non-disclosure agreement, or a statement attached
thereto, you change the process for that individual from an abstraction to a reality.
When disclosing information to an individual, you are not likely to fall victim to “mistaken identity”.
John Smith isn’t going to pretend that he is Richard Rowe.
You can always go up to an individual. You can ask him his name, his job, his role in the project,
what he intends to do with your confidential information. Nine times out of ten, you will get a straight
If only that were so with a corporate recipient!
A corporation is a legal fiction. A corporation is rarely an orphan. It is usually part of a family of
corporations. It may have brothers and sisters, called affiliates. It may have children, called subsidi-
aries. It may have a father or mother, called a parent company.
A Practical Guide to Non-Disclosure Agreements Page 12
Which member of this extended corporate family should sign your non-disclosure agreement? I
have seen more clients come unstuck because the party that signed the non-disclosure agreement
turned out not to be the actual party that received the confidential information.
I do not care how many corporations the recipient may have created for operational, legal, tax or
other reasons. The recipient should not play a version of the “corporate shell game” on the unwitting
discloser of confidential information.
There are several ways to safeguard the discloser’s interests where more than one corporate re-
cipient may be involved.
First, the recipient should take responsibility for the acts and omissions of its parent, subsidiaries
Add extra signature lines for the other companies comprising the recipient’s group. Then make
each recipient jointly and severally liable for the acts and omissions of every other recipient that
signed the non-disclosure agreement.
Sometimes, the recipient will be a company against whom it will be difficult for you to enforce your
rights. The recipient may be a new company, possibly organised for your specific project. The re-
cipient may lack an established trading history. It may be financially weak. It may be based in some
To overcome these risks, you may seek to include multiple recipients. However, if no other com-
pany with whom the nominal recipient is affiliated will be receiving confidential information, this ave-
nue may be closed off to you.
In that case, I would go for a guarantee of the recipient’s obligations. The parent or an affiliate of
the recipient should have no qualms about guaranteeing the full and faithful performance by the re-
If you are just disclosing confidential information to one recipient, it may be awkward to insist that
other recipients sign. However, this should not give you tunnel vision. You should still consider the
feasibility of having another company, normally affiliated with the nominal recipient, guarantee such
The bottom line is this. If you ever seek to enforce your remedies under a non-disclosure agree-
ment, you want a very large target. That means bringing in as many parties, both individual and cor-
porate, as you can get away with.
Sometimes, the discloser of confidential information is not the owner of such information. An affili-
ate, subsidiary or parent of the discloser may own such information. It may even be owned by an in-
dividual shareholder of the discloser.
It is not necessary to include each and every owner of confidential information as a separate con-
tracting party. As stated above, it is wise to do so in respect to each and every recipient of confiden-
tial information, but not in respect to each and every owner.
In cases where the confidential information is owned by person(s) other than the discloser, the
agreement should define confidential information to include information supplied by such other per-
son(s). Name them, too.
You may even go one step further. You may confer upon such person(s) rights to enforce the
non-disclosure agreement on the basis that they are “third party beneficiaries” thereof.
If you disclose information that does not belong to you, you should obtain written authorisation
from the person on whose behalf you are making such disclosure. That’s pretty obvious.
Incidentally, a reference to “person” may be to an individual, partnership, corporation or trust, as
the case may be.
If you wish, you may include multiple discloser(s) as contracting parties. The non-disclosure
agreement may contain signature lines for multiple disclosers just as it may do so for multiple recipi-
A Practical Guide to Non-Disclosure Agreements Page 13
The agreement should contain a clause indicating that each separate discloser shall have the
right, both jointly and severally, to enforce the agreement.
Corporations are “things”. Ultimately, corporations must act through human beings.
The non-disclosure agreement should mention employees, agents, advisers and consultants who
will be acting on its behalf.
Otherwise, the recipient could argue that it received the confidential information from a third party
who was not bound by obligations of confidentiality to you.
As you will soon see, this is a standard exception. It could destroy any claim that the recipient
breached its non-disclosure obligations to you.
Usually, but not always, the recipient does not pay to receive confidential information. Confidential
information is neither bought nor sold. It is disclosed with the anticipation, indeed expectation, that a
commercial relationship will ensue. The disclosure, itself, does not normally involve any transfer of
There is one exception to this rule. If you grant the recipient an exclusive evaluation period, be it
one month, three months or longer, you are entitled to consideration for keeping your confidential in-
formation on ice. Such a payment could be quite substantial.
That’s fair. After all, putting your confidential information on hold has an opportunity cost. That
cost could be quite high in an industry experiencing rapid fire change.
For you to commit not to explore other opportunities for even so short a period as three months
may result in the loss of such opportunities forever.
Thus, if the recipient demands an exclusive evaluation period, he should pay for that benefit.
Some of my clients dangle the carrot of an exclusive evaluation period as a way to raise cash for a
project. The recipient may be the only realistic opportunity out there. The recipient does not need to
know this however.
You can offer the recipient an exclusive evaluation period for a sum of money. You will say that
you are putting on hold numerous other persons that have expressed a keen interest in pursuing a
relationship. So what if it’s a white lie. It’s a clever strategy to receive up front money at a very early
Earlier, I mentioned that the three purposes of all non-disclosure agreements were to define what
information is considered “confidential”, to limit its disclosure and to impose restrictions upon its use
by the recipient.
Let’s now consider the first purpose, to define what information is confidential.
“Confidential Information” Defined
To understand the meaning of “confidential information”, let’s first start with the meaning of “infor-
Look up the meaning of “information” in the dictionary. It’s a lot of gobbledegook. It is not the dic-
tionary’s fault either.
The term “information” is amorphous. It can mean different things to different people.
The problem is compounded by the use of the adjective “confidential” to qualify “information”.
Even the word “confidential” is subject to varying interpretations, such as: Restricted, intimate, secret,
private, classified, personal, privy and arcane.
I apologise for sounding like a linguist. In the practice of law, defining one’s terms is essential.
That’s why virtually every legal contract starts off with a section on definitions.
Clients frequently gloss over this section. Lawyers can not afford to be careless.
So what does “information” actually mean in the context of a non-disclosure agreement?
A Practical Guide to Non-Disclosure Agreements Page 14
Think of information as the by-product of communication.
One party conveys information to another party in a conversation. Information may consist of
words on a sheet of paper. Information may be contained in electronic media such as videos, audio-
tapes, floppy disks and CD-Roms.
You derive information by inspecting a prototype or sample. You disseminate information by e-
mail, fax, telephone and virtually every other means of communication conceived by mankind.
When considering information, do not adopt a myopic perspective. As a discloser of information,
you want to protect all types of information through all channels of disclosure.
You can define “confidential information” in general terms as being all non-public information, in
whatever form, owned by the discloser.
I personally prefer to mention a few specific items by name. Over the years, I have accumulated a
large list of potential items that I refer to, and select from, each time that I draft a non-disclosure
My list of items loosely falls into two categories: Commercially sensitive information and technol-
ogy sensitive information.
Here’s my list:
Budgets Marketing Information
Business Plans Marketing plans
Capital expenditures Patent Applications
Computer Systems and Software New Products
Costs and margins Operating results and yields
Customer lists Pricing strategies
Demonstrations Product information
Designs Production information
Drawings Quality control procedures
Employee information Research and development
Financial Data Sales forecasts
Formulae Software and Documentation
Intellectual Property Strategic plans
Know-How Technical Information
Manuals Test results
Manufacturing techniques and processes Trade Secrets
You should select from the above list those items that you may potentially disclose to the recipient.
But make sure it is clear that such items do not exhaust the universe of possible items. They are pro-
vided for purposes of illustration only.
Interpreted in that manner, there is no need to overreach. Don’t tick off more items than you hon-
estly think apply.
In addition to mentioning specific items from the above list for purposes of illustration, I also rec-
ommend that you mention the generic process, product, technology or project that forms the overall
subject matter of the non-disclosure agreement. In that way, you have covered both the general and
Sometimes, either the discloser or the recipient may wish the very existence of the non-disclosure
agreement to be kept confidential. Absent a compelling reason, I would discourage this.
A Practical Guide to Non-Disclosure Agreements Page 15
I can think of one compelling reason where the very existence of a non-disclosure agreement
should be kept confidential. If the purpose of the non-disclosure agreement is to facilitate the ex-
change of information as part of the due diligence to sell the business, the discloser may well wish to
keep the relationship confidential.
Knowledge that the discloser’s business is up for sale might have a negative impact upon staff
morale or the goodwill of its customers. In these situations, the parties must exercise special care to
conceal the true purpose of the disclosures.
It is not uncommon for the parties to assign a code name to the project. The non-disclosure
agreement usually imposes restrictions upon communicating with staff. All communications may be
directed to a secure fax or postal address.
Notwithstanding the parties’ best efforts to conceal their true purpose, invariably someone lets the
cat out of the bag. You may succeed in keeping the details of negotiations secret. Staff will inevitably
learn what’s going on no matter how hard you try to keep them in the dark.
Other than special circumstances, such as the sale of a business, I think that it is going a bit too
far for one party to claim that the non-disclosure agreement, itself, is confidential. The mere disclo-
sure of the relationship, with nothing more, should not offend either party’s sensitivities. Besides,
such a clause is so often breached that it is almost pointless to insert it in the first place.
Marking Information “Confidential”
Clients often ask whether they have to mark information that they disclose as “confidential”. Al-
though marking information “confidential” is certainly desirable, it is generally impractical.
A good analogy is that infamous logbook of our car expenses that IRD requires us to keep. I
doubt that there is anyone in New Zealand that maintains that log with the care and diligence that IRD
The same is true with the requirement that confidential information be identified as such at the
time of disclosure. In the rush of business, even reasonably diligent people will forget to identify in-
formation as confidential.
It’s an unfair requirement, in my judgement.
I have read such hair-brained schemes in non-disclosure agreements you wouldn’t believe it. In
one agreement, the parties had to approve minutes of every single communication. I’m not just talk-
ing about meetings. The requirement applied equally to telephone calls, faxes, even e-mails.
Then the parties would have to mutually agree what portions of such communications contained
confidential information and what portions did not. Some lawyer in an ivory tower with absolutely no
commercial bone in his body probably concocted that scheme.
Take it from me. None of these schemes work, however well intended they may be.
Once the non-disclosure agreement is signed, it is filed away and rarely sees the light of day. The
recipient and discloser will have a general awareness that they are parties to a non-disclosure agree-
ment but the specifics thereof will have long been forgotten.
My advice to a discloser of confidential information is to resist like the plague any obligation to
physically identify information as confidential at the time of disclosure.
It’s a trap. Don’t fall into it.
Indeed, I go to the opposite extreme. In my non-disclosure agreements, I include a clause to the
effect that information shall be deemed confidential whether or not it is identified as such at the time
In other words, information is presumed confidential unless otherwise noted.
That does not mean that a discloser can be casual. To the contrary, I strongly recommend that
you go to the nearest office supply store and buy a rubber stamp marked “ ”. I further
advise that you use that rubber stamp until you get tennis elbow.
Rarely is information purely confidential or purely non-confidential. Most information is a hybrid of
the two. My advice is simple. If in doubt, stamp it!
A Practical Guide to Non-Disclosure Agreements Page 16
In pushing for a marking requirement, the recipient will probably argue that he is entitled to know,
at the time of receipt, exactly what information the discloser considers confidential. Otherwise, the
recipient will not know how to treat the information that he receives.
On its face, that sounds reasonable enough. In practice, it is anything but reasonable. It’s a red
Indeed, it may well be the case that the discloser will not even know for sure whether the informa-
tion that he discloses satisfies the criteria for confidential information.
To further confuse matters, the information will invariably include non-confidential elements and
confidential elements. What is a discloser to do, take a yellow highlighter and examine the informa-
tion sentence by sentence?
Even worse, should a discloser obtain a legal interpretation whether a specific item of information
satisfies the criteria in the non-disclosure agreement? Imagine the legal fees!
Suffice it to say it’s a hopeless task and an unfair burden to impose upon a discloser.
The onus must always be upon the recipient to make the threshold determination how to treat in-
formation received. The recipient should assume that all information is confidential, unless otherwise
The recipient may, if he wishes, challenge a specific item of information on the basis that it is not
truly confidential. The non-disclosure agreement may even establish a procedure for that purpose.
If the recipient does not avail himself of that procedure, he does not necessarily waive his rights
either. He may still challenge any claim of confidentiality in accordance with one or more of the stan-
dard exceptions contained in the non-disclosure agreement.
Thus, neither the discloser nor the recipient is necessarily disadvantaged by the absence of any
requirement to indicate whether or not the information disclosed is confidential.
Format of Information
Documentary information is the most common form of confidential information. I’m referring to
words on pieces of paper.
However, confidential information comes in a variety of formats. It may be electronic, such as a
floppy disk, videotape, audiotape, CD-Rom or a secure website.
It may come from a visual examination, such as viewing a prototype or taking a plant tour. Plant
tours frequently involve the disclosure of far more confidential information than documentary informa-
tion. As the saying goes, a picture is worth a thousand words.
Whereas documentary information can be stamped confidential and thereafter easily identified,
this is not so with information received during a visual examination.
Unfortunately, a non-disclosure agreement is a very imperfect means of protecting information
received during a visual examination. I have read all sorts of schemes to address this problem but
none of them are truly workable. I have tried to concoct my own schemes but they’re not much bet-
The best advice I can give you is that if visual examination is the most likely means of disclosing
confidential information, you should prepare a simple addendum to the non-disclosure agreement
describing the visual presentation and what elements thereof the discloser considers confidential.
Any non-disclosure agreement or technology evaluation agreement should “claw back” prior dis-
closures that you may have made, whether inadvertently or intentionally. That’s an important clause.
Otherwise, the agreement will speak as of the date of the signature only.
The agreement should apply retrospectively to communications between the parties prior to the
A Practical Guide to Non-Disclosure Agreements Page 17
Just as a non-disclosure agreement should apply retrospectively, it should also apply prospec-
tively. That is to say, it should apply to confidential information that may not yet exist on the date of
Confidential information, by its nature, never crystallises. It is constantly evolving.
Some information loses its confidentiality over time. For example, it may enter the public domain.
Meanwhile, the discloser is always creating new confidential information.
This is yet another reason why it is so hard to grasp the boundaries of confidential information.
The goal posts are always shifting.
At any rate, make sure that the non-disclosure agreement does not restrict confidential information
to that which exists on the date of the agreement. That would be a very unfair, not to mention unreal-
Patents vs Know-How
A patent application is normally considered confidential information. An issued patent is never
The very reason for a patent is to publicise your claims for the whole world to see. Your protection
derives from disclosing what you have invented, not from keeping it a secret.
In that respect, a patent is the polar opposite of know-how. The essence of know-how is secrecy.
Both patents and know-how are types of intellectual property. Your know-how is protected by a
non-disclosure agreement. Indeed, know-how is usually the most important thing that you seek to
protect in a non-disclosure agreement.
You do not need a non-disclosure agreement to convey information in a published patent.
A patent application, however, is a different story. The information in a patent application is as
sensitive as know-how. It deserves the same degree of protection as know-how in a non-disclosure
Even with patents, a non-disclosure agreement may still be appropriate. To truly exploit a patent,
the owner thereof will probably need to disclose a significant amount of know-how.
By way of analogy, take a recipe in a cookbook. I would be absolutely hopeless following the rec-
ipe. I can barely make toast.
The same is true with a patent. To effectively use a patent, the owner will probably need to impart
a significant amount of know-how. There may also be new techniques and processes not mentioned
in the original patent.
Incidentally, that happens to be one of my major complaints with patents. Patents seek to crystal-
lise an invention at a specific point in time. In the real world, a good invention is in a continuous state
of evolution. For that reason, a patent is always one step behind the inventor.
Know-how does not suffer from this impediment. A well drafted non-disclosure agreement will pro-
tect the secrecy of know-how as it evolves over time.
A non-disclosure agreement recognises the vitality of know-how. A patent can only speak for the
novelty of the claims therein as at a finite date.
Let’s now consider some of the standard exceptions that appear in most non-disclosure agree-
Public Domain Exception
The first exception concerns “information that is in the public domain or that subsequently enters
the public domain through no fault of the recipient”. No doubt, you’ve heard those words before.
A Practical Guide to Non-Disclosure Agreements Page 18
Make sure that your non-disclosure agreement addresses this potential trap for the unwary. You
should have the right to disclose confidential information to a third party pursuant to a non-disclosure
agreement with such third party. Such information shall not be deemed to have entered the public
domain as a result of such disclosure.
Without that caveat, the recipient can argue that the information entered the public domain when
you disclosed it to a third party.
If you think the definition of “confidential information” is vague and subjective, you haven’t seen
anything until you consider the meaning of “public domain”.
Ask two different lawyers and you will get two different responses. Ask 100 different lawyers and
you will get 100 different responses!
The fact of the matter is that there is no universally accepted definition of “public domain”. Isn’t
“Public domain” is a term that we so frequently use. Yet nobody quite knows what it means! It is
far from being the only ambiguous word or phrase in a legal contract.
Who knows what “best efforts”, “reasonable discretion” or “good faith and fair dealing” mean? Yet
we see these words and phrases in many legal contracts.
Information in the Public Domain but not Readily Available
Recently, a client came up to my office and asked me to draft a non-disclosure agreement for him.
A lengthy discussion ensued as to what confidential information he sought to protect.
The upshot of this discussion was that virtually all of the information that my client sought to pro-
tect was in the public domain. He compiled it from published sources, such as medical journals, PHD
theses catalogued at university libraries, papers presented at professional conferences and the like.
It took my client the good part of a decade to locate thousands of pages of relevant information.
He then took pains to compile it, catalogue it and store it in a form that allowed for easy retrieval. I
dare not mention the cost of his labours!
I told my client that his information was not truly confidential. It all came from the public domain.
He nearly had a heart attack!
That raises and interesting question: What happens if the information is in the public domain yet
you still seek to protect it. In other words, you don’t want to lose the benefit of a ten year head start.
When you stop and think about it, my client’s dilemma is not so uncommon. You can probably
empathise with him.
After all, a lot of research and development involves sifting through information in the public do-
main and making sense of it. This takes time, effort and money. Certainly, a good lawyer should be
able to protect that information.
Here’s what you need to know. First of all, while the public domain exception is pretty standard, it
is not carved in stone.
There is no law that requires a non-disclosure agreement to contain an exception for information in
the public domain.
To illustrate what I am saying, let me give you an absurd example. Sometimes, it takes an absurd
example to illustrate the obvious.
Let’s say you give someone yesterday’s newspaper containing the results of a cricket match.
There is no reason under the sun why you and the party to whom you gave the newspaper can’t enter
into a written contract whereby that other party agrees not to disclose the results of that cricket match.
This is so even though the results are right there in yesterday’s newspaper for the entire world to see.
It goes back to the basic common law of contracts, what they teach first year law students. Free-
dom to contract has been an inalienable right that we have enjoyed for hundreds of years.
A non-disclosure agreement is simply one form of a contract. Provided there is consideration, and
the contract does not offend some overriding public policy, courts will enforce it.
A Practical Guide to Non-Disclosure Agreements Page 19
If the standard public domain exception would defeat your claim of confidentiality, you would be
fool to accept it. There is no law that says you must hand over on a silver platter information that you
painstakingly accumulated over many years. The recipient should not be allowed to weasel out of its
non-disclosure responsibilities by invoking the public domain exception.
How then would I amend the public domain exception? There are two ways. One is long and the
other is short.
For the client that I mentioned earlier who took the good part of a decade to accumulate medical
and scientific information, I drafted this clause for him:
We acknowledge that some of the Information is in the public domain. However, the Informa-
tion is not readily available unless you know where to look for it and have the requisite knowl-
edge and expertise, as do we, to interpret it. It took us a considerable amount of time and
money to locate, compile and interpret such Information. We do not wish to give a third party
an advantage that we did not have. Therefore, even such Information as is in the public do-
main shall be deemed confidential for purposes of our relationship with you.
That’s the long way to address the issue. It would be appropriate where most of the information
disclosed is in the public domain, as was the case with this client.
There is a shorter way that gives less prominence to this issue. Simply provide that the public
domain exception only applies to “generally known” information in the public domain.
You can readily see the problem with this. The term “generally known” is highly subjective.
I have seen the public domain exception further qualified: “Information that is generally known in
the same trade or business as practiced by the Discloser”.
In other words, if the information is not generally known in your trade or business, even if it is gen-
erally known in some other trade or business, the recipient can not avail himself of the public domain
The Specifics Known; the General Unknown
What if some bits and pieces of information are generally known in the same business as the dis-
closer? Other bits and pieces of information are not generally known.
Can you combine bits of generally known information with bits not generally known and protect the
combination? Can the recipient avoid his non-disclosure obligations, claiming the public domain ex-
ception on the basis of random bits and pieces of generally known information collected from diver-
gent sources within the relevant trade or industry?
There are no clear-cut answers to these perplexing questions. Nonetheless, like any lawyer, I do
the best I can.
The following clause addresses the aforementioned questions but, in the process, raises new is-
sues, and so it goes. At any rate, the clause reads:
Matter shall be deemed “generally known” in the pertinent trade only if the Recipient can estab-
lish that the full particulars of the Confidential Information are, in the combination disclosed to
the Recipient, well known or generally used within the Discloser’s trade or industry.
I think I have beaten the public domain exception to death! Let’s now move to the next standard
Information Received by the Recipient in Good Faith
This exception concerns information that the recipient receives in good faith from a third party.
The exception is normally qualified by the proviso that the third party must be lawfully in possession of
the information and have the right to disclose it to the recipient.
In most cases, the discloser will not know what the recipient received from someone else until it is
too late. Therefore, in my non-disclosure agreements, I try to impose a “duty to disclose” on the re-
A Practical Guide to Non-Disclosure Agreements Page 20
That is to say, the recipient must make timely disclosure of information received from a third party.
Otherwise the recipient loses the right to invoke this exception with respect to such information.
The recipient is sometimes reluctant to accept a “duty to disclose”. The reason why is pretty obvi-
ous. The receipt of information from a third party implies that the recipient is shopping around.
Nonetheless, in most cases, a “duty to disclose” sounds reasonable enough and the recipient will
not object to it.
Clearly, my strategy is always to narrow these exceptions.
Agreement to Release from Confidentiality
Another common exception concerns information that the parties agree in writing to release from
the terms of the non-disclosure agreement.
This is a very silly exception. Two parties can always agree to do whatever they want. You don’t
need a signpost.
It amazes me to no end how many clauses in contracts are prefaced with the phrase “Unless the
parties otherwise agree,….” Have you noticed that yourself?
Such a phrase adds absolutely nothing. It’s implicit in every single clause of every single contract.
You might as well preface every clause by that phrase but that would be even sillier I suppose.
As you can tell, I don’t think much of this exception. Then again, it does no harm.
The next exception is a curly one.
This exception concerns information that the recipient can demonstrate, by written record, it knew
on the date of disclosure. In other words, it protects the recipient’s prior knowledge.
It is perfectly understandable why a recipient needs this exception. The recipient may be part of a
large organisation. The organisation may have multiple research and development departments or
manufacturing facilities in numerous geographic regions.
Indeed, the organisation may be fully possessed of the very information you disclose to the recipi-
ent. The individual representative with whom you are dealing is not aware of this “corporate knowl-
Anyway that’s the argument from the standpoint of the recipient. From the standpoint of the dis-
closer, the exception, if not heavily circumscribed, can produce unexpected and unpleasant results.
The recipient usually invokes this exception to defend itself against a claim by the discloser that
the recipient has not honoured its confidentiality undertakings. In that respect, the recipient does not
act too differently than the recipient of information in the public domain.
Thus, the discloser may continue to share confidential information with the recipient. Meanwhile,
all the time, unbeknownst to the discloser, the recipient intends to invoke the “prior knowledge” ex-
That’s not fair.
To protect the discloser, I borrow a trick from an earlier exception concerning information received
from a third party. I impose upon the recipient a “duty to disclose” if it wishes to invoke the “prior
That is to say, the recipient must invoke the exception within a specified time (say, 30 days) from
the date of disclosure. Otherwise, the recipient shall be deemed to have waived its right to invoke the
“prior knowledge exception”.
Do not underestimate the potency of what might appear to be a minor qualification. Believe me, its
The recipient will invariably waive his right to invoke this exception simply because he will invaria-
bly forget about his “duty to disclose”.
A Practical Guide to Non-Disclosure Agreements Page 21
To further complicate matters, the meaning of “prior knowledge” is just as subjective as the mean-
ing of “public domain”.
Presumably, the intent of this exception is that the recipient knew all, or substantially all, the infor-
mation disclosed to it. Further, the recipient knew it in a way of comparable utilitarian import.
Well, that’s at least what the legal precedents say. If you ask me, it does more to confuse than to
“Public domain”, “prior knowledge”, “prior art” and terms of the same ilk, were all concocted by
lawyers. Unfortunately, these concepts fare poorly when applied in a practical situation.
Take “prior knowledge” for example. What does it really mean? In a classroom of 29 students,
you will have 29 different gradations of prior knowledge. It’s no different in a commercial situation.
Explain your technology to five different people and you will have five different types of “prior
knowledge”. Explain it to ten different people and guess how many different types of “prior knowl-
edge” you will have?
“Prior knowledge” is a vague concept. For that reason, I believe that the acid test is not the pos-
session of prior knowledge. It is the application thereof.
Therefore, in my non-disclosure agreements, I provide (if I can get away with it!):
If the recipient claims the exception of “prior knowledge”, the subject information must have
been in actual commercial use (or at least experimental use) by the recipient before the date of
the disclosure by the discloser.
At least that takes “prior knowledge” out of the ethereal realm, which is so subjective, and focuses
instead on whether the recipient actually applied such “prior knowledge”. That’s easier to corrobo-
Information Independently Developed
This next exception concerns information that the recipient’s employee or consultant develops in-
The employee or consultant should not have had access to information disclosed pursuant to the
non-disclosure agreement. Otherwise, it would be an impossible task to distinguish information that
he developed, himself, from information that he received from the discloser.
Some view this exception as a variation to the “prior knowledge” exception. The legal issues bear
a striking similarity to the “prior knowledge” exception. There are, however, some key differences.
The “prior knowledge” exception protects the recipient from committing to non-disclosure obliga-
tions in respect to information it already knew. The exception for information that is developed inde-
pendently has a somewhat more “pro-active” spin to it.
In effect, the recipient is telling the discloser: “Just because I am signing your non-disclosure
agreement doesn’t mean that I plan to put on hold my research and development programme. Fur-
thermore, in the course of my research and development programme, I don’t rule out the possibility of
discovering the very information that you are prepared to disclose to me. Should that happen, and
provided I have not used your information to facilitate that discovery, your information shall not be
deemed confidential information pursuant to the non-disclosure agreement.”
Can you grasp the subtle difference between “prior knowledge” and “independently developed
The discloser should try to avoid this exception. “Prior knowledge” is bad enough. This exception
goes too far.
For example, there is no practical way to make sure that the person credited with independently
developing information did not actually have access to the discloser’s information. In other words, the
potential for mischief is rife.
A Practical Guide to Non-Disclosure Agreements Page 22
If possible, the discloser might condition the disclosure of confidential information upon the recipi-
ent’s promise not to engage in parallel research and development. If the recipient is a small com-
pany, and the subject matter of the disclosure is unrelated to the recipient’s research and develop-
ment programme, the recipient might well accept such a restriction.
A large company would probably insist upon the unrestricted right to engage in parallel research
Another tact that the discloser might take is to allow parallel research and development provided
the recipient establishes that all work is undertaken by personnel with neither access to, nor knowl-
edge of, the discloser’s information. This is known as the “clean room approach”.
With the ”clean room approach”, the recipient has the burden of establishing that each employee,
consultant and any other person acting on its behalf, did not have access, direct or indirect, to the
Suppose the recipient digs his toes in and will not accept anything short of the standard exception
mentioned before? There is one last option open to the discloser.
The discloser should, in that case, obtain signed undertakings by the recipient’s employees. This
is to make sure that at least those employees do not share confidential information with a person en-
gaged in parallel research and development within the same organisation.
The employees of the recipient would acknowledge their familiarity with the terms of the non-
disclosure agreement signed by the recipient. They would agree to be bound by the same restric-
tions on use and disclosure.
This will help the discloser should any future disputes arise concerning the “clean room” research
and development activities of the recipient.
The final exception concerns information that the recipient is required to disclose by applicable
Disclosures Required by Law
Rarely, do I see this exception invoked. The reason is that the law generally respects confidential
information. It does not compel disclosure except in extenuating circumstances, such as where the
public health and safety is threatened.
Even though this exception is rarely invoked, you might as well get the words right. Otherwise, in
those rare cases where it is invoked, the recipient may be more generous than you would wish.
The recipient should have an obligation to notify the discloser of any proposed disclosure. The
recipient should take reasonable and lawful action to avoid and/or minimise the extent of such disclo-
The recipient may also grant the discloser a limited time within which to obtain a protective order
or other equitable relief to prevent the disclosure.
Let me say a few words about burden of proof.
Burden of Proof
Let’s say a recipient uses confidential information in breach of its obligations in a non-disclosure
agreement. Does the recipient have the burden of proving that the information fell within one of the
exceptions cited above?
The answer is a definite “yes but”. Normally, the recipient has the burden of proof but circum-
stances may militate otherwise.
To avoid a “yes but” answer from your lawyer, it is wise to spell out who carries the burden of
proof. It should not be left in doubt.
The non-disclosure agreement should expressly impose the burden of proof on the recipient. The
recipient should have the burden of proof either that (a) no such disclosure occurred, or (b) if such
disclosure occurred, the information disclosed fell within one of the stated exceptions.
A Practical Guide to Non-Disclosure Agreements Page 23
Failure to Invoke Exception
There should be a finite period within which the recipient may invoke an exception. Failure to in-
voke an exception within that period should constitute a waiver thereof.
The purpose of such a clause is to prevent the recipient from breaching the agreement and then
fishing around for a defence of his actions.
The notice requirement will not prevent a recipient from breaching his obligations. It will ensure
that, if he does so, it will be in a conscious, pre-meditated, fashion rather than invoking an exception
as a means to defend action already taken.
100% Pure Confidential Information Doesn’t Exist in the Real World
There is no such thing as unadulterated, 100% pure confidential information. Confidential informa-
tion is always couched in material falling within one of the exceptions. The material may be in the
public domain. The material may be subject to the “prior knowledge” exception.
Every single page of confidential information will contain at least some extraneous bits of non-
confidential information. Thus, all confidential information, by its nature, is hybrid. It would be most
unfair if the recipient tried to defeat your claim of confidentiality on that basis alone.
A non-disclosure agreement treats these issues as black and white. In the real world, there are
subtle variations of grey.
Make sure that the non-disclosure agreement does not treat confidential information as an all or
nothing proposition. If it does so, the discloser will always be at the short end of the stick.
Specific Elements/General Elements
To protect the discloser against these risks, I would add the following clauses to the non-
Disclosures of specific elements of confidential information shall not fall within any of the ex-
ceptions merely because the discloser incorporates them within disclosures of general ele-
ments already known to the recipient or in the public domain.
Disclosures of any combination of elements of confidential information shall not fall within any
of the exceptions merely because one or more such element was already known by the recipi-
ent or was in the public domain provided that the combination of such elements was not known
by the recipient or in the public domain.
The first clause addresses situations where the general elements are known but the specific ele-
ments are confidential. The second clause addresses the exact opposite situation. The specific ele-
ments are known but nobody has combined them in quite the way that the discloser has done.
The second clause is even more important than the first. Chances are, you will combine certain
elements that are either known to the recipient or in the public domain. Your combination of elements
should not lose its protected status simply because one or more of the elements thereof were known
by the recipient or in the public domain.
Take the internal combustion engine. It’s been in the public domain for many years. Indeed, most
of the specific elements thereof are in the public domain too.
Nonetheless, you may have slightly modified one specific element and thereby achieved greater
engine performance. The recipient must treat that specific modification as confidential, notwithstand-
ing its prior knowledge of the general elements.
This is known as a rule of interpretation. It’s actually just another technique to narrow the excep-
tions and remove some of their subjectivity.
Thus, the first clause protects the specific confidential elements where the combination of ele-
ments is not confidential. The second clause protects the combination of elements where the specific
elements are not confidential.
A Practical Guide to Non-Disclosure Agreements Page 24
Recipient’s Work Product
Here’s another problem. You give the recipient confidential information. There is no issue about
From your information, the recipient prepares internal memoranda, reports and other documents.
This is to be expected. You can’t reasonably ask a recipient not to do this.
The issue then arises as to whether such internal memoranda, reports or documents prepared by
the recipient are confidential.
Bear in mind that these are not your memoranda, reports or documents. While they may include
your confidential information, the recipient prepared them from scratch.
Logic would dictate that it should not matter who prepared the memoranda, report or document. It
should only matter who owned the information contained in that memoranda, report or document.
The value of a piece of paper containing information is determined by the information on the pa-
Your aim is not to protect specific pieces of paper. Your aim is to protect specific pieces of infor-
This is so regardless of how you communicate that information to the recipient or how the recipient
uses that information.
Therefore, your claim of confidentiality should extend to any memoranda, reports or documents
that the recipient compiles or generates from information that you disclosed to the recipient.
To cover this situation, you might consider the following clause:
Confidential Information also includes any memoranda, reports or documents that the Recipient
may compile or generate from the Discloser’s information if a third party could identify or extract
such information from such memoranda, reports or documents.
General Rules of Interpretation
These are really “anti-mischief” clauses but “general rules of interpretation” sounds less emotive.
There are three clauses that typically go together. Each clause addresses a variation of the same
Here’s an all too common situation. You can not enforce contractual rights against a party who is
not a signatory to the contract. There is no privity of contract between you and that third party.
That basic notion of law makes good sense most of the time. On occasion, however, it can pro-
duce an anomalous result.
It allows a dishonourable person to use a non-contracting party to do his bidding. Technically, the
contracting party is not in breach of the contract. You can’t enforce your rights against the non-
Doesn’t sound fair, does it?
To protect against this, you need a clause that prohibits a contracting party from enlisting the ser-
vices of a non-contracting party to commit a breach. The following three clauses would prevent a
contracting party from engaging in this sort of mischief:
Certain clauses in this agreement may prohibit a party from doing a specific act or thing. In
such case, such party shall not aid, abet or encourage a third party to do such act or thing that
such party could not do itself.
Any obligation not to do anything shall include an obligation not to suffer, permit or cause the
doing of that thing. Neither party shall suffer, permit or cause an affiliate, subsidiary or third
party to do an act that, if done by such party, would violate this agreement.
A Practical Guide to Non-Disclosure Agreements Page 25
The Discloser shall regard any breach of this agreement by a subsidiary or affiliate of the Re-
cipient as a breach of this agreement by the Recipient. The Discloser shall regard any breach
of this agreement by an officer, director, staff member, adviser or other person acting for the
Recipient as a breach of this agreement by the Recipient.
Incidentally, the above clauses are not intended strictly for non-disclosure agreements. They have
value in other contracts as well.
It will be hard for the recipient to object to these clauses. To object to them almost constitutes an
admission that the recipient may wish to engage in the mischief proscribed by such clauses.
Use of Confidential Information
As already stated, a non-disclosure agreement has three purposes:
• To define what information is “confidential”;
• To impose reasonable restrictions upon the recipient’s use of such in-
• To impose reasonable restrictions upon the recipient’s disclosure of
Let’s now consider what restrictions a discloser may impose upon the recipient’s use of confiden-
The non-disclosure agreement should state in plain English its purpose. Why is the discloser giv-
ing confidential information to the recipient?
You should state the purpose as narrowly as possible. For example:
• The purpose of this non-disclosure agreement is to enable the Sup-
plier to determine whether it wishes to enter into a supply contract with the discloser.
• The purpose of this non-disclosure agreement is to facilitate the due
diligence of the recipient who has expressed an interest in buying the business of the
• The purpose of this non-disclosure agreement is to enable the cus-
tomer to determine whether it wishes to buy products from the discloser.
• The purpose of this non-disclosure agreement is to enable the recipi-
ent to evaluate the technology and to determine whether it wishes to enter into a licence
agreement or joint venture with the discloser.
Reciting the purpose of a non-disclosure agreement does not have any legal effect, per se. Yet,
take it from me, it is one powerful signpost.
If an issue ever arises over the use, or misuse, of confidential information, that issue will almost
certainly be resolved by examining the intention of the parties when they entered into the agreement.
You might say that stating the purpose is a clever way to enshrine the contractual history.
As a lawyer, I am a firm believer in setting out the contractual history in as much detail as possible.
Indeed, I sometimes go overboard, with my recitals extending several pages.
Other lawyers have criticised me for my excessive use of contractual history. They maintain that
contractual history does not truly belong in a contract. They claim that the purpose of a contract is to
set out the rights and obligations of the contracting parties. It is not to erect a series of signposts that
explain why the parties entered into the contract in the first place.
I don’t care what other lawyers say. I’ll stick to my guns.
A Practical Guide to Non-Disclosure Agreements Page 26
I firmly believe that the recital of contractual history aids not only the lawyers but also their clients
in interpreting the clauses in the contract should an issue arise in future.
Therefore, it is my recommendation that a non-disclosure agreement contain a paragraph or two
explaining why the parties are exchanging information and what they hope to gain from such ex-
State this as specifically as possible. Specify the expectations of both the discloser and the re-
cipient. What will the recipient do with the confidential information? Spell this out in as much detail
A non-disclosure agreement is not a pretext for a nosy recipient to engage in a “fishing expedi-
tion”. The recipient must agree upon the ground rules, namely:
• What will the recipient do with the confidential information?
• Why does the recipient need the confidential information?
• Who on behalf of the recipient will evaluate the confidential informa-
• Where will the recipient perform its evaluation?
• How will the recipient perform its evaluation?
• When will the recipient perform its evaluation?
If the recipient is either unable or unwilling to address these issues in reasonable specificity,
chances are you are wasting your time with him.
The Importance of Milestones
A non-disclosure agreement should set milestones for measuring progress. It should require the
discloser and the recipient to convene regular meetings. It should describe any other activities or
events that should occur in order to move the project along.
What am I trying to do? I’m trying to take the non-disclosure agreement out of the realm where
the recipient plays a purely passive role. I’m trying to change the paradigm of the relationship to one
where both parties work together, pro-actively, to achieve a common goal.
Take my word for it. If the recipient’s attitude is: “Yeah, if you wish, my people will have a look at
it”, you’re wasting your time. You’ll have as much luck with that recipient as you would have sending
an unsolicited manuscript to a book publisher.
You must find a way to get the recipient committed to the project. A non-disclosure agreement
setting out an action plan for the parties to commit to is an essential first step in the process.
A non-disclosure agreement should not be a sterile legal document. It should be a charter for ac-
By far, the most common use of confidential information by the recipient is for evaluation and as-
sessment. Be careful, however. The term “evaluation” means different things to different people. It’s
a slippery word indeed.
Japanese commercial whalers get around the ban on commercial whaling in the name of “scien-
tific research”. So too, recipients of confidential information can get into lots of mischief in the name
Restrict “evaluation” to intellectual evaluation only. That is to say, evaluation does not extend to
the manufacture of prototypes, trial marketing, commercial testing or similar activities except with the
discloser’s express written consent.
These other activities go beyond pure intellectual evaluation. If the recipient wishes to engage in
them, a standard non-disclosure agreement is probably not the appropriate legal instrument. The
parties should consider a “technology evaluation agreement” or a “test market agreement”.
A Practical Guide to Non-Disclosure Agreements Page 27
A non-disclosure agreement should be limited to the intellectual evaluation of information. A non-
disclosure agreement should expressly prohibit the recipient from engaging in other activities in the
name of “evaluation” such as manufacturing prototypes, using the confidential information as a
springboard for further research and development and test marketing.
All of these activities are certainly to be encouraged, but at a later stage. If the recipient is keen to
move to that later stage, the parties should discuss the terms of a more elaborate agreement between
Absence of Representations and Warranties
During the recipient’s evaluation, the discloser will be in communication with the recipient. Inevi-
tably, the discloser will puff up his confidential information to capture the recipient’s enthusiasm.
Beware! The recipient may construe your remarks as representations and warranties.
The non-disclosure agreement should dispel any such notion. Statements made by the discloser
are solely for the purpose of supporting the recipient’s evaluation. They are not representations or
The recipient is responsible for making an independent evaluation of the confidential information.
To drive home this point, I would recommend the following two clauses:
You are responsible for your own independent judgment, valuation and assessment of the con-
fidential information. You shall not rely upon any opinions, statements, assurances or repre-
sentations that our staff or we may express.
Such confidential information is supplied for evaluation only and is provided “as is” with no war-
ranties of any kind, express or implied, including any warranty of merchantability or fitness for a
particular purpose. Under no circumstance shall we be liable for any direct, indirect, special or
consequential damages arising from your evaluation of such confidential information.
Does that mean that a recipient is never entitled to rely upon statements and opinions that the dis-
closer furnishes? Certainly not!
At so early a stage as a non-disclosure agreement, the discloser normally furnishes the confiden-
tial information without any representations or warranties. At a later stage, representations and war-
ranties may be entirely appropriate, such as in a joint venture or licence agreement.
Results of Evaluation
Okay. The recipient completes his evaluation. Now what?
The usual protocol is for the recipient to provide the discloser a written summary of the results of
The evaluation results are considered confidential information. The recipient is prohibited from
using the evaluation results without the express written consent of the discloser.
The discloser may use the evaluation results. If the discloser releases the evaluation results into
the public domain, the recipient is then relieved of any further confidentiality obligations in respect to
such information. Of course, that principle applies to all types of confidential information.
For the protection of both the recipient and the discloser, it is important for the recipient to prepare
evaluation results and to share those results with the discloser. This procedure will help to avoid any
future disputes over the recipient’s use or misuse of the confidential information.
Other Uses of Confidential Information
Evaluation is certainly the most common use of confidential information. It is by no means the only
Before, I mentioned some other possible uses: Research and development; production of proto-
types; and test marketing, to name a few.
A Practical Guide to Non-Disclosure Agreements Page 28
Whatever the allowable uses, specify them in the non-disclosure agreement. Limit the recipient to
only the uses so specified. If you do not do this, the recipient may use the information for purposes
that you never intended.
Limit the recipient’s discretion. Make the recipient come back to you for permission to use the
confidential information in a manner not authorised in the non-disclosure agreement.
Prohibited Uses of Confidential Information
In addition to specifying the “permitted uses”, you should also specify the “prohibited uses”. Men-
tion specific uses that are off limits.
For example, if you give confidential information to a toolmaker, you might state:
The recipient shall not use the confidential information to supply tools to any other customer
That would be a “prohibited use”.
The recipient should acknowledge that the confidential information is your property. It’s okay if the
recipient wants to reserve the right to invoke one of the exceptions mentioned earlier.
In the case of bona fide confidential information, where none of the exceptions apply, the recipient
should agree to use such confidential information in a manner that would not be detrimental to the
This is the minimal standard of care that a recipient should commit to. If the recipient is unwilling
to make this minimal commitment, that should set off alarm bells.
You may, if you wish, elaborate on the types of uses that you would consider “detrimental” to your
Clearly, it would be detrimental to your business if the recipient used the confidential information to
compete with you or to confer a competitive advantage on a third party. In the same vein, it would be
detrimental to your business if the recipient disclosed the confidential information to your customers
In mentioning these “prohibited uses”, I do not wish to limit your own thinking. You know better
than anyone what uses would be detrimental to your business. Don’t be afraid to mention them in the
Disclosures to Third Parties
Virtually every non-disclosure agreement prohibits the recipient from disclosing confidential infor-
mation to an unrelated third party except with the discloser’s prior written consent. The discloser may
condition his consent upon such third party entering into confidentiality undertakings similar to those
contained in the non-disclosure agreement with the recipient.
This raises an interesting issue. Who is a “third party”?
A corporation is a “thing”. A thing is not capable of receiving any thing!
Individuals are capable of receiving confidential information. These individuals may work for the
corporation. They may be independent advisers or consultants.
Inevitably, warm-blooded human beings will be receiving, evaluating and assessing your confiden-
There are several ways that you can bind these individuals to confidentiality. The most obvious
way is to get each of them to sign an agreement accepting the terms and conditions of your non-
disclosure agreement with the recipient and agreeing to be bound thereby.
In some situations, the recipient may not want its staff and advisers to sign any instrument that
purports to confer upon the discloser a direct right of action against them. The recipient may feel that
this is unnecessarily intrusive. The recipient may feel that it, alone, is responsible for ensuring com-
pliance by its staff.
A Practical Guide to Non-Disclosure Agreements Page 29
In that case, your next best protection is to require the recipient to enter into employee confidenti-
ality agreements with such members of its staff as shall be receiving, evaluating and assessing your
confidential information. Concomitant with that obligation would be an obligation by the recipient to
assume full liability for the acts and omissions of its employees and other persons to whom it dis-
closes your confidential information.
A clause that embodies all of these points would read:
The Recipient shall only disclose the Confidential Information to those of its trusted employees
and agents who require it for the purposes described in the agreement. The Recipient shall
fully inform its employees and agents of the Recipient’s obligations to the Discloser concerning
the Confidential Information. The Recipient shall obtain written confidentiality undertakings
from its employees before disclosing any Confidential Information to them. The Recipient shall
be responsible for making sure that its employees and agents understand and comply with
Protection of Confidential Information
Let’s take stock where we are.
Thus far, we have defined “confidential information”. We have considered the various exceptions
and rules of interpretation. Next, we considered both permissible and prohibited uses of confidential
Now let’s consider some of the ways to protect confidential information.
I start with this cautionary statement. In reality, the discloser has very little control over how care-
ful, or careless, the recipient is with confidential information entrusted to it.
There is only so much that a discloser can do. Beyond that, it is simply a case of crossing your
fingers and praying that the recipient will behave in a responsible fashion.
For what it is worth, I shall describe typical contractual undertakings that a recipient gives a dis-
One such undertaking requires the recipient to protect the confidential information with the same
skill and care as the recipient applies to its own confidential information.
This undertaking is helpful provided the recipient has adequate internal procedures in respect to
its own confidential information. This undertaking is not very helpful if the recipient is haphazard and
careless with its own confidential information.
You can specify any number of other precautionary measures that the recipient should implement
to protect the confidential information. But at the end of the day, it is pretty much outside your control.
Anyway, it is next to impossible to prove that the recipient did not follow one or more such meas-
Restrictions on Use
The more copies of confidential information floating around, the greater is the risk of accidental
disclosure. That’s obvious. Therefore, it is not uncommon to find in a non-disclosure agreement a
restriction against photocopying confidential information.
As stated before, whether or not the recipient honours that restriction is something you will proba-
bly never know.
Even with restrictions against photocopying, a recipient is normally allowed to retain at least one
copy of the confidential information for its archives. The recipient may need to maintain a record of
confidential information received to comply with good manufacturing practices, for reasons of quality
assurance or relevant accreditation requirements. Indeed this is an ISO requirement.
Another common restriction is to limit disclosure to a few trusted employees and then only on a
“need to know” basis. Such words have a pleasant sounding ring to them, don’t they?
The trouble is, aren’t all employees “trusted”? Employees who aren’t “trusted” have a way of
changing their status to “ex-employees”!
A Practical Guide to Non-Disclosure Agreements Page 30
Furthermore, disclosing confidential information only to employees on a “need to know” basis
doesn’t afford as much protection as you may think. Employees who do not have a “need to know”
are less likely to misuse the confidential information. Employees who have a strong “need to know”
pose the greatest risk of misuse.
I have seen non-disclosure agreements that require maintenance of confidential information under
“lock and key”. In most cases, that’s not practical. Besides, the recipient would probably consider
such a restriction over the top.
Your best protection is to have each individual recipient undertake in writing to maintain the confi-
dentiality of the information disclosed. This can be achieved by:
• Having the individual recipient sign the non-disclosure agreement;
• Having the individual recipient sign a statement affirming that he will
abide by the restrictions in the non-disclosure agreement applicable to the recipient; or
• Having the individual recipient sign an employee confidentiality
agreement with the recipient.
Responsibility for Unauthorised Disclosures
This would be an appropriate place to distinguish three different levels of responsibility by the re-
The highest level is where the recipient accepts total responsibility for protecting the confidential
information from unauthorised disclosure by it or its staff. Such an undertaking affords the greatest
level of protection to the discloser.
However, the recipient may balk at giving such an onerous undertaking. Instead, the recipient will
perhaps agree to use its “best endeavours” to protect the confidential information from unauthorised
disclosure. This is an undertaking of one lesser degree, but still very good.
Unauthorised disclosures may still occur despite a recipient’s best endeavours to prevent them.
A watered down version of “best endeavours” is “reasonable endeavours”. What’s the difference
between “best endeavours” and “reasonable endeavours”?
A few years ago, a judge issued a ruling that, on its face, seemed to impose an extremely high
level of performance on a person that gave a best endeavours undertaking.
According to this judge, to use your “best endeavours” in respect to an undertaking, you would
have to accord that undertaking a higher priority than any other undertaking. You would have to de-
vote sufficient resources and effort to achieving that undertaking even if it meant putting other under-
This unusual interpretation of “best endeavours” struck the legal community like a bolt of lighten-
ing. Virtually over night, lawyers discarded the concept of “best endeavours” and substituted “rea-
sonable endeavours”. The new standard is as subjective as the standard that it was intended to re-
No one quite knows what “reasonable endeavours” means. Yet the term is very much in vogue
As far as I am concerned, it makes little difference whether a recipient commits to use its best en-
deavours or its reasonable endeavours to protect a discloser’s confidential information. Far more
important is the consequences of an unauthorised disclosure, be it intentional or through inadver-
The “Designated Discloser”
I have discussed the problems associated with limiting disclosures to a few key people, so called
“trusted employees”. The flip side of that issue concerns limitations upon individuals who will actually
be doing the disclosing rather than the receiving.
A discloser may not want the recipient to communicate with just anybody.
A Practical Guide to Non-Disclosure Agreements Page 31
The ideal situation would be for just one person representing the discloser to co-ordinate all dis-
closures. Such a person would have an intimate knowledge of the confidential information. He would
also know the rights and obligations of the discloser and recipient pursuant to the non-disclosure
A designated discloser can exert greater control over the types of information disclosed, the
means of disclosing it and the security measures to protect it.
The risk of accidental disclosure increases dramatically to the extent that you have multiple recipi-
ents and multiple disclosers.
There may be good reason for the recipient to designate a few persons to receive the confidential
information. The recipient may adopt a team approach to its evaluation and assessment.
Ideally, a single designated discloser should be the contact person for the recipient. All confiden-
tial information should be channelled through this person. The buck stops with him.
This may not be a problem in a small company. It is more likely to be a problem in a large com-
pany where several individuals are involved in the same project, each of whom possess confidential
information bearing upon the project.
Consider including a clause in your non-disclosure agreement that requires the recipient to com-
municate only with such person or persons as the discloser may designate. The clause should pro-
hibit the recipient from contacting any other officer, employee or agent within the discloser’s organisa-
Anti-Competitive Aspects of Non-Disclosure Agreements
A non-disclosure agreement bears certain similarities with a restraint of trade.
A non-disclosure agreement has the potential to restrict competition. For that reason, prohibitions
against use of confidential information by the recipient must be drafted with great care lest such pro-
hibitions be interpreted as a backdoor means of restricting competition.
If the restraints upon use and disclosure are deemed anti-competitive, the entire agreement could
be declared void as against public policy.
In determining whether restraints are anti-competitive, courts generally apply the so-called “rule of
reason”. It works like this.
Taking all the circumstances into account, is it “reasonable” for the discloser to insist upon these
restraints. If not, then the discloser is deemed to be acting unreasonably and in an anti-competitive
To justify clauses that others might consider anti-competitive, I resort to the tried and true method
of “signposting”. In other words, explain the reason for the clause. Explain why the discloser needs
the protection conferred thereby.
These signposts do not have the force of law. They do, however, offer helpful contractual history
concerning the intent of the parties when they signed the non-disclosure agreement.
If you include a clause with anti-competitive overtones, make sure that you limit its scope, territory
and duration to only what you need.
Do not overreach. If you overreach, you may lose everything. Just go for the very basic protec-
tion that you need.
If you are sailing close to the wind, add a “severability clause” to your non-disclosure agreement.
A “severability clause” is a useful bit of boilerplate. You will find it in many different types of legal
contracts. What it says is this.
If any clause is determined to be invalid, the entire contract should not fail simply because of that
one invalid clause. Instead, the invalid clause is “severed” from the contract, hence the term, “sever-
A Practical Guide to Non-Disclosure Agreements Page 32
I have seen some rather creative severability clauses. For example, instead of severing the
clause altogether, the parties agree to “reinterpret” the invalid clause to the extent required to render it
valid. Lawyers never give up, do they!
Just because there is a risk that a court may strike down a clause as being anti-competitive, don’t
be afraid to use it. In the right circumstance, the clause may be perfectly acceptable.
For example, if you provide confidential information to a prospective supplier, you have every rea-
son to expect him not to use that confidential information to supply your competitors. In that circum-
stance, the clause would be no more anti-competitive than clauses of the same type in exclusive sup-
I have even seen clauses that restricted the recipient from pursuing parallel research and devel-
opment activities for a period of time. That was a rather “big ask” of the discloser!
A discloser would not be too pleased if the recipient stole his chief technical guru, now would he.
Believe me, this can happen!
The non-disclosure agreement may be bulletproof but what good is it if the recipient can circum-
vent it simply by hiring away the very person that created, or possessed, the confidential information?
If that is a possibility, it is easy enough to prevent. All you have to do is insert an “anti-raiding
clause” in the non-disclosure agreement.
With an anti-raiding clause, the recipient agrees not to offer employment to, or otherwise engage
the services of, the Discloser’s personnel. Such a restraint normally expires one year after the termi-
nation of the non-disclosure agreement.
Although an anti-raiding clause sounds simple enough from a conceptual point of view, take it from
me, it is anything but simple to draft! That’s because raiding can occur in so many different ways. It
is almost impossible to address them all short of cobbling a three page anti-raiding clause to a two-
page non-disclosure agreement.
Let me give you a few examples of what I mean. If the anti-raiding clause only addresses situa-
tions where a person is “solicited”, what happens if a person approaches the recipient on his own voli-
tion? So you get into all sorts of “argy bargy” as to who solicited whom.
Here’s another example. What happens if you dismiss the employee and the recipient then hires
him? This is tricky because courts are loath to enforce a restriction that prevents an employee from
earning a livelihood.
Then, too, the whole area of dismissal, constructive dismissal and resignation is fraught with am-
biguity. You claim your employee was “raided”. Your employee claims that he resigned, or worse,
was constructively dismissed.
Perhaps the cleanest way to handle this is to insert a clear contractual prohibition. Then provide a
mechanism for the waiver of the prohibition.
For example, the mechanism would start with a notification by the recipient to the discloser seek-
ing permission to hire one of the discloser’s employees. The discloser would then grant or withhold
its permission either in its sole and absolute discretion or in its reasonable discretion.
In granting permission, the discloser might impose reasonable conditions.
Thus, the whole purpose of such a mechanism would be to foster a dialogue between discloser,
recipient and perhaps even the employee.
There is no guarantee that an acceptable resolution will come from such dialogue. But it may
avoid a protracted dispute involving a clause that is, at the same time, difficult to draft and even more
difficult to enforce.
Length of Term
I am often asked how long should the term of a non-disclosure agreement be. That’s like asking
how long is a piece of string. It all depends upon the circumstances.
A Practical Guide to Non-Disclosure Agreements Page 33
Some non-disclosure agreements run for a long time while others are short lived.
Some non-disclosure agreements provide for termination upon notice by the discloser to the re-
cipient. That’s called “instant termination”. Well, you can’t get much shorter than that!
Yet there is some logic to allowing the discloser to terminate at will. After all, the moment that the
discloser does not wish to disclose, there is really no sense holding the discloser to any agreement.
The discloser should be allowed to pull the plug: “That’s all folks. You’re not getting any more out
of me. What’s more, I want you to return everything that I already gave you.”
Remember that in most non-disclosure agreements, there is no obligation upon the discloser to
disclose. Never forget that. It’s important.
All things being equal, a stand-alone non-disclosure agreement tends to have a short term, say
one year or less. The reason is that the purpose of most stand-alone non-disclosure agreements is
to allow the recipient to evaluate confidential information and nothing more.
The discloser and recipient may view a non-disclosure agreement merely as a pre-cursor to an
agreement that involves a more lasting relationship. The non-disclosure agreement, itself, does not
contemplate a lasting relationship.
It shouldn’t take long for a recipient to evaluate the discloser’s confidential information. It should
probably take only a few weeks, maybe a month at most.
Many non-disclosure agreements provide a one-year term. It’s largely an arbitrary term.
When you have long term non-disclosure agreements, it is generally in the context of a long-term
relationship. Examples of long term relationships are joint ventures and licence agreements.
Purely as a matter of personal preference, I prefer to incorporate the confidentiality clauses within
the licence or joint venture, as the case may be, rather than in a free standing non-disclosure agree-
I like everything to be in one tidy agreement. Other lawyers prefer to do it the opposite way. It’s
really a matter of personal style.
If you go with a freestanding non-disclosure agreement in the context of a long-term relationship,
such as a licence or joint venture, make sure that you at least incorporate by specific reference the
terms of the non-disclosure agreement into the licence or joint venture.
The two documents should be “collateral”. That means if one terminates, so does the other.
Here’s a pretty common situation. You enter into a non-disclosure agreement. The recipient likes
what he sees. The parties then proceed to negotiate a more formal relationship. What happens to
the non-disclosure agreement?
You have several options.
First, you can terminate the non-disclosure agreement and incorporate equivalent confidentiality
undertakings in the more formal agreement.
Second, you can amend the non-disclosure agreement so that it runs co-terminously with the for-
mal agreement. That is to say, so long as the formal agreement is in effect, so too is the non-
Third, and this is a bit tricky, you can include a clause in the non-disclosure agreement that auto-
matically extends its term in the event that the parties enter into a subsequent formal agreement.
Upon termination of a non-disclosure agreement, the recipient should stop using the confidential
information. I suppose that goes without saying.
The non-disclosure agreement should establish a procedure whereby, upon termination, confiden-
tial information is either returned to the discloser or destroyed.
A Practical Guide to Non-Disclosure Agreements Page 34
Incidentally, you don’t have to wait until the non-disclosure agreement terminates to get back your
confidential information. You should have the right to recall your confidential information at any time
during the term of the agreement.
Now this next point I’m about to make is quite important.
Survival of Obligations
Regardless of the length of the term of a non-disclosure agreement, the confidentiality obligations
therein should survive termination.
Think about that. As much as you may need the protection of confidentiality during the term, even
more so do you need it when the agreement expires.
For how long should the confidentiality obligations survive? I have seen some agreements where
they survive in perpetuity. That’s a long time!
In most agreements, however, the confidentiality undertakings survive for anywhere from three to
My clients always seem to demand a longer survival period than I think is necessary or appropri-
ate. As far as I’m concerned, if you freeze a recipient for a year or so, he’s frozen forever. Chances
are slim to nil that the recipient will log a date in his diary as a reminder when the restriction lapses.
There is a tide in these transactions. If the tide passes, the recipient is on to the next opportunity.
He never looks back. Remember what I said about the fickleness of technology.
Confidential information has a very short half-life. Within a year or so, most of it will become stale
and irrelevant anyway. It may even enter the public domain.
That’s why I feel that if the confidentiality obligations survive for a year or so, that’s as good as
Whatever the term of the non-disclosure agreement may be, make sure that it survives any
agreement that follows it. Let me explain what I mean.
Let’s say you enter into a non-disclosure agreement. Six months later, you enter into a licence
Chances are, the licence agreement will contain non-disclosure undertakings of its own. Further-
more, the licence agreement will contain a clause, usually under the heading “Entire Agreement” stat-
This licence agreement represents the entire agreement between the parties concerning the
subject matter thereof. As such, it supersedes any prior agreement in respect to the same sub-
Unwittingly, you have terminated the non-disclosure agreement.
If you do this intentionally, that’s fine. My fear is that this might happen by accident. It usually
Therefore, in your non-disclosure agreement, you must state that it shall survive any subsequent
agreement concerning the same subject matter.
A non-disclosure agreement is a stand-alone legal contract. It should not lose it’s effectiveness
simply because the parties incorporate non-disclosure covenants in a subsequent legal contract, un-
less they expressly state that to be their intention.
Try to impose record keeping requirements on the recipient. Don’t be surprised if the recipient
bristles at such a requirement.
It is reasonable for the recipient to maintain a record of all persons to whom it discloses confiden-
tial information. Furthermore, the recipient should make that record available to the discloser, upon
A Practical Guide to Non-Disclosure Agreements Page 35
Non-disclosure agreements are too frequently signed, sealed, delivered, filed and neglected (if not
altogether forgotten!). This is not the way that it should be.
The discloser should have a genuine interest in maintaining the vitality and relevance of a non-
disclosure agreement. There are certain techniques that a discloser may employ to achieve this.
The discloser should try to keep the recipient aware of his obligations. One means of doing so is
to require the recipient to furnish periodic affidavits or certificates indicating his compliance with the
Such affidavits or certificates have the virtue of creating a “self-policing” procedure. The recipient
is less likely to commit a breach of the non-disclosure agreement if he has to certify his compliance
therewith. Likewise, the discloser has less need to police the recipient’s compliance.
Another technique to achieve compliance is to impose an obligation upon the recipient to report,
periodically, on how he is using the confidential information.
Take, for example, a recipient who is a consulting engineering firm brought in to work on the dis-
closer’s plant. The non-disclosure agreement might contain a clause prohibiting the recipient from
designing or rendering engineering services on a similar plant for a finite period. Along with such a
prohibition, the discloser would periodically report to the recipient concerning projects undertaken for
actual or prospective competitors.
Typically, these periodic reports would be rather general yet sufficient enough to rule out the re-
cipient’s working on an identical or similar project for a competitor.
Remedies for Breach
As noted many pages ago, damages for breach of a non-disclosure agreement are exceedingly
difficult to prove. A discloser’s best remedy is often equitable (i.e. injunctive) relief. The discloser
must be able to go into court and slap a writ against the recipient.
You may be entitled to equitable relief even where the non-disclosure agreement is silent on the
subject. However, the inclusion of a clause expressly granting the discloser the right to seek, and to
obtain, equitable relief would certainly not go amiss.
Equitable relief is considered extraordinary relief. Courts grant it on a discretionary basis. They
will exercise their discretion with considerable restraint. Courts are reluctant to grant such relief
unless: (a) the claimant is suffering “irreparable injury”; and (b) there is not an “adequate remedy at
law”. That’s code meaning an award of damages will not adequately compensate the discloser for
the injuries sustained at the hands of the recipient.
When a discloser applies for equitable relief, invariably, the recipient will invoke the following de-
fence. The recipient will say that the discloser does not need equitable relief because an adequate
remedy at law exists.
Therefore, any clause in the non-disclosure agreement concerning equitable relief would be defi-
cient if it did not include a waiver by the recipient of that defence.
The recipient may, of course, defend an application for injunctive relief on other substantive
grounds. For example, the recipient certainly may defend on the grounds that he did not breach the
non-disclosure agreement. A waiver of that defence would, clearly, be against public policy. So don’t
for a minute think that the recipient is without defences to raise.
Here is a clause concerning equitable relief. It’s a bit long winded yet it addresses all of these is-
sues pretty well:
The Recipient acknowledges that the Discloser will be irreparably harmed by any breach by the
Recipient of its obligations under this Agreement and that a remedy at law may be insufficient
to protect the Discloser's interest in the event of such breach. By reason thereof, the Recipient
agrees that the Discloser shall be entitled, in addition to any other remedies it may have under
this Agreement or otherwise, to preliminary and permanent injunctive and other equitable relief
to prevent a breach or to curtail any breach or threatened breach of this Agreement by the Re-
cipient. The Recipient waives any right to challenge any such claim for equitable relief by the
Discloser on the basis that an adequate remedy at law exists.
A Practical Guide to Non-Disclosure Agreements Page 36
Getting equitable relief after the horse has bolted may not be worth the effort and expense. What
would really help the discloser is to obtain such relief beforehand. This is known as bringing an ac-
tion for an “anticipatory breach”.
If you thought equitable relief was hard to get, you haven’t seen nothin' yet! Punishing a recipient
even before the recipient has committed a crime runs counter to deeply ingrained notions of fairness.
A man is innocent until proven guilty.
Nonetheless, where you have good reason to fear that the recipient will breach the non-disclosure
agreement, but the recipient has not yet done so, you may still apply for equitable relief.
It’s one big ask! You must persuade the court that some future event is very likely to occur. There
is a serious “ripeness” issue, meaning that the dispute is not yet “ripe” for adjudication.
Damages for Lost Profits
In addition to equitable relief, the discloser can always recover damages. A typical measure of
damages is lost profits.
“Lost profits” is a very hard thing to quantify. The amount of lost profits can be very high or very
low. It all depends upon what assumptions you use.
The discloser and the recipient will each have an expert witness to give evidence. Each expert will
use arcane financial models to derive a figure for lost profits. Most of the cross-examination concerns
the assumptions employed by the expert witnesses.
Lost profits are in the nature of consequential losses.
Direct losses are usually minimal or non-existent. That’s why it is so difficult to recover money for
breach of a non-disclosure agreement.
It is helpful if the non-disclosure agreement contains an indemnity by the recipient. I say “helpful”
only. The discloser still has the burden of proving damages.
An indemnity is not absolutely essential. It rarely goes further than what common law would say
In fact, I often wonder why so many contracts include an indemnity. Under common law, a breach
of contract gives rise to a claim for damages. This is so whether or not the breaching party has given
Anyway, if you want to put in an indemnity, go right ahead.
You might say that the recipient should indemnify the discloser against any losses, costs, claims,
damages and expenses that the discloser may incur because of the recipient’s breach of the non-
Because damages are so difficult to prove in court, the parties should consider a liquidated dam-
Non-lawyers frequently misunderstand the purpose of liquidated damages. They believe that liq-
uidated damages are awarded as a penalty or punishment for wrongdoing. That’s not so.
Criminal courts mete out punishments. Civil courts mete out damages.
In civil law, there is no basis for punishing one party for breaching a contract. You can only award
damages resulting from such breach.
Thus, a liquidated damages clause can not be punitive. If it is punitive, it will be unenforceable.
A Practical Guide to Non-Disclosure Agreements Page 37
A liquidated damages clause must represent a genuine, good faith, pre-estimate by the parties of
the damages that the discloser is likely to sustain as a result of the recipient’s breach of the non-
I should point out one drawback to a liquidated damages clause. It could bar the discloser from
obtaining equitable relief.
The discloser would have difficulty arguing that there was no adequate remedy at law after agree-
ing, in advance, on the exact quantum of damages (down to the last cent) that he would sustain in the
event of a breach by the recipient.
Thus, a liquidated damages clause is somewhat inconsistent with a clause granting the discloser
the right to obtain equitable relief.
Mediation and Arbitration
Mediation and arbitration are great dispute resolution procedures. But don’t use them in a non-
In my opinion, and others may disagree, there is just no substitute for judicial relief. Besides, how
often have you heard of an arbitrator granting interim equitable relief?
Certainly, mediation is inappropriate. If a recipient misuses your confidential information, it is
highly unlikely that mediation will produce a satisfactory result for you.
If you have to play hard ball, you might as well sue the bastard. A “touchy feely” approach rarely
Jurisdiction and Venue
The discloser should always determine the jurisdiction and venue. This is one turf battle that the
discloser must win.
Arguably, it is in the recipient’s interest for the discloser to make this call. The reason is that the
discloser may have entered into the same, or similar, non-disclosure agreements with persons in
Unless all such agreements are interpreted uniformly, there is a serious risk that different jurisdic-
tions will come up with different interpretations. That could destroy the benefit of the confidential in-
formation for both the discloser and the recipient.
For the sake of uniformity, the discloser must determine the jurisdiction and venue. Courts will
normally uphold that determination.
In addition to stating which country’s laws shall govern, the recipient should expressly submit to
the jurisdiction of the relevant courts in that country. Otherwise, even though the recipient may have
agreed on the governing law, you may not be able to obtain a judgement against the recipient.
Use It or Lose It
I am not a fan of including unnecessary “boilerplate” clauses in a non-disclosure agreement.
Other lawyers clutter their agreements with unnecessary boilerplate to safeguard against some re-
For that reason, I would eliminate such standard boilerplate clauses as notice, entire agreement,
force majeure, good faith and fair dealing, counterparts and the like.
I’ve been practising law for more than 30 years. Do you know how many times I can recall a client
invoking force majeure? Never! Yet you’d be amazed how many contracts contain a force majeure
Ditto for notice clauses. I’ve never met a client who couldn’t apply practical sense and determine
a reasonable way to notify the other party to a contract.
The shorter the non-disclosure agreement, the better.
A Practical Guide to Non-Disclosure Agreements Page 38
Having said that, I nonetheless suggest that one boilerplate clause, in particular, is appropriate in
a non-disclosure agreement. It is known as a “non-waiver clause”.
What this clause does is protect you in the event that you delay in enforcing your rights and reme-
dies against the recipient.
Without such a clause, the recipient could claim that a “constructive waiver” occurred because you
delayed enforcing your rights and remedies.
In this same vein, it is advisable to state that your rights and remedies are “cumulative”. What that
means is that the assertion of one right or remedy shall not pre-empt you from asserting another right
or remedy at the same time or in the future.
Aside from these two clauses (“Non-waiver” and “Rights Cumulative”), I think that you can safely
dispense with the other boiler plate clauses.
Admission of Novelty; Representations and Warranties
A recipient may wish to include the following clause: The receipt of confidential information shall
not constitute an admission as to its novelty or patentability”.
In other words, the recipient wants to keep his options open, foremost among them being to chal-
lenge the validity of your intellectual property.
Needless to say, you should avoid such a clause like the plague.
On the other hand, you may wish to state for the record that your disclosure of confidential infor-
mation does not constitute a representation, warranty or guarantee to the recipient that such confi-
dential information does not infringe the patents or other intellectual property rights of third parties.
Such a clause is entirely reasonable within the context of a non-disclosure agreement. It may be
entirely unreasonable in the context of another agreement.
Understandably, the recipient might seek exactly such a representation from you before entering
into a more formal relationship with you.
You will find that many clauses that might be entirely appropriate in a joint venture or licence
agreement are inappropriate in a non-disclosure agreement. This is due to the narrower scope of a
Inaccurate or Incomplete Information
You may come across the following clause:
The discloser shall not be liable for any errors or omissions in the confidential information. The
discloser does not make any representations or warranties concerning the use of the confiden-
tial information or the results to be obtained therefrom. There are no representations or war-
ranties concerning the accuracy or completeness of the confidential information. The recipient
should satisfy itself through independent inquiry and investigation in respect to these matters.
This may surprise you but I generally accept these disclaimers when I represent recipients of con-
Don’t get the wrong idea. I’m no pushover. I’m simply biding my time. I would never allow these
disclaimers to appear in a more formal agreement.
In a licence agreement, for example, the licensee is certainly entitled to representations and war-
ranties that the confidential information is free of errors or omissions. The licensee is also entitled to
rely upon the completeness and the accuracy of the information.
The licensee may even be entitled to representations concerning its use of the confidential infor-
mation and the results to be obtained.
It is purely a case of timing. In a non-disclosure agreement, it is not worth fighting over these is-
sues since the relationship may never go any further.
A Practical Guide to Non-Disclosure Agreements Page 39
Besides, rarely does a recipient sustain any harm if it turns out that the confidential information
was not as represented to it. The only cost would be the time and expense of evaluating the confi-
Of course, this would not be so if the non-disclosure agreement anticipated more extensive uses
of the confidential information by the recipient. These might include the manufacture of prototypes or
the conduct of a test market.
But in the typical garden-variety situation where the recipient is receiving confidential information
solely for purposes of intellectual evaluation, the recipient can be rather relaxed about these dis-
Information Not Up-to-Date
In the same vein, the discloser may wish to state that the confidential information might not be cur-
rent as at the date of its disclosure.
Normally, the discloser has no obligation to update information previously furnished to the recipi-
Again, the currency of confidential information is not of any great consequence to the recipient at
such a preliminary stage as a non-disclosure agreement. Once the recipient negotiates a full-blown
licence agreement or joint venture, the fact that the information is current on the date of its disclosure
can be of paramount concern. The recipient is entitled to assurances to that effect.
No Obligation to Disclose
Here’s a point that I have mentioned before. It bears repeating.
A non-disclosure agreement should never impose an affirmative obligation upon the discloser to
disclose confidential information. The discloser has the absolute right to determine what information
to disclose. That includes the right not to disclose anything.
Just because you have signed a non-disclosure agreement, don’t throw caution to the wind. You
should still make qualitative judgements concerning what information to disclose and what information
Some non-disclosure agreements state, for the avoidance of doubt, that a non-disclosure agree-
ment is only that, namely, an agreement by one party not to disclose the confidential information of
the other party. It implies no greater rights or obligations than that.
For example, the disclosure of confidential intellectual property does not confer upon the recipient
the right to use such intellectual property other than for the limited purposes stated in the non-
This is all pretty obvious, wouldn’t you think? Nonetheless, it’s a common clause in non-disclosure
By far the best means of protecting your confidential information is by not disclosing it. That
means establishing appropriate safeguards within your organisation.
Every company should adopt internal guidelines and procedures for protecting confidential infor-
mation. Furthermore, there should be no exceptions to such guidelines and procedures.
The temptation is almost irresistible to make an exception simply because it seems easier or more
convenient at the time.
Develop a corporate culture that accords due respect to company secrets.
Your company does not have to function like a police state. But breaches of security should be
dealt with swiftly and severely.
No Business Relationship Implied
You may also come across this clause:
A Practical Guide to Non-Disclosure Agreements Page 40
This non-disclosure agreement does not obligate either party to enter into a business relation-
ship with the other party. This non-disclosure agreement does not create any such business
relationship, either expressly or by implication.
Once again, this sounds pretty self-evident to me.
Grant Back Clauses
Once in a blue moon, a non-disclosure agreement will contain a “grant back clause”. A non-
disclosure agreement is a rare habitat for such a clause.
The clause is much more common in licence agreements. Even then, it is often the subject of
It is easier for me to explain a grant back clause in the context of a licence agreement. So that’s
what I’ll do.
When a licensor licenses his intellectual property to a licensee, it is almost inevitable that the li-
censee will discover enhancements and improvements to that intellectual property.
After all, isn’t that the natural order of things? Products improve over time.
Inevitably, the issue will arise as to who owns the enhancements and improvements, the licensor
or the licensee.
A “grant back clause” confers ownership on the licensor in respect to enhancements and im-
provements developed by the licensee.
If you think that the licensor is over reaching by claiming the licensee’s enhancements and im-
provements, consider this. Chances are that the licensor made the major breakthrough. The licensor
discovered the “core technology”.
The licensee’s enhancements and improvements would not have been discovered but for the li-
Therefore, by all rights, such enhancements and improvements should accrue to the licensor. A
“grant back clause” achieves that result.
Whether or not you agree with the arguments supporting a grant back clause, you will certainly
see its relevance in a licence agreement.
A grant back clause is usually not relevant in a non-disclosure agreement. The reason is because
the likelihood of the recipient discovering an enhancement or improvement is so remote.
Whether or not a discloser needs a grant back clause in a non-disclosure agreement depends
upon the use to which the recipient will put the confidential information.
If the confidential information is disclosed solely for purpose of evaluation, chances are the dis-
closer does not need a grant back clause. However, if that evaluation is more extensive than a sim-
ple “look see”, a grant back clause may be entirely appropriate.
For example, if, in the course of the recipient’s evaluation, the recipient plans to engage in exten-
sive lab work, or conduct performance tests or review quality control procedures, clearly those activi-
ties go well beyond a simple evaluation.
The possibility that the recipient will discover an enhancement or improvement is certainly not re-
mote in that circumstance.
Confidential Information Distinguished from Proprietary Information
There is a difference between confidential information and proprietary information. Proprietary
information is usually intellectual property.
Confidential information may be proprietary information. But it doesn’t have to be.
Take a situation where you wish to disclose confidential information “about” proprietary informa-
tion, but not the proprietary information itself. In that case, you should take steps to ensure that the
recipient does not use your confidential information to discover your proprietary information.
A Practical Guide to Non-Disclosure Agreements Page 41
Let me give you an example.
Let’s say that you are a software developer. You give the recipient software in “object code” form.
The recipient should not use the “object code” to discern the underlining information, namely, the
Here’s another example.
Suppose you wish to show the recipient a prototype of a commercial product. You wouldn’t be too
pleased if the recipient took the prototype to pieces in an effort to figure out how it worked.
Okay, I just gave you two examples. Now it’s your turn to consider whether the recipient of your
confidential information could wrongfully use it to obtain your proprietary information.
If you propose to give the recipient both your confidential information and your proprietary informa-
tion, then there’s no problem.
If you plan on holding back a portion of proprietary information, you would certainly want to make
sure that the recipient did not use your confidential information as a means to obtain your proprietary
If this is a matter of concern to you, try this clause on for size:
The Recipient shall not in any way attempt to discern the Discloser’s intellectual property un-
derlying the Confidential Information. Without limiting the generality of the foregoing, the Re-
cipient shall not disassemble or de-compile, or reverse engineer the Confidential Information,
or perform any like operation, to discover the underlying Intellectual Property.
Protecting Proprietary Information
A non-disclosure agreement is not normally the appropriate document to lay claim to ownership
rights. Indeed, the many exceptions to confidential information (eg. public domain, prior art, etc.)
make that abundantly clear.
There is no rule of law that says you can’t use a non-disclosure agreement as a means of claiming
ownership of proprietary information. You may even get away with it! This is because there is so
much confusion over the difference between “confidential information” and “proprietary information”.
What I am saying is this. You may be able to use a non-disclosure agreement as a means of ob-
taining back door intellectual property protection. Here’s how.
First, you must define your terms. In particular, include a definition of “proprietary rights”. This
means the same as “intellectual property” but is far less emotive.
If you include a definition of “intellectual property”, the lawyer for the recipient will be on the scent
faster than a greyhound.
For some reason “proprietary rights” sounds less threatening.
Okay, once you have defined “proprietary rights” to include the specific items comprising your in-
tellectual property, half the battle is won. Then, you can include any number of undertakings concern-
ing your proprietary rights, such as:
• The recipient expressly acknowledges your ownership of the proprie-
tary rights and disclaims any right, title or interest therein.
• The recipient shall respect your proprietary rights and take no action
in derogation thereof.
• The recipient shall not use your proprietary rights to compete with
you, to confer a competitive advantage upon a third party or in any other manner that is
detrimental to your business.
• The recipient shall not modify or adapt your proprietary rights for the
purpose of deriving any benefit therefrom that would not accrue to the discloser.
I could think of other restrictions. The ones above should give you an awareness of what can be
accomplished even within the context of a non-disclosure agreement.
A Practical Guide to Non-Disclosure Agreements Page 42
It’s pretty amazing, huh? It is ironic that recipients sometimes accept these restrictions on proprie-
tary rights in a non-disclosure agreement when they would never accept them in a licence agreement
or joint venture.
I suppose it’s a case of “ignorance is bliss”. Once the recipient becomes familiar with your proprie-
tary rights he is less likely to accept these restrictions.
Notification of Breach
The non-disclosure agreement should impose an obligation upon the recipient to notify the dis-
closer in the event that the recipient breaches the agreement.
I know what you are thinking. Such a requirement is unrealistic. It is tantamount to an admission
Try to justify the clause by explaining to the recipient that not all breaches are malicious. Some-
times wrongful disclosures occur by accident or through inadvertence. The notification requirement
may help mitigate the injury sustained.
In addition, not all breaches result in injury or damages. Yet it is still wise to keep track of them.
I would not go to the mats for this clause but it would help if you could get it.
Non-disclosure agreements are normally non-assignable. The reason is that the disclosure of
confidential information envisages a personal relationship based upon trust.
You don’t tell secrets to just anyone.
Make sure that the non-disclosure agreement is signed by persons with appropriate signing au-
thority. This is more important in some jurisdictions (eg. New Zealand) than in others.
In the United States, for example, signature formalities are extremely lax. You hardly need to in-
quire into the authority of the signer thanks to such common law doctrines as “implied authority” and
Today, signature by fax is acceptable. Include a clause in the non-disclosure agreement allowing
counterparts to be exchanged by facsimile transmission. Then you don’t even have to exchange blue
ink signature copies.
A client of mine actually scans his signature and e-mails the document as a PICT file.
The Final Word
If you read this far, you know as much as I do, and more than most lawyers! Well done!
Now it’s over to you. Here’s wishing you the best of luck in your future legal relationships.
To quote Bugs Bunny: “That’s all folks!”
Watch this web site for more of the “practical guide series” from Robert Auerbach.
A Practical Guide to Non-Disclosure Agreements Page 43