Key Issues in Non-Disclosure Agreements – Alan N. Walter, Counsel

SUMMARY Before signing an NDA, scrutinize the scope of confidential information, exclusions and duration. Watch for residual knowledge restrictions that prevent using information retained in memory. Review return obligations, remedies including injunctive relief, fee provisions and jurisdiction clauses. Beware hidden non-competes or IP assignments. Ensure restrictions are reasonable and compliance is feasible.

Non-disclosure agreements are among the most common legal documents in business, yet they’re often signed with barely a glance. Understanding what you’re agreeing to can mean the difference between routine protection of legitimate secrets and serious constraints on your professional life.

Defining the Scope of Confidential Information

The scope of confidential information is the most critical element of any NDA. What exactly counts as “confidential”? Definitions range from tightly specified categories to sweeping language encompassing virtually anything the disclosing party wants to protect. Overly broad definitions like “any information disclosed during the relationship” are difficult to comply with and may be unenforceable.

Well-drafted NDAs include explicit exclusions: information already in the public domain, information you independently developed and information you legally obtained from third parties. Without these exclusions, you could be prohibited from using knowledge you already had or information anyone could find online.

Consider how oral disclosures are handled. Some agreements require that oral disclosures be confirmed in writing within a certain timeframe to count as confidential, protecting you from later claims that something you heard in passing was actually a protected trade secret.

The Residual Knowledge Problem

One of the most challenging aspects involves “residual knowledge,” the general ideas, concepts and know-how that naturally stick in your mind after exposure to confidential information. Unlike documents you can return, you can’t simply erase memories or unlearn technical concepts.

Some NDAs include residual knowledge clauses that explicitly allow you to use general knowledge retained in your unaided memory. However, these clauses can create ambiguity about what crosses the line from general knowledge to impermissible use of trade secrets. Some companies specifically exclude such clauses, requiring you to affirmatively avoid using anything you learned, which can create nearly impossible compliance burdens.

Purpose, Duration, and Structure

The agreement should specify the purpose of disclosure and who can access the information. Can you share it with your entire team or only specific individuals? These limitations affect whether compliance is even feasible.

Duration matters significantly. Common timeframes range from two to five years, though trade secrets may require indefinite protection. Understand when the clock starts: does the confidentiality period begin at signing or does each disclosure trigger a new period? The latter could bind you for years longer than expected.

Consider whether the NDA is one-way or mutual. Mutual NDAs are common in partnership discussions where both sides share sensitive information. One-way NDAs are typical for employee relationships. If you’re asked to sign a mutual NDA but won’t receive confidential information, you’re taking on obligations without corresponding benefit.

Agreements typically require you to return or destroy confidential materials when the relationship ends, extending to copies, notes, summaries and electronic files. Some require written certification of destruction, creating potential liability if you inadvertently retained something.

The practical reality is that in the digital age, complete destruction is often impossible. Information lives in backup systems, archived emails and memories. Courts generally understand this, but strict provisions can still create leverage in disputes.

Remedies and Enforcement

Most NDAs allow for injunctive relief, meaning the disclosing party can ask a court to order you to stop disclosing information. This makes sense because once confidential information is disclosed, monetary compensation may be inadequate. However, it also means a breach could result in emergency court proceedings with very high stakes.

Pay attention to who pays attorney’s fees if there’s a breach. Many NDAs specify that the losing party must pay the winner’s fees, significantly affecting your willingness to defend yourself even when you believe you’re right.

Legal Requirements and Jurisdiction

The agreement should address what happens if a court or government agency demands information through a subpoena. Is the receiving party required to give advance notice so the disclosing party can seek a protective order? Who bears the cost of fighting disclosure?

Some agreements require you to resist disclosure, which could mean hiring lawyers at your own expense. Others simply require notice and allow you to comply with legal requirements without breaching the NDA.

Jurisdiction and governing law provisions determine which state’s laws apply and where a lawsuit would be filed. If you’re a small business in California and the NDA specifies disputes must be litigated in Delaware, you’re facing significant added cost and complexity. Some agreements require arbitration, which affects the cost, speed, and process of resolving disputes.

Hidden Red Flags

Watch for provisions that extend beyond confidentiality:

Non-compete or non-solicitation clauses sometimes hide in NDAs, restricting your ability to work in your field or hire talent. These may have different enforceability standards than pure confidentiality obligations.

Automatic assignment of intellectual property rights can mean any ideas you develop during the relationship belong to the other party, with major implications for your future work.

Overly burdensome security requirements like mandatory encryption or regular audits may be impractical and create compliance nightmares.

Before You Sign

Ask yourself: Do I understand what I’m agreeing to keep confidential? Are the restrictions reasonable? Could this agreement limit my ability to work in my field? Can I realistically comply with the requirements?

When in doubt, particularly with mutual NDAs, agreements covering broad categories or those lacking residual knowledge protections, consult an attorney. An hour of legal review is invariably cheaper than years of unintended constraints or costly litigation over a document you barely read.