Entrepreneurs often assume that using an NDA will provide the tightest security possible for their confidential information. This is not always true.
The tightest security possible is to avoid disclosing anything not essential to the deal. For the information which must be disclosed, an NDA might be the tightest security available IF the NDA is robust enough for your circumstances.
What makes an NDA robust?
This will depend on several factors, including how the confidential information is defined; whether this definition is broad enough to capture everything that would be protected without the NDA; how the other party is permitted to use the information; and whether the NDA also contains non-compete and non-use provisions which extend your protection beyond simply maintaining the confidentiality of your information.
What if you have no NDA?
Without an NDA, the courts will protect your confidential information if you can show that you have the sole right to benefit from the use of that information, someone else has wrongfully used it, and damages have been suffered as a result. The courts will also apply a multi-pronged test to determine the confidential nature of the information. This will include, for example, the question of whether the information is generally unknown to others, you have protected it with some measure of secrecy, the information is in some way unique or novel etc.
What are the Advantages of an NDA?
The advantage of an NDA is that you can expand the definition of what is protected beyond what would otherwise be considered to be confidential information by the courts. Another advantage is that if your NDA says so, you can apply for a court order to stop someone from misusing the information - you won’t have to wait until all the damage is done and then sue them. The process for getting a court order will also likely be cheaper because the other party has already agreed that you can do this.
When are you better off without an NDA?
If the NDA is not drafted to suit your particular needs, you might be better off without one.
A high profile example of an expensive drafting mistake involved two mining companies bidding to purchase the mining interests of a third company.
The NDA prohibited competition by using the confidential information to stake new claims in the “area of influence”, which was defined to include a 1 km zone.
The losing bidder used the confidential information to (successfully) stake new claims outside the 1 km zone. The court held that the agreement was clear that the protection under the agreement covered only the 1 km zone, and the losing bidder did not breach the contract. Without the NDA, the protection would not have been limited to the 1 km zone. The court held the parties to their bargain. The result was that the successful bidder paid for information that the unsuccessful bidder used for free to ‘strike it rich’, all because the protection in the NDA was defined too narrowly.
- make sure that the NDA definitions capture all the information you want to protect
- be cautious when using geographic limits to define your confidential information