Hahn Law Firm

Should I sign that CDA?

Confidential Disclosure Agreements, or "CDA"'s, have other names: NDA's, Confidentiality Agreements, Non-disclosure Agreements, Secrecy Agreements, etc. Regardless of the name, this type of agreement is ubiquitous in business relationships. The CDA is usually the first formality exchanged before a new relationship or project begins, and with good reason, too. The CDA sets the ground rules and expectations between the parties for the exchange of information and defines what happens to this information once it's exchanged. Setting these rules and expectations upfront facilitates open discussions and a sense of trust.
     The parties planning to discuss potential business arrangements are usually anxious to start those discussions as soon as possible. But in the excitement to start exchanging information, they shouldn't rush to sign a CDA without understanding what commitments they are making in the signed CDA and whether it fully protects them. While seemingly a simple document, the CDA should be read carefully and fully understood. Some of the things to consider before signing a CDA are:
     Is the CDA one-way or mutual? One way CDA's protect only one party's information. Mutual CDA's protect both parties' information. Sometimes there are several parties to a CDA. Which type of CDA is appropriate will depend on the circumstances. In any case, each party should consider whether it will be disclosing information it wishes to protect and, if so, make sure the CDA will protect its information.
     Is "Confidential Information" defined? The CDA should include a specific definition of what type of information is meant to be kept confidential and not misused. This definition may be very broad to cover all samples, business and technical information in whatever form. Or it may be very narrow to cover only a particular piece of information or subject. Should information developed by a recipient from information or samples received from the discloser also be "confidential information" and, if so, whose? The breadth and details of the appropriate definition depends on the circumstances. Sometimes a CDA defines confidential information as only that information that is marked as "confidential" (or some other similar word). 
     Must the confidential information be marked to be protected? There are good things and not so good things about an obligation to mark information as "confidential" for it to be protected under the CDA. The ultimate goal of a CDA is preventative: to prevent the wrongful disclosure or use of information. Although the CDA may provide a remedy to the party whose information is wrongfully disclosed or misused, that remedy doesn't usually make up for the fact that the information was disclosed or misused. For instance, it is hard to measure the damage caused by wrongful release of information. What truly was the full economic consequence of the release or misuse? So, if information is marked as "confidential" the recipient is constantly reminded of the confidentiality obligations, lest they forget. This is a good thing. On the other hand, if information must be marked "confidential" and one forgets to mark it, then it can be harsh that the information won't be protected by the CDA because of this lapse. 
     Does the CDA protect information disclosed by or received by affiliates? Often more than one related company will be a recipient or discloser of information under a CDA. For instance, an international company may have different affiliates in different countries who will receive or disclose information. If this is the case, then the CDA should expressly state that information so received or disclosed is covered by the CDA's provisions. 
     How are disclosures to third party agents and consultants handled? Sometimes a party to a CDA wants to share the other party's information with an outside consultant, agent or subcontractor. If the CDA allows this type of disclosure, it should include provisions requiring the consultant, agent or subcontractor to also sign an agreement having at least the same restrictions on non-use and non-disclosure as the CDA itself does. This agreement by the consultant, agent or subcontractor should be signed before they receive any of the information. 
     Does the CDA have a defined length or term? There are two parts to the term of a CDA. First, there is the period of time for exchange of information that is covered by the CDA. For example, the CDA may cover discussions over a year or two. Second, there is the period of time that the non-use and non-disclosure obligations of the CDA prevent the non-use or non-disclosure of the information. There are a variety of ways CDA's present these time periods. Sometimes the CDA has a fixed term so that all the information exchanged during the term is protected from non-use and non-disclosure for a period of time either (a) following the end of the term of the CDA or (b) following the date of disclosure. Trade secrets are valuable for as long as they are indeed secret. So, if trade secret information is going to be disclosed under a CDA, the term of non-use and non-disclosure of the trade secret information should last as long necessary to prevent the loss of the trade secret's value. 
     Does the CDA include non-competes? Sometimes clauses preventing the parties from competing with each other appear in a CDA. In most cases, at the CDA stage of a relationship, it is premature to include any prohibition against competition. For one thing, such clauses may not be enforceable according to the law governing the CDA so there is no real benefit to including them – giving rise to a false sense of "non-compete" security. Also, and very importantly, such clauses may raise antitrust concerns. Instead of having a non-competition clause, a better approach is to include provisions specifically addressing how information received can be used (or not used) by the recipient.
     Does the CDA assign inventions? CDA's may include provisions assigning inventions to one of the parties. If provisions like this appear in the CDA – and are agreeable to all the parties – they deserve careful review to be sure that the scope of the assignment is exactly what is agreeable and not more than that. For instance, if the recipient of information under a CDA makes inventions based on the information they received from the discloser, it might be appropriate to assign the invention to the discloser. But even so, what happens if the invention made combines technology already owned by the recipient with the information learned from the discloser? What if the recipient's information is the most important part of the invention and the discloser's information is a minor part? Because inventions may be very valuable, one should be wary of invention assignment provisions and thoroughly think through all the possible outcomes before agreeing to them.
     Does the CDA contain the usual exceptions to confidentiality? Most CDA's include a list of situations where information disclosed is no longer required to be kept confidential. These include cases where the information is or becomes known to the public, was already known to the recipient, was also received from another who didn't have to keep it confidential, is independently developed, etc. Also, a court or government agency may require information to be disclosed. In the case of a court or agency order, the recipient should notify the discloser so the discloser can take any steps it desires to protect the information. These important provisions should be included in the CDA.

Disclaimer: As a reminder, the information in this blog is for informational purposes only and is not intended as legal advice or to be exhaustive of all considerations. We recommend consultation with an attorney for legal advice specific to the circumstances of any particular CDA.

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