Nondisclosure agreements (NDAs) are a critical legal document that every startup company should have. NDAs are usually concise and can be taken to mean a simple agreement. NDAs can be used for many different uses, according to our experience. These scenarios can be classified either as “external” or “internal” by nature.
NDAs, which are essential contracts for external use, should be considered every time a MedTech startup interacts with vendors, vendors, partners, contractors, or finance companies. NDAs are often used to establish the goals and behaviors of the parties and mark the beginning of third-party interactions. NDAs can also show confidentiality between parties, essential for protecting trade secrets.
NDAs are helpful for startups to establish their internal guidelines for exchanging information, both incoming and outgoing. For example, NDAs can define what a startup considers confidential/proprietary information and how that is disclosed to other parties. NDAs can further determine how a startup receives personal/proprietary information and maintains its confidential nature. Future disputes such as those involving misappropriation of trade secrets may hinge on the definition and subsequent adherence.
One NDA does not satisfy all needs.
We often see the misconception that one uniform NDA will suffice in all situations. Many companies use the same language or form for NDAs. Standardized language can help with efficiency and consistency, which significantly benefits. There are times when interactions between parties may be too diverse to warrant changes to standard NDAs.
A preference for one type of language may lead to unexpected results or challenges in another interaction. A unilateral exchange of information, where one party discloses and one receives information, allows for highly tailored terminology to fit the nature of the disclosure. Bi-lateral information exchanges may require more general vocabulary or sections to describe the disclosure activities of each party. Another example is that a third-party vendor’s spirit and scope of information disclosure to execute a clearly defined task may be less than for joint venture partners or investors. Specific and well-thought-out NDAs will yield the best results and prevent potential missteps caused by generic, standard terms.
Who are the parties to an NDA
In general, the NDA is only required to be signed by the parties who have an obligation under the NDA. It is essential to define the responsibilities of each party under the NDA early on in negotiations. This will establish which entities must sign the NDA and help identify the actions and scenarios that need to be addressed by the NDA.
An NDA is only as effective as its scope. This is why it is essential to define the area.
Every clause and term in an NDA must be carefully considered. Even the most basic words and clauses in an NDA can significantly impact the relationship between the parties. However, we have found that the NDA’s scope affects the rest of the terms and clauses.
It would appear that a strategy to keep the scope definition broad would be effective at first glance. An overly broad definition of scope can cause potential disputes between parties, even if this is not intended. Disputes can arise about IP and technology licenses granted to the disclosing party beyond the technology at issue under an NDA. Another example is disputes over residuals, feedback rights, and obligations of the recipient party. This is especially true if the scope seems very wide. A broad definition of scope may also be detrimental to the parties’ ability to clearly define the subject matter to be included or excluded from the NDA and create the necessary procedures/processes to comply with such designations.
The Challenges of Negotiations: Feedback and Residual Clauses
It is essential to include in an NDA feedback and residual clauses. These clauses govern how parties behave after receiving information from another party. These clauses can be challenging to negotiate and define. A residual clause, for example, allows a recipient party to use residual knowledge from an information exchange while still adhering to the terms of an NDA. A feedback clause may govern the rights to use suggestions and improvements made by the other party.
It is essential to get the parties to agree on the terms. Then, it would help if you built in the processes/workflows that will ensure compliance. Suppose a disclosing partner concurs that all suggestions and feedback regarding the other party’s technology will be licensed and without any obligation. In that case, the disclosing side may need training and controls to ensure that the feedback is knowingly and intentionally provided. This prevents the possibility of a friendly, ad-hoc suggestion (e.g., a hallway idea), leading to disputes about other licensed technology under NDA.
Choose a term length.
An NDA does not have to be standardized or defined. The initial term, or associated renewal process, should, at a minimum, be adequate to cover the expected timeframe for parties’ interactions. To allow the parties to review critical considerations and avoid any future changes, a shorter term or length can be advantageous. A renewal mechanism that allows for a one- or two-year period may allow the parties to review critical times such as the scope and granted licenses. A longer term is better for relationships and projects with a longer duration or where the parties don’t wish to have a renewal process. This will help avoid interactions that go on beyond the NDA’s term. If an NDA is attached to a Master Services Agreement (MSA), which may include multiple projects defined in Statements of Work, the NDA might need to be open-ended and run with the last SOW. Or a sufficient length to cover the expected last SOW.
State-Specific Considerations
NDAs are contracts interpreted by the laws of the state where they were signed. An NDA allows the parties to specify the state law that will govern the language of their contract. Although there is much consistency between the laws in each state, there are key areas where there can be significant differences in state regulations and case law. This is particularly true when it comes to the exclusions of confidential information. It is essential to ensure compliance with all applicable state laws.
My personal opinion is that an NDA should never be enforced. An NDA can be used to establish acceptable behavior and procedures that each party will follow. Both parties can benefit greatly from an NDA’s creation and implementation.
