Overview on Non-Disclosure Agreements
Non-disclosure agreements (NDAs) are contracts that create a confidential relationship between parties to protect any type of confidential information or trade secrets that the parties wish to share with one another for certain purposes, but wish to restrict from wider use or disclosure. NDAs are commonly used in commercial relationships – sometimes as part of the broader principal agreement – to protect sensitive information. They can protect the confidentiality of discussions between parties with regard to a potential business relationship, as well as safeguarding the use and disclosure of confidential information exchanged during the course of a business relationship. In particular, it is important to obtain appropriate NDA protection for any "non-public" information that potential business partners will review and consider when evaluating the desirability of entering into a business transaction, as disclosers typically do not want those individuals to disclose the information to others or utilize the information for their own advantage , which could harm the position of the discloser. NDAs can also be used by employers to protect their confidential and proprietary information, such as employee training procedures, customer and vendor lists and pricing data, against disclosure and use by prospective and current employees, vendors, and others, including former employees who might otherwise use that information to solicit the employer’s customers or other employees. By clearly defining the scope and the duration of the required restrictions, NDAs can help prevent misunderstandings about what exactly is protected, and thereby help prevent NDA parties from unintentionally violating the terms of the agreement. In addition, by clearly defining the information that is protected, including by specifying whether the restrictions apply to information that was created prior to the NDA being executed, the parties to an NDA can avoid disagreement about which items are covered by the NDA.
Sample Duration Provisions in Non-Disclosure Agreements
Non-disclosure agreements (NDAs) work by restricting a party’s ability to disclose private information. Because of this, one party’s interest in preserving the secrecy of the information is most often at odds with the other party’s need to later disclose for a legitimate purpose. Therefore, NDAs typically specify that their obligations will only be valid for a certain amount of time. This is often referred to as the "term."
One of the more common provisions specifying a term in NDAs typically reads as follows: "This Agreement shall be in effect for a period of [insert period of time] from the date hereof and shall renew for an unlimited number of one (1) year periods on the expiration of the initial term or any renewal term upon the giving of written notice by either Party hereto to the other Party at least thirty (30) days prior to the expiration of the then current term." Other NDAs may specify a fixed term such as "[T]he term of this Agreement is five (5) years from the date hereof." Like the provision above, NDAs that specify a fixed term often state that the term will extend indefinitely unless either party provides the other with advance notice of termination.
NDAs are often silent on the issue of the termination of the NDA’s obligations, except to state that they remain valid until a certain time. In the absence of a provision stating otherwise, courts have held that an NDA remains in effect for a reasonable period of time. Several factors are relevant to whether a period is reasonable, but the most relevant concern is the extent to which the non-disclosed information has value that would be destroyed with the passage of time. For example, a company would probably not be able to argue that provisions in an NDA prohibiting the disclosure or use of a customer list are valid for as long as it takes the company to acquire new customers. The obvious reason being that such information diminishes over time as it becomes known to new customers or competitors. However, an NDA provision restricting the disclosure of a unique formula may last longer since the formula’s value diminishes more slowly. Determining the reasonable duration of any particular NDA is therefore a fact-specific inquiry.
Parties are also free to adopt terms that prohibit the disclosure of confidential information indefinitely. Indeed, courts impose no restrictions on the duration that the parties may agree to. As discussed earlier, however, courts will not enforce restrictions on the use of legally obtained information, indefinitely.
Legal Considerations Regarding Expiration of Non-Disclosure Agreements
There are a number of legal factors that can affect the duration of an NDA. One such is the concept of statutory limitations: a period of time within which a party is required to file a successful legal action or inquiry. In England, for example, the Limitation Act of 1980 stipulates that legal actions relating to civil resolve arising out of breach of contract must occur within six years of the registered date of the violation. Thus, once a party either issues or receives confidential information, that party has six years within which to prosecute for violation of the NDA (e.g. the use or sale of confidential information without written consent). In many jurisdictions, including the United States, APA may provide that the minimum duration of such resolution periods is ten years. In Japan, the statute of limitations is five years. An additional factor to bear in mind is that statutory limitation periods are in many cases tolled upon discovery of the anticipatory (future) or actual breach of the contract, so if in doubt, timing clock starts later rather than earlier.
Another such factor is the jurisdictional differences between NDA agreements. Interpretation of any enforcement of a particular NDA may thus vary from state to state, and indeed country to country. For example, under Colorado law, a trade secret and all related intellectual property must be treated as such if they are declared in Appendix B of the NDA; on the other hand, some states require only that such IP related to the protected trade secret be declared in order for the term of protection stated in Appendix B to hold. Depending on jurisdiction, such provisions may be enforceable in perpetuity, or limited; as such, an extra-judicial resolution via updated contract law should be used to ensure agreement.
In addition, the existence of contractual timeframe parameters (or lack thereof) can affect the duration of a document’s period of enforceability. While it is typically prohibited to preemptively enforce an NDA beyond the scope of its timeline provisions – for example, if the initial period of protection is five years but the NDA is enforceable indefinitely – in some states, simply exceeding such a timeline is not sufficient to nullify the contract. Thus, it is recommended that any party disclosing confidential information within a defined period of time add such provisions to the contract in order to ensure its enforceability.
Issues That Extend or Nullify Non-Disclosure Agreements
Non-disclosure and confidentiality agreements have a stated term, but there are several conditions that can lead to an extension of the time period or termination of the agreement prior to the end of the stated term.
Amendments
Like many contracts, parties can mutually agree to extend a non-disclosure or confidentiality agreement beyond the stated term. It is important to include in the amendment the revised termination date and/or conditions for termination. As with any contract, careful consideration should be given to the inclusion of any new conditions. New conditions may limit the obligations of either party or add to the rights and obligations of either party. If a company has reason to believe that its confidential information may not be protected adequately or properly as required by the agreement, additional obligations may be added to the amended agreement. A mutual agreement to extend the term of the agreement must also be in writing.
Breach
If a party breaches the non-disclosure or confidentiality agreement, the other party may terminate the agreement regardless of the stated term. For example, if a party discovers that someone privy to its confidential information shared such information without permission, it can terminate the agreement even if there still remains a year of the contract’s stated term. Termination for breach generally does not require termination to be in writing, however, to mitigate the risk of a claim for wrongful termination, termination should be in writing.
Mutual Agreement
It may be the case that the parties decide they no longer need to share information with each other as previously contemplated by the agreement. In this instance, it is a good idea for the parties to terminate the agreement, which can be done through a simple written communication to the other party. If it is agreed that a specific date will end the agreement, it is recommended that the date be included in the written communication.
Confidential Information vs. Non-Disclosure Agreement Expiration
Expiration of a NDA
The legal and practical impact of the NDA’s expiration on the Confidential Information is dependent on the manner in which the NDA treats the Confidential Information. Even if an NDA expires, the confidential status or proprietary nature of the information at issue may continue indefinitely. Parties to an NDA should consider how the expiration of the NDA affects the information covered by the NDA. For example, if the information is tagged "Confidential," then the expiration of the NDA also stops the Confidential process.
In other cases, termination could also mean the expiration of any restrictions regarding the use or disclosure of such information.
Parties may agree to a sunset provision relating to Confidential Information if termination isn’t appropriate . Sunset provisions may create triggers for the return of information once the triggers occur. These triggers usually include the occurrence of certain events including:
Not all NDAs have a sunset provision. Parties should consider whether a sunset provision is appropriate and what the length of the period of time should be. For example, the period might be one year or longer depending on the nature of the confidential information and relationship between the parties.
Notably, in the absence of an NDA clause relating to the effect of termination, most states consider the duration of confidentiality obligations as reasonable only to the extent necessary for the employee to transition to new employment.
How to Keep Non-Disclosure Agreements Valid
Our NDAs need to stand the test of time. We’re going to discuss several strategies we can use to ensure that our NDAs stay effective throughout their term. When running a business, part of our job is to anticipate the changes in the company’s operation and adjust fundamentally important aspects of the business like our contracts and legal protections. While it may be easy to overlook a future challenge that we may face, we need to stay ahead on our NDAs so sensitive information isn’t leaked or used against the company in an unethical manner.
The first strategy to ensure our NDAs are effective for as long as the term of the agreement is to draft bulletproof Employment Agreements. In addition to a Non-Disclosure clause, there should be a term that indicates the confidentiality obligations survive the termination of the Employment Agreement. The language can be simple: You will be required to uphold your confidentiality obligations for &number; years after the termination of your Employment Agreement and the lawyer can go into further detail if necessary. It’s also a best practice to identify confidential information as narrowly as possible, to ensure that our definition doesn’t sweep in everyday business practices or things that are publically available. Additionally, even the most effective NDA will begin to fade into the past if we do not have a policy in place to routinely review and edit the NDA as needed, to ensure the NDAs are up-to-date with current sentiment within the industry, the law, and the company. If we don’t have a process to regularly review the NDAs, then we will miss out on an opportunity to modify the NDAs throughout their term, and enough of a change could render our NDAs ineffective if we leave them in a vacuum for too long.
What we would highly recommend is to build a regular calendar event, to go back and review the NDAs that were executed over a period of time (e.g. any NDAs that were executed the previous year and the year before) and check back in with those employees and ask them to keep any notes, information, or trade secrets confidential that came into their possession and let the employees know that the confidentiality obligations still stand. Another strategy we can use to ensure that our NDAs stay effective is to build in terms to ensure they are renewed after the expiration of the term. This will ensure that we do not forget to visit the NDAs on a regular basis to remind employees that their confidentiality obligations still stand, and to re-evaluate whether certain terms still make sense given the changes in the company or the law. An NDA that is drafted to expire at a certain interval and automatically renew will ensure that we do not have to remember to go back and revisit an outdated NDA.
Next, we will talk about what happens if we need to enforce an expired NDA and the challenges we may face.
Closing Thoughts on Non-Disclosure Agreement Lifespans
Best Practices for Managing and Monitoring NDA Lifespans
As we have seen, the expiration of non-disclosure agreements is generally unique to the individual circumstances involved. But this is certainly not to say that businesses or individuals should not implement measures to ensure proper handling of their non-disclosure agreements. This is especially true when a business’ success hinges on its proprietary information and trade secrets. There are several steps that can be taken in order to ensure that both parties remain protected in the event of a non-disclosure agreement’s expiration, regardless of the particular circumstances involved.
First, businesses may consider implementing a regular schedule for the review of their non-disclosure agreements before their respective expirations take effect. This can help avoid any unnecessary costs or delays when handling pre-expiration negotiations between the business and its opposing party. It also ensures well in advance, that there will be sufficient lead time to draft any necessary amendments to the agreement that may be necessary. Typically, such lead times can be a minimum of 90 or 120 days before the expiration date. Additionally, when such a policy is coupled with a regular review of the business’ stockpiles of proprietary information, these measures can help ensure that the business does not conduct any business involving their proprietary information that is not covered under the terms of the agreement . When there is a risk that the agreement is going to expire and the business has not yet decided how they want to proceed, owners can make sure that their team is well aware of the terms of the agreement and follows them to the letter. Even so, there could still be the very real potential for missteps. If a business inadvertently exposes its proprietary information or trade secrets once a non-disclosure agreement has expired or otherwise terminated, then it can be extremely difficult for the business to prove that the information at issue is proprietary or confidential in nature when dealing with a court of law. In those cases, all documentation of the business’ attempts at enforcing the terms of the agreement and monitoring covered activity will become extremely valuable.
Last but not least, parties who wish to further enhance their protection in the event of a non-disclosure agreement’s expiration may consider working with trusted legal counsel experienced in the drafting and management of non-disclosure agreements. Such legal representatives can often offer both advice and representation regarding any related matters a business or an individual may have. Regardless of whichever strategy is used in the management of non-disclosure agreements, it should always be clear and unconfusing for both parties involved.