Defining a Mutual Disclosure Agreement
Mutual Disclosure Agreements (MDAs) are recognized as legally binding contracts that are specifically designed to protect sensitive information that is shared by the parties. The purpose of an MDA is to allow each party to receive the confidential information belonging to the other, without the risk of its misuse or unauthorized disclosure to third parties, and to give legal recourse if such happens.
An MDA is a contract between the parties disclosing information and the parties receiving the information which clearly and precisely sets out the extent of confidentiality that will be applied to information disclosed by either parties. What this means is that when one party discloses information, the other party is legally bound by the MDA to keep it confidential . Under an MDA, the agreement is binding on the disclosing party and the receiving party and only those persons who have signed the agreement. The MDA, however, does not bind third parties unless that third party is an heir of either party to the MDA, or unless that third party is an agent or a company that is connected to either or both parties (or unless the MDA was made with or for that third party).
The MDA acts as a safeguard for confidential information that is disclosed by either party to another party. The class of confidential information is defined in the MDA so that only information that is clearly within the ambit of the definition will be protected.
Key Components in a Mutual Disclosure Agreement
At the center of any mutual disclosure agreement are details that explicitly state what information is deemed confidential, how it will be used, and whether it will be shared with other parties. So, in order to ensure mutual trust and understanding between all parties involved, an MDA must contain certain provisions. Here are some key provisions that can help properly draft a mutual disclosure agreement:
Confidential Information
This is typically the first section of any mutual disclosure agreement. This part details which information is considered confidential and qualifies for protection under the agreement. The following elements can be utilized to define confidential information: The agreement also needs to state whether the confidential information, once disclosed, is protected by Federal law. Section 37 of the Securities Act of 1933 Amendment states that generally, confidential information is protected from disclosure to any third party, including government agencies. Based on numerous cases, courts have consistently interpreted information that is in the public domain as non-confidential, regardless of whether the information was previously disclosed to the receiving party under a nondisclosure agreement.
Term of Agreement
The duration of the mutual disclosure agreement is the next provision. Generally, the confidentiality obligations last for a fixed time period, however, the term needs to be reasonable and can span years if necessary. The term starts the day the defined confidential information is disclosed to the receiving party and can last up to five years or the term defined in the mutual disclosure agreement. Often, the duty to protect the confidentiality of the information continues indefinitely, including after the agreement is terminated. However, the duty to continue to protect the existence of the proprietary information only lasts as long as it is commercially valuable information. (Crimi v. Glen Oaks Escrow, Inc., 616 So.2d 645,650 (Ala. 1993)) In order to terminate the agreement, the disclosed confidential information must have been publicly known prior to disclosure or through actions by the receiving party.
Use of Confidential Information
This provision requires that the disclosing party provides the receiving party with a written consent and approval before the receiving party can utilize the information for any purpose, other than to evaluate the information.
No License Granted
A Mutual Disclosure Agreement shall not grant either the disclosing party, or the receiving party, any rights to the other party’s intellectual property, unless expressly stated in the agreement.
Return or Destruction of Information
The following provision states that the receiving party shall return or destroy the received confidential information at the request of the disclosing party. If the information is destroyed, then the derogating party must provide evidence of the same.
No Assignments of Rights
This provision bars any assignments of rights, claims, or interests to the receiving party or any third party, without the prior written consent of the disclosing party.
State Laws and Governing Law
Most mutual disclosure agreements contain default provisions such as the aforementioned.
Amendment
This provision should state that either party can amend the agreement, provided that it gets written consent from the other party and both parties put the amendments in writing.
Ownership Rights
Ownership right provision oftentimes gives the disclosing party ownership rights over all the information that it provides to the other party.
Exclusions
Non-public information that was known to the receiving party prior to the disclosure, or generally available to the public would be excluded from the confidentiality obligations.
Entire Agreement
This provision states that the MDA contains the entire understanding between the parties with respect to the subject matter of the agreement.
Advantages of a Mutual Disclosure Agreement
For individuals sharing potentially proprietary or confidential information with companies, the benefits of having a Mutual Disclosure Agreement are quite significant. The first and most obvious benefit is that as long as the individual keeps his or her part of the bargain, any information he or she shares should be protected under the Agreement. Thus, the Agreement helps to ensure that the delineation between the proprietary information of the owner and the confidential or proprietary information of the company will not become blurred, at least so long as the information shared actually applies to the subject matter of the Agreement. Secondly, the Agreement should provide that the information the individual receives from the company is used only for the purposes of the Agreement, thus helping to ensure that it will not be otherwise disseminated to or used by persons who have not agreed to keep it confidential. Furthermore, the Agreement should also help make clear that any patents or inventions that the individual may have developed using the confidential information that the individual received from the company are not owned by the individual, but rather by the company. In addition to the foregoing benefits of a Mutual Disclosure Agreement, there may be other benefits as well to particular individuals and companies depending upon their circumstances.
With regard to businesses receiving potentially proprietary or confidential information, the benefits of a Mutual Disclosure Agreement may be equally great. First and foremost, the Agreement should help a company to ensure that the shared information remains confidential. Thus, if information is acquired during the course of discussions between a business and an individual, the Agreement provides a certain level of assurance that the information acquired will not be disseminated beyond its designated purposes (or beyond those designated for those individuals that are permitted access to the information). However, the Agreement is not without its limitations. For example, it may not prevent members of a board of directors or other individuals or groups within a company that currently do not have access to the information from gaining such access without entering into a separate agreement. Notwithstanding such potential limitations, the Agreement should provide the company with a reasonable amount of comfort and assurance as to how the company’s confidential information will be treated by the individual(s) to whom it is disclosed. Moreover, the Agreement should also provide the company with some assurance that the individual(s) will not proceed to independently develop technology similar to that which was disclosed to them, much less that the technology which originated from the company which was disclosed to them during the period of their entering into a Mutual Disclosure Agreement. Thus, as a general matter, the Agreement should prove to be beneficial to the company in several respects, including the following:
When is a Mutual Disclosure Agreement Needed?
Mutual Disclosure Agreements are useful in a variety of situations such as when the parties are engaged in a strategic alliance, joint venture, or exploring opportunities for funding, licensing, acquisition, or joint ownership of technology. However, it is not always necessary to enter into a Mutual Disclosure Agreement. For example, if a required disclosure is, or can be treated as, public knowledge, it often does not need to be protected via NDA. Another example is where the material is less sensitive to one party than another. In this case, it is logical and efficient to have only the party with more to lose enter into a Mutual Disclosure Agreement. In a venture capital investment, for instance, the investor will submit its due diligence documents containing some confidential information, and the target company should enter into a Mutual Disclosure Agreement to protect this information from public disclosure.
How to Create a Mutual Disclosure Agreement
When drafting a mutual disclosure agreement, it’s important to keep in mind what matters to the client. The following guidelines are suggested:
- The definition of confidential information should capture the categories of information that the client is willing to provide. In most cases, this will include information about products that will be under development.
- The confidentiality period should be six years for most transactions. Longer periods are likely to be negotiated. The confidentiality period typically should not extend beyond the life of any patent directed to the disclosed information.
- The agreement should not allow public disclosure of the information after the parties’ NDA has terminated. Elimination of the non-perpetual nature of the NDA has been debated. In most cases, though , the NDA should be non-perpetual.
- Review the standard exemptions from the definition of confidential information carefully. Non-perpetual includes information that 1) is already known to the receiving party or is in the public domain; 2) becomes known to the receiving party through no fault of its own; 3) is disclosed by a third party that had the right to disclose it; and 4) is disclosed to the receiving party by the disclosing party. The fourth exemption presents the biggest problem because it allows the recipient to disclose confidential information to the public simply by providing it to a colleague who is not authorized to receive it.
- Be wary of exceptions for prior rights to know that are included in some mutual NDAs. Prior rights to know should be addressed in the context of the background rights of each party and not as an exception.
- The mutual NDA must include severity appropriately for the parties. Liquidated damages are no longer a viable approach. The NDA should only have a couple of days’ notice provision prior to lawsuit. Permanent injunctive relief should be included. A forum selection provision can be useful to help address issues related to non-perpetual rights to know. It is likely best to avoid the appointment of a receiver. The receiving party should be required to return confidential information at the conclusion of the transaction.
Legal Aspects of a Mutual Disclosure Agreement
A Mutual Disclosure Agreement (MDA) can be a powerful tool in protecting intellectual property (IP). However, the MDA still does not eliminate all of the risks associated with disclosing nondisclosable information. A patent may still be invalidated or unenforceable due to an inadvertent betrayal of the disclosure obligation. Furthermore, the nonbreaching party still runs the risk of an unenforceable agreement for a variety of reasons, which will be discussed below.
Some jurisdictions hold that an MDA is unenforceable because the nondisclosure/nonuse consideration is illusory or because the agreement is not supported by consideration. The argument is that the nondisclosure/nonuse promise is illusory because the nondisclosure/ nonuse promise will almost always be broken and thus nothing will ever be exchanged in return. See, e.g., Fortress Credit Corp. v. US Bank Nat. Ass’n, 2015 WL 5761540, at *3 (Del. Ch. Sept. 30, 2015). Some courts have expressly rejected that argument, concluding that there is sufficient actual consideration for the nondisclosure/nonuse promise. See, e.g., IDT Corp. v. Fox Television Holdings, Inc., 2009 WL 1124457, at *21 (Del. Ch. Apr. 27, 2009). Other courts have rejected that argument in the context of a covenant not to compete. Ghitterman v. Aon Consult., Inc., 2000 WL 1819554, at *7-8 (Del. Ch. Oct, 30, 2000).
Another argument supporting the unenforceability of the nondisclosure/nonuse promise is that the information to which it applies is publicly known. See, e.g., Daimler, Chrysler Ins. Co. v. Datex Ohmeda Inc., 2008 WL 818226, at *7 (D.N.J. Mar. 27, 2008). A related argument is that the nondisclosure/nonuse promise is not supported by mutual consideration because the agreement applies only to information that is already in the public domain and neither party is promising anything they did not already have a legal right to do.
One potential argument against the enforceability of the nondisclosure/nonuse promise is that it is an unenforceable restraint on trade. Under the common law, noncompete agreements must be reasonable as to time, geographic area, and scope of activity. The same standard applies to nondisclosure/nonuse promises that are characterized as being part of a noncompete agreement. See, e.g., Milton H. Greene Archives, Inc. v. Marvin Korn & Assocs., Inc., 243 A.D.2d 227, 229, 673 N.Y.S.2d 438, 439 (N.Y. App. Div. 1998) (applying the rule to "nonuse/non-competition provisions").
Another possible reason a MDA may be unenforceable is that a court may refuse to grant an injunction because the legal and factual issues presented in the litigation cannot be resolved without further discovery. See, e.g., In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1058 (9th Cir. 2008). This normally happens when the parties dispute the existence of an NDA, the information subject to the NDA, and/or the propriety of the nondisclosure/nonuse clause.
Mutual Disclosure Agreement vs. Non-Disclosure Agreement
Although a Mutual Disclosure Agreement ("MDA") has many of the same protections as a stand-alone Non-Disclosure Agreement ("NDA"), they are not the same thing. An MDA arises in the context of discussing a relationship between parties, each of whom wants to evaluate the other’s businesses. Each party must disclose confidential information to the other in order to conduct their analysis and each considers the information confidential that is shared with the other. The MDA then allows for the parties to have a thorough discussion , recognizing that each may seek to disclose their confidential information without fear that the other will do something improper with it.
An NDA does not contemplate a business relationship. An NDA is a mutual decision to share confidential information. An NDA is usually entered into after one of the parties already has a business relationship or is in the process of forming a relationship with the other. One party wants the assurance of confidentiality from the other. The NDA can be stand-alone or part of an MDA or a hybrid of the two.
A hybrid agreement is entered into by parties who want to develop or continue a business relationship. The hybrid agreement allows for the exchange of confidential information between the parties, which is protected. At the same time, the hybrid agreement allows for unrestricted exchange of other confidential information between the parties, that is shared under obligations of confidentiality that are not governed by the hybrid agreement. A hybrid agreement may be the best option when the parties have multiple layers of relationships and want a "one stop" document that covers all of them.