Non-Disclosure Agreements and their practical limitations

Limits of Reliance on Non-Disclosure Agreements

Businesses will, from time to time, desire to disclose confidential information. This typically arises when an acquisition or disposition is being contemplated, although it can also arise as part of other types of contractual arrangements such as the manufacturing arrangements requiring the disclosure of proprietary information.

When such situations arise the parties should definitely enter into a Non-Disclosure Agreement often referred to as an "NDA"; however care should be taken not to place too much reliance upon an NDA.

First, the NDA typically includes the following exclusions from confidential information being protected: (i) entered the public domain without receiving party's breach of any obligation owed disclosing party; or (ii) became known to Receiving Party prior to disclosing Party's disclosure of such information to receiving party; or (iii) became known to receiving party from a source other than disclosing party other than by the breach of an obligation of confidentiality owed to disclosing party, or (iv) was independently developed by receiving party without reference to confidential information and such independent development is adequately documented.

The receiving party may attempt to apply one or more of these exemptions from the NDA to make use of the confidential information.

Second, courts have failed to enforce an NDA when the receiving party demonstrated that the disclosing party had not adequately protected the confidentiality of the information to qualify as a trade secret. See n Closures, Inc. v. Block & Co. v. Block and Co., Inc., Case Nos. 13-3906 & 14-1097 (7th Cir. December 22, 2014)(Seventh Circuit applying Illinois law). For the full opinion, please click here.

Third, it can be very difficult to prove that the receiving party disclosed the information to a third party.

Lastly, while an NDA will typically provide for injunctive relief (i.e. a court order preventing future disclosure), a company seeking monetary compensation for the disclosure will have to establish economic damages (i.e. money lost). That, as a practical matter, is difficult.

The bottom line is if you are disclosing confidential information, you should get an NDA, but be careful what is disclosed. Critical information should either not be disclosed, or the disclosure should be carefully limited so as to make copying and transmission practically impossible.

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