ditor's Note: Adam Atlas, a practicing attorney from Montreal, Canada, is a member of both the New York and Quebec bar associations. His legal work is primarily focused on U.S. agreements, and a majority of his clients are U.S. businesses in the payment- processing field. Adam recently has begun specializing in electronic transaction law.

Question: Should I bother to read a Non-Disclosure Agreement?

Answer:

Yes, and closely.

I was inspired to write on this topic while acting for a medium-size Midwestern ISO that was asked by a large East Coast bank to sign an NDA that was heavily one-sided in favor of the bank.

The purpose of a Non-Disclosure Agreement or a Confidentiality Agreement (either of which can be referred to as an NDA) is usually to protect both parties to a business negotiation from the loss of rights or control over confidential or proprietary information disclosed during the course of the negotiations.

Parties are often in a rush to sign NDAs in order to get business negotiations moving as quickly as possible. Most larger businesses, such as banks and processors, have their own standard form of NDA.

Medium-size and even small businesses should consider having on file their own standard form of NDA that is ready for use in case of an unexpected business negotiation.

The following are some key considerations to keep in mind when reading an NDA:

1. Should I Sign an NDA?

   If in doubt, yes. Whenever you enter into business negotiations with a new party and there is any risk at all of you disclosing sensitive, proprietary or confidential business information, it is advisable to first sign an NDA. Your attorney is very likely able to provide you with a standard generic form of an NDA that you can use whenever you begin negotiations with the new party.

   This is not a complicated document and you should not expect your attorney to spend many hours preparing it for you. If the negotiations you are entering into are particularly important, such as the negotiation of your main supplier or customer agreements, then some additional attention is warranted by your attorney.

2. Bilateral vs Unilateral

   A bilateral, or reciprocal, NDA provides protection for information disclosed by either party. A unilateral NDA provides protection for only one of the two parties to the agreement.

   For example, suppose an ISO was interested in starting to work with the new processor. A bilateral NDA between these two parties would prevent either party from disclosing to third parties information received from the other.

   If, however, the NDA was unilateral in favor of the processor, then information disclosed by the processor would have to be kept confidential by the ISO, but information concerning the ISO disclosed to the processor, such as pricing and portfolio size, would not have to be kept confidential.

   Unless you are certain that your side to the negotiations will not disclose any information at all, then it is always advisable to have a bilateral NDA rather than a unilateral NDA. It is also standard business practice for an NDA to be bilateral.

3. Definition of Confidential Information

   Perhaps the most important clause in an NDA is the definition of Confidential Information. If you are the party to the business negotiations that is likely to be disclosing sensitive information, such as pricing, customer lists or other financial information, then it is in your interest that the definition of Confidential Information be as broad as possible. You even may ask for the definition to include "any information disclosed to the other party."

   If the definition is narrower and includes only "financial information," for example, and you disclose sensitive information other than financial information to the other side, that disclosure will not be protected.

   Large businesses often feel comfortable having narrow definitions of Confidential Information because they have in place very strict information-governance systems and rules. Large businesses, therefore, do not expect to disclose information that they were not specifically planning to disclose. Take into consideration your own information-governance rules and policing and consider whether you are able to rely on them or whether you should protect yourself by having a broad definition of Confidential Information in your next NDA.

4. Negotiable

   Parties often believe that an NDA is a non-negotiable document; this is not true. Drafting and negotiating an NDA should never take more than a few days, at most, and usually takes only a few hours. If there are major difficulties in negotiating the terms of an NDA, you may take this as a sign of things to come when negotiating the more important business terms of the deal. Negotiating the NDA is actually a good way to get to know the parties on the other side.

5. Non-Binding as to Deal

   When an NDA is being put in place as the first step in a business negotiation, it is advisable to have language in the NDA to the effect that neither party is making any commitment to the underlying business deal. Be careful that the NDA remains only a document to protect the Confidential Information of the parties; it is not advisable to intertwine it with other business terms such as those that normally would be found in a letter of intent or memorandum of understanding.

6. Title

   An NDA should expressly state that it shall not cause any title to pass from one party to the other in any Confidential Information. You want to avoid inadvertently giving away rights in your Confidential Information.

7. Use and Disclosure

   An NDA should prevent the recipient of Confidential Information from both (1) disclosing that information to any third party and (2) using that information for any purpose other than evaluating the business transaction being negotiated.

8. Term

   Most NDAs remain in effect for a limited time, usually between one and five years. Consider how long your Confidential Information should remain confidential and be sure the agreement protects you accordingly.

9. Rights on Termination

   It is standard that upon the termination of an NDA, both of the parties undertake to destroy or return to the other all Confidential Information received.

10. Other Terms

    Depending on the circumstances, other terms specific to the situation may be included in an NDA. Make sure that an NDA that you sign is suitable for your needs.

Whatever the circumstances of your signing an NDA, pay close attention to what rights the other party may have in any information that you may disclose to them.

Remember, the processing business is highly competitive and when sensitive pricing or customer information is inadequately protected, businesses occasionally incur significant losses. An NDA is no less important to your business than antivirus software. Govern yourself accordingly.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law. E-mail: atlas@adamatlas.com. Phone: 514-842-0886.