Five Common Mistakes When Sharing Your Confidential Information and How to Avoid Them

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When starting discussions or negotiations with potential customers or suppliers, companies may share some of their own confidential information to see if there is a basis for a future cooperation. In these situations, you may want to move ahead fast in light of a promising business opportunity. But even though no agreement has been signed yet, it is important to take precautions to protect your confidential information – and to be thorough when doing so.

The following aspects are often overlooked and can lead to detrimental consequences in the long term.

Thinking you do not need a Non-Disclosure Agreement (NDA)

Sometimes parties think that they do not need an NDA. They might not even consider that the information they are sharing requires to be kept confidential. But any information that a company owns can be commercially sensitive. This is especially true for any information relating to products, methods, or techniques that a company developed. Even the fact that a company is having negotiations about a certain type of project or with a certain customer or client can be sensitive information. Not protecting this information from being published can result in loss of profit or competitive disadvantages. A competitor might benefit from knowing your confidential information and reproduce products or techniques that you have developed or use the information to undercut your pricing. A supplier or client might not agree to details of your business relationship being published and terminate a contract with you or sue for damages.

While the law can imply an obligation of confidence, this is only the case if special requirements are met. You will first need to prove that your information has the “necessary quality of confidence”. The information must not be public knowledge and be somewhat secret. Often disputes arise about information that might not be public knowledge itself, but can be collated from what is in the public domain. The information must have also been shared in circumstances in which an obligation of confidentiality arises. If the parties did not expressly agree on this in an NDA, there might be doubt about whether one party needs to keep the other’s information confidential. So while the law does provide some protection, this is a risky and expensive approach and not one we would recommend.

It is therefore vital to sign an NDA before starting discussions or negotiations with potential customers, suppliers, or others, to avoid any future detriments.

Not having the right kind of NDA in place

There are different kinds of NDAs that cover different situations. One-way NDAs are used, when only one party will reveal its confidential information. Mutual NDAs are used when both parties will reveal their confidential information. It can be problematic if the parties have concluded a one-way NDA, but then both parties end up sharing confidential information. This might even happen indirectly. In this case, only the confidential information of one party is protected. The party that originally did not intend to share any information will be in the same situation, as if no NDA had been in place at all when it comes to protecting its information. It is therefore important to choose the right type of NDA for your specific situation.

Limiting the impact of the NDA

It is important that the NDA covers all information that you might share with someone else. A common mistake is to define confidential information too narrowly in an NDA. Often, NDAs only cover information that is labelled as confidential. This will limit the impact of the NDA. You will risk that any information not covered by the NDA could be revealed to others without your consent. In case you accidentally forget to mark information as confidential before sharing it, the receiving party might assume that it is not obliged to keep this information confidential. It is better to define confidential information broadly, and to cover both information that is labelled as confidential and information which others ought reasonably treat as confidential.

Not tailoring the NDA to your situation

It is important to tailor an NDA to your situation. You should define a specific purpose for which you disclose your confidential information. This limits to what extent the other party can use your confidential information.

Some companies define this purpose very broadly. They want the NDA to cover any discussions they might have with another party. This can be useful because you will not have to sign multiple NDAs if you wish to discuss lots of different business opportunities with the same party. The downside of having a broad purpose is that the use of your confidential information might be harder to control. If you have several discussions that concern different potential agreements or business opportunities, you will risk getting the exchange of information mixed up. Often parties do not share confidential information separately for each individual discussion, but rather grouped together. Then confidential information that was disclosed in relation to one discussion might also be used for a different discussion. The parties might not have wanted such an extensive use of their confidential information when they initially shared it.

Defining the purpose of an NDA more specifically is arguably better. You will be able to control the use of your confidential information better. The only downside is that you will need a separate NDA for each separate topic of discussion.

Hence, consider for what specific purpose you want the other party to use your confidential information before you sign an NDA.

Overstretching the scope of your NDA

While some NDAs are not specific enough, others will cover situations that go well beyond the role of an NDA. The function of an NDA is only to cover discussions or negotiations between parties about potential collaborations. If either party is doing any work or evaluating the other party’s technology or product, then this exceeds the scope of an NDA. An NDA is not the main agreement itself. Important clauses that would be necessary in a main agreement are either missing or kept short, such as clauses relating to liability, termination, intellectual property rights, or dispute resolution. Therefore, you should make sure to only use an NDA for what it was intended and sign a main agreement at a later stage.

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These are just five examples of common mistakes that companies make when sharing their valuable confidential information. There are more aspects that you will need to consider, for example if the confidential information should be shared with employees. The protection of your confidential information does not end here. An NDA will help give you certainty in the event of contract negotiations and discussions. But this is only the first step that you will need to take. You will also need to make sure that any following main agreement protects your confidential information and any other intellectual property rights you might have in this regard.

You should get professional advice on what type and scope of NDA is necessary for your or your company’s specific circumstances. Published information can spread like wildfire among competitors. We can help prevent those fires from starting. We can tailor an NDA to your needs and help you when it comes to the main agreement itself. And it does not have to be an expensive exercise. We are happy to provide a free 20 minute strategy discussion to discuss your concerns, so we can propose how we could help highlight the risks you may face, based on your specific circumstances and/or industry sector.

If you would like to learn more about how you can protect your business with NDAs, please get in touch with a member of our IPDC team.

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