Non-Disclosure Agreement (NDA) – A Complete Business Guide

“Where there’s a hit, there’s a writ”. This popular industry maxim refers to the fact that as soon as a singer has made a reasonable amount of money, someone out there will launch a lawsuit claiming unpaid royalties, copyright infringement, bootlegging and the like.

Artists and tech creatives take an enormous chance when they get their idea or concept out in the open to the public. This is because it is often impossible for creatives to launch their work without the help of a commercial entity such as a production company, publisher, or developer. And by reaching out for commercial support, they risk having their ideas stolen.

Copyright law may offer some protection; however, it can be notoriously difficult to protect an idea that isn’t fully developed. This was highlighted in the case of Wade and another v British Sky Broadcasting Ltd [2016] EWCA Civ 1214, [2016] All ER (D) 22 (Dec). The claimants had created an idea for a musical talent competition for singer/songwriters being judged by professional peers, with the aim of promoting new and unique talent. They pitched the format to a commissioning editor at Sky TV using a PowerPoint presentation, which was retained by the editor. The editor was positive about the proposal and raised their hopes. An original part of the format was that electronic versions of the songs performed on the show would be available for download and could hit the charts. About six months later, Sky commissioned an independent production company to create a similar programme. The claimants believed the new show was a clear copy of their format and sued for breach of confidence.

In a decision which was upheld by the Court of Appeal, the judge at first instance found that although there were similarities between the shows, Sky had not misused the claimants’ confidential information. Sufficient differences between the show existed to demonstrate it had not been a flagrant copy of the claimants’ idea. Sky was also able to put together a convincing argument as to how it came to develop a programme in such a short space of time after hearing the claimant’s pitch.

Now, think of this case what you will – many would consider it a little too convenient that the network was able to send a fully developed concept to production in 26 weeks. The fact is that proving a breach of confidence in tort is a tough challenge and cases will always turn on their facts.

The situation might have turned out differently if the claimants had instead been able to rely on a confidentiality/non-disclosure agreement (NDA).

Being presented with a non-disclosure agreement (NDA) can sometimes feel like having a prenuptial agreement put in front of you. Most people don’t like the idea that a person they are doing business with (or planning to marry for that matter) does not trust them to do the right thing. However, like prenuptial agreements, NDAs are a fact of modern life, and in many cases, business owners have made millions by ensuring their confidential information is protected; Colonel Sanders (of KFC fame) being one of the best-known examples.

NDAs can be confusing for the disclosing party and the receiving party. The more complex the information, the greater the detail that needs to be included.

An NDA is a legally enforceable contract. One party to the NDA will agree to disclose confidential information to the other party, who in turn, agrees not to divulge the information to anyone else.

NDA templates are available to purchase online, however, as some recent cases have illustrated, NDAs which contain ambiguous clauses can end up costing the disclosing party both time and money to obtain a court ruling to determine whether what was disclosed was technically ‘confidential’. Therefore, it is worth investing in professional legal advice when drafting an NDA, especially if the breadth of confidential information is complex and disclosure could result in considerable financial loss.

A robust NDA should consist of the following clauses:

• The full names of the parties to the agreement and their addresses.
• What is defined as ‘confidential’. This is the clause that has the greatest potential to cause a dispute, therefore it is imperative to spell out exactly what the confidential information consists of. Often creating a list that describes elements of the confidential information in reasonable detail helps avoid ambiguity.
• Under what circumstances is the confidential information allowed to be used for a ‘permitted purpose’. One of the most common reasons for NDAs to be used is when a company is being sold. A potential buyer will want to see a great deal of confidential information such as company figures, employee details, and descriptions of stock and trade secrets. The permitted purpose of the confidential information would, therefore, be to conduct due diligence on the company for the purpose of buying the business.
• What the recipient of the information can and cannot do with the information. This clause should include who in the company can have access to the information and whether it is to be returned or destroyed after it has been used for its permitted purpose.
• The length of the NDA. In most cases, NDAs cease to be valid after the confidential information is made public. It is possible to impose a time limit, commonly three to five years. However, in some cases, the NDA can last forever, e.g. in the case of the recipe for Coca-Cola or KFC’s 11 secret herbs and spices (although the latter may have been revealed to the public recently).

The law can still provide protection if confidential information is disclosed. It must have been made clear to the recipient of the information that the knowledge they received was not to be divulged and the owner of the information must have suffered damage as a result of the unauthorised disclosure.

The advantage of a formal NDA is:

• the NDA will provide written proof of what is considered confidential information, the permitted purpose, and how the information can be used
• NDAs are contracts; therefore, if breached, the provider of the information may have an action for damages and an injunction under contract law
• other clauses such as non-competition and non-solicitation clauses can be added into the NDA to provide further protection

On 9 June 2018, the Trade Secrets (Enforcement, etc) Regulations 2018, (the Trade Secrets Regulations) came into force; this implements the Trade Secrets Directive (2016/244/EU) (the Directive).

The Directive was designed to harmonise existing trade secrets law across the EU, thereby minimising the cost associated with enforcement. It provides a minimum standard in the form of remedies and provides policies for protecting trade secrets during civil litigation.

Because trade secrets already enjoyed significant protection under common law, the Trade Secrets Regulations simply codify existing rules and plug any gaps.

Regulation 2 of the Trade Secrets Regulations introduced a new definition of ‘trade secret’, as follows:

“”trade secret” means information which meets all of the following requirements:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question

(b) has commercial value because it is secret; and

(c) has been subject of reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret”

The main provisions of the new regulations are:

• the current law on confidential information will run in parallel with the rights granted under the Directive – meaning the remedies such as an injunction or an order to account for the profits someone has made as a result of a breach, will be available for those bringing a claim for disclosure of trade secrets under the Trade Secrets Regulations
• there is a six-year limitation period for bringing a claim under the Trade Secrets Regulations
• a separate provision covers the assessment of damages

The new Directive is not designed to override existing IP or contract law. But where there is a conflict between it and the Intellectual Property Enforcement Directive (2004/48/EC), the Trade Secrets Directive will prevail.

A further related concept is ‘know how’ which, like confidential information, does not have a statutory definition in UK law. Article 1 of Regulation (EU) 316/2014 – the Technology Transfer Block Exemption Regulation, states:

“Know-how” means a package of practical information, resulting from experience and testing, which is:

(i) a secret not generally known or easily accessible,

(ii) substantial, significant and useful to produce the contract products, and

(iii) identified, described in a sufficiently comprehensive manner to make it possible to verify that it fulfils the criteria of secrecy and substantiality”.

There is a clear overlap of what constitutes confidential information, trade secrets, and ‘know how’, so it is important to clarify what is meant by a breach of confidence.

A breach of confidence occurs where, once it has been determined there is a duty of confidence, the receiver of the information makes a prohibited disclosure or uses the confidential information in an unauthorised way.

In the case of Vestergaard Frandsen A/S & Ors v Bestnet Europe Ltd & Ors [2013] UKSC 31, the Supreme Court looked at the scope of a duty of confidence. Lord Neuberger restated the principle that the key factor in a breach of confidence action is whether the conscience of the recipient is affected:

“The classic case of breach of confidence involves the claimant’s confidential information, such as a trade secret, being used inconsistently with its confidential nature by a defendant, who received it in circumstances where she had agreed, or ought to have appreciated, that it was confidential… Thus, in order for the conscience of the recipient to be affected, she must have agreed, or must know, that the information is confidential.”

Therefore, unless the defendant is aware of the information relating to the alleged breach is confidential, a breach of confidence cannot be said to have occurred.

Article 4(3) of the Trade Secrets Directive codifies the definition of the breach of trade secrets as:

“The use or disclosure of a trade secret shall be considered unlawful whenever carried out, without the consent of the trade secret holder, by a person who is found to meet any of the following conditions:

(a) having acquired the trade secret unlawfully

(b) being in breach of a confidentiality agreement or any other duty not to disclose the trade secret

(c) being in breach of a contractual or any other duty to limit the use of the trade secret.”

A third-party (i.e. a person other than the recipient of the information) may be liable for breach of confidential information if the claimant can prove the third-party knew the recipient of the information was misusing it.

Confidentiality agreements are no cure-all.

The downside of an NDA is that you need to have a budget to enforce it. Let’s imagine you are an unknown entity presenting a script to a large movie production company. Even if you convince them to sign your NDA, would you realistically have the financial clout required to take the organisations to court if you believe they misused the information you give them? And what about the risks to your future career? In the technology world, ask a venture capitalist to sign an NDA, and you risk being labelled an amateur or ‘difficult’. From the investor’s perspective, they may feel like will not be shown anything substantive, and yet are being asked to enter into a binding agreement.

So how do you overcome these challenges? By seeking experienced legal advice.

For example, a prudent approach for an entrepreneur is to pitch the idea to investors in multiple stages. This way, you can provide a high-level overview of your business concept without giving away too much confidential information. Once you have the investor’s confidence, you can present them with an NDA before providing further details.

A good commercial law solicitor is a business person first, and a lawyer second. They will advise you on when and how to use/create a confidentiality agreement, so not only is your idea protected, but so is your credibility and reputation.

Your solicitor will also understand the nuances of a confidentiality agreement and ensure yours is constructed in the following way to ensure its professionalism and credibility:

• It will only include truly commercially sensitive information. Some NDA drafters get over-excited about what is actually confidential in the real world. Your solicitor should work with you to isolate information that belongs in the agreement. For example, if you’re approaching another organisation to enter into a joint venture to develop an app, information such as the research you have undertaken, business plans, the development details of the app and financial forecasts may require greater protection than say details about the marketing of the product or details of subcontractors.
• Some information may be better protected by intellectual property rights. For example, a new play may be copyrighted, or a product patented. Although the details of a patent will be made public (if indeed patenting is possible), it will provide greater long-term protection for your invention. In addition, investing in a patent or trademark gives you an asset which can be used to attract investment.
• Where the information is contained in a database or an artistic work, it is common for the owner to ‘seed’ it, using unique grammar, spelling, or even putting in deliberate mistakes so they can prove a deliberate copy of the material has been made. When Ben Affleck and Matt Damon were seeking a producer for their script ‘Good Will Hunting’, they included a scene where two of the male characters engage in a sexual act. This was never meant to be part of the film and was inserted in a totally random place. This achieved two things, 1) if a producer mentioned the scene, the writers knew he or she had actually bothered to read the script, and 2) it would alert them to an incident of someone reading and rejecting the script, then taking their idea. Good Will Hunting went on to win an Academy Award for Best Original Screenplay.
• For employers, it is vital to ensure that even where confidentiality agreements are in place, there is training and communication around the keeping of trade secrets ‘secret’ in the first place. Strict disciplinary policies should be put in place, so employees know the consequences of breaching a confidentiality clause in their employment contract.
• Start-ups need to invest in adequate protection of their confidential information, allowing it to be accessed on a ‘need to know’ basis only. Any databases should be encrypted, and security put in place so employees and third-parties can only access the information they need – the rest is locked down. Appropriate encryption should be used to protect information that is inadvertently lost or stolen. Many of the most serious losses of confidential information have arisen because relevant data was not properly encrypted.

The law must maintain a balance between protecting confidential information and allowing for fair competition. For example, employees should have the freedom to capitalise on the skills they have learned throughout their employment, without which, free enterprise would collapse. But equally, a creative and/or entrepreneur must feel confident that they have protection available at law preventing an individual from stealing what amounts to years of hard work in the space of a meeting or two.

NDAs are not always necessary; sometimes marking information ‘confidential’ or using secure data rooms to exchange information will provide enough protection. However, in situations where the release of confidential information could greatly compromise your professional credibility, reputation or cause you financial loss, a confidentiality agreement is essential.

If you have any questions regarding points that have been mentioned in this article, please call us on 020 3588 3500.