Here are some other provisions that you can add to your agreement. These provisions are not essential but we recommend including at least some of them if you have sufficient bargaining power. They can give you additional rights and create additional obligations on the other party.
An injunction is a court order directing a person to do (or stop doing) something. If someone violated your NDA, you would want a court order directing that person to stop using your secrets. To get an injunction, you must demonstrate to the court that you have suffered or will suffer irreparable harm as a result of the unauthorized use of your secrets. Irreparable harm is harm that can't be compensated for later by money.
Proving that in court is expensive and time-consuming. In order to cut through some of that legal work, some nondisclosure agreements include a provision similar to the one below. In it, the receiving party agrees that the harm caused by a breach is irreparable, so you will have less to prove if and when you seek a court order. This provision only makes it easier to obtain an injunction; by itself, it will not compel a judge to order an injunction. In other words, don't expect that a judge will automatically stop the disclosure simply because this provision is in your agreement. To get an injunction, you will always need to demonstrate that you are likely to prevail in your dispute. That said, this clause provides some tactical advantages and it's a good idea to include it.
EXAMPLE: Injunctive Relief
Receiving Party acknowledges that any misappropriation of any of the Confidential Information in violation of this Agreement may cause Disclosing Party irreparable harm, the amount of which may be difficult to ascertain, and therefore agrees that the Disclosing Party shall have the right to apply to a court of competent jurisdiction for an order enjoining any such further misappropriation and for such other relief as the Disclosing Party deems appropriate. This right of Disclosing Party is to be in addition to the remedies otherwise available to Disclosing Party.
Some NDAs require the receiving party to pay for all damages (lost profits, attorney fees or other expenses) incurred by the other party as a result of the receiving party's breach of the nondisclosure agreement. This obligation is known as indemnification. Leaving out the indemnity provision does not prevent you from suing and collecting damages for a breach (contract law holds the receiving party responsible for a breach), but the clause makes it easier to claim damages. To include indemnity in your nondisclosure agreement, add the following language at the end of the obligations section:
Receiving Party agrees to indemnify the Disclosing Party against any and all losses, damages, claims or expenses incurred or suffered by the Disclosing Party as a result of the Receiving Party's breach of this Agreement.
What if the other party breaches the NDA, and you are forced to sue? The rate for business lawyers is $200 to $400 an hour. The filing and initial stages of a lawsuit cost $5,000 to $50,000 and can quickly escalate to more than $100,000, depending on the length of the suit and the subject matter. The amount you pay lawyers could quickly overshadow any amount you might win.
In the United States (unlike many other countries), the loser of a lawsuit is not required to pay the winner's attorney fees. In other words, each party has to pay its own lawyer, regardless of the outcome of the suit. There are two exceptions to this rule:
1) a court may award fees if a specific law permits it; and
2) a court must award attorney fees if a contract provides for it.
If you don't include an attorney fees clause in your agreement, a judge may (in most states) order the award of attorney fees in cases where the theft of the trade secret was willful and malicious. It's up to the judge, which makes things unpredictable. You are far better off using an attorney fees provision like the one below. Because lawyers are so expensive, having an attorney fee provision-that is, having each side afraid it will get stuck paying someone's attorney fees-can prove crucial to ending a dispute.
However, don't be surprised if the other party is opposed to the idea. Why? Because it is the receiving party that is usually sued, not vice-versa, and the receiving party may believe that the provision will encourage you to sue.
EXAMPLE: Attorney Fees and Expenses
In a dispute arising out of or related to this Agreement, the prevailing party shall have the right to collect from the other party its reasonable attorney fees and costs and necessary expenditures.
This attorney fees provision is mutual-that is, whoever wins the lawsuit is awarded attorney fees. This is fair, and encourages the quick resolution of lawsuits. We discourage a provision that allows only one party to receive attorney fees. No matter which side they favor, such provisions create an uneven playing field for resolving disputes. One state (California) recognizes this unfairness and automatically converts a one-way attorney fees contract provision into a mutual one.
Arbitration and mediation are referred to as alternative dispute resolution (ADR) procedures because they offer ways to end squabbles without litigation. These ADR procedures have become popular over the last decade because they avoid the court system and can save time and money. However, taking a dispute out of the court system may not always be the right decision, because you may be bound by a decision from which there is no means of appeal. Below we discuss both options and offer examples of appropriate contract provisions.
Arbitration is like going to court with less formality and expense. Instead of filing a lawsuit, the parties hire one or more arbitrators to evaluate the dispute and make a determination. The arbitration process can be relatively simple; usually arbitration involves some document preparation and a hearing. A lawyer is not required to arbitrate, but many parties use attorneys for help in presenting the strongest legal arguments.
The arbitrator's determination may be advisory (in which case either party can disregard it and file a lawsuit) or it may be binding. A binding decision can be enforced by a court and cannot be overturned unless something especially unfair happened-for example, the arbitrator ruled against you and you later learn that the arbitrator owned stock in your opponent's company.
In order to arbitrate a dispute, both parties must consent. Unfortunately, when you are in the midst of a dispute, it's hard to get the parties to agree to anything. So, the best method of guaranteeing arbitration is to include an arbitration provision in your nondisclosure agreement.
Arbitration is not, however, always preferable to litigation. Even though ADR is quicker than going through a trial, it may take several weeks to initiate ADR proceedings. By going to court, however, a business may obtain a temporary court order restraining disclosure (TRO) in less time than it takes to initiate arbitration. This initial period of the dispute can be crucial when you're concerned about the loss of secrecy. For this reason, you need to weigh the potential cost of litigation versus the speed of obtaining relief. For a small company with limited resources, arbitration is usually the preferable route.
Many businesses are opposed to arbitration for other reasons as well. They may have recently lost an arbitration proceeding and refuse to participate in another one. They may be fearful that the dispute will be placed in the hands of an inappropriate arbitrator or they may prefer the litigation process in order to intimidate the other party. In addition, some arbitrations can be expensive and end up being appealed in the court system.
Many associations and companies offer private arbitration: the most well-known organization is the American Arbitration Association (AAA). If your dispute relates to patents as well as trade secrets, the AAA has special Patent Arbitration Rules and a national panel of patent arbitrators. The AAA has offices in every state and can provide mediators and arbitrators in most areas. If you would like to check the availability of AAA arbitrators or mediators in your area before using one of these clauses, visit www.adr.org.
If you would like to use arbitration, we suggest the following provision. The statement at the end of the provision ("An award of arbitration may be confirmed in a court of competent jurisdiction") means that the winner can convert the arbitration into a court judgment. That way, a court can order the loser to pay damages or abide by the decision.
In the next section we provide a mediation clause that offers arbitration as a back-up option, to be used if mediation fails.
If a dispute arises under or relating to this Agreement, the parties agree to submit the dispute to binding arbitration in the state of ___ [insert state in which parties agree to arbitrate] or another location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall be in writing and shall provide an explanation for all conclusions of law and fact and shall include the assessment of costs, expenses and reasonable attorney fees. Any such arbitration shall be conducted by an arbitrator experienced in ___[insert industry experience required for arbitrator] and ____ [insert area of law that is at the subject of your dispute, for example, licensing law] law and shall include a written record of the arbitration hearing. The parties reserve the right to object to any individual who is employed by or affiliated with a competing organization or entity. An award of arbitration may be confirmed in a court of competent jurisdiction.
In mediation, a neutral evaluator (the mediator) attempts to help the parties reach a resolution of their dispute. Both sides sit down with the mediator and tell their stories. The mediator advises ways to resolve the dispute, and the two parties try to agree. If they do, they sign an enforceable settlement agreement. Because it is not binding and because it is less expensive than litigation or arbitration, some businesses prefer mediation, at least as a first step. You can locate a mediator through the American Arbitration Association (www.adr.org) or local bar associations.
Mediation is the most inexpensive and peaceable method of solving problems. You can arrive at a settlement rather than being told how to resolve the dispute by an arbitrator or judge. It's less likely to exacerbate bad feelings between the parties, as lawsuits inevitably do.
By itself, however, mediation is often not enough because it doesn't force the parties to end the dispute. If you cannot resolve the dispute with mediation, you must find some binding method of ending the battle, either arbitration or litigation. Sometimes one party chooses mediation simply to buy more time. Keep in mind, as we mentioned in the preceding section, that time is generally of the essence in disputes over the disclosure of information.
If you want to use a mediation clause, we suggest a provision like the one below, which progresses from informal meeting to mediation and then to arbitration.
EXAMPLE: Mediation & Arbitration
The parties agree that any dispute or difference between them arising under this Agreement shall be settled first by a meeting of the parties attempting to confer and resolve the dispute in a good faith manner.
If the parties cannot resolve their dispute after conferring, any party may require the other to submit the matter to non-binding mediation, utilizing the services of an impartial professional mediator approved by both parties.
If the parties cannot come to an agreement following mediation, they will submit the matter to binding arbitration at a location mutually agreeable to the parties. The arbitration shall be conducted on a confidential basis under the Commercial Arbitration Rules of the American Arbitration Association. Any decision or award as a result of any such arbitration proceeding shall include the assessment of costs, expenses and reasonable attorney fees and shall include a written record of the proceedings and a written determination of the arbitrators. Absent an agreement to the contrary, any such arbitration shall be conducted by an arbitrator experienced in intellectual property law. The parties may object to any individual who is employed by or affiliated with a competing organization or entity. In the event of any such dispute or difference, either party may give to the other notice requiring that the matter be settled by arbitration. An award of arbitration shall be final and binding on the parties and may be confirmed in a court of competent jurisdiction.
Every state has laws regarding contract interpretation and trade secrecy. You can choose any state's laws to govern the agreement, regardless of where you live or where the agreement is signed. Most businesses favor the state where their headquarters are located.
Does it matter which state you choose? Some states have a reputation of being favorable for certain kinds of disputes. For example, California's state and federal courts have resolved many high-tech disputes; as a body of law has developed, judges' decisions have become more predictable. Generally, however, the differences in state law are not great enough to make this a major negotiating issue.
EXAMPLE: Governing Law
This Agreement shall be governed in accordance with the laws of the State of .
Jurisdiction (sometimes referred to as personal jurisdiction) is the power of a court to bind you by its decision. If a court doesn't have this authority over you, any judgment it issues isn't worth anything. A court can get jurisdiction over you in three ways: (1) you are a resident of the state in which the court is located; (2) you have sufficient contacts in the state, such as selling considerable merchandise there; or (3)you consent to jurisdiction.
The purpose of adding a jurisdiction provision to an NDA is to get each party to consent in advance to jurisdiction in one county or state and to give up the right to sue or be sued anywhere else. Consider the couple who opened a Burger King franchise in Florida. In their agreement with Burger King, they consented to jurisdiction in Michigan. Later, when problems arose, the couple argued that it wasn't fair to have to travel to Michigan and that they had not understood this provision. The courts upheld the jurisdiction clause and the couple was forced to fight Burger King in a Michigan court.
This may seem like a trivial issue at the time you are negotiating an agreement, but it will be a major issue if there is ever a dispute. In fact, the prospect of hiring lawyers and traveling to another state is often enough to dissuade companies from pursuing a lawsuit. We recommend the following strategies:
If you have sufficient bargaining power, obtain jurisdiction in your home county.
If you cannot obtain jurisdiction in your home county, don't say anything about jurisdiction. If there is no reference to jurisdiction, the location of the case is usually determined by whoever files the lawsuit.
If you do include a jurisdiction clause it may be helpful to choose the same state you chose for governing law, as discussed above. It's simpler and more efficient for a court to apply the familiar laws of its own state.
The parties consent to the exclusive jurisdiction and venue of the federal and state courts located in ____ [insert county and state in which parties agree to litigate] in any action arising out of or relating to this Agreement. The parties waive any other jurisdiction to which either party might be entitled by domicile or otherwise.
In some states, jurisdiction clauses are invalid. Idaho, Montana and Alabama refuse to honor jurisdiction provisions in contracts. In those states, if you use a jurisdiction provision, it will be invalid. The states' reasoning? They think jurisdiction should be determined by law, not by people shopping around for the most convenient or advantageous forum.
It's possible that either may be succeeded by someone else. For example, a sole proprietor's heirs may inherit the business. In that case you would make want to sure that the heirs were bound by the same nondisclosure requirements.
In other cases, a party may assign its rights to another company. For example, the business you sign an NDA with may be acquired by another company-maybe even a competitor of yours. So, if you have the bargaining power, prohibit any assignment of your contract unless you give written consent. But understand that in today's world of acquisitions and mergers, many companies want the freedom to assign agreements and oppose a complete prohibition on assignments.
EXAMPLE: Successors & Assigns
This Agreement shall bind each party's heirs, successors and assigns. Disclosing Party may assign this Agreement to any party at any time. Receiving Party shall not assign any of its rights or obligations under this Agreement without Company's prior written consent. Any assignment or transfer in violation of this section shall be void.
If the other party is concerned that this language gives you too much control, you can soften the effect by agreeing to withhold consent only if you have a valid business reason. What's a valid reason? Perhaps the potential assignee has a poor reputation for maintaining trade secrets, or maybe it is in poor financial shape. You cannot, however, withhold consent for an arbitrary reason, such as that someone from the company once treated you rudely.
EXAMPLE: Assignability-Consent Not Unreasonably Withheld
This Agreement shall bind each party's heirs, successors and assigns. Receiving Party may not assign or transfer its rights or obligations pursuant to this Agreement without the prior written consent of Disclosing Party. Such consent shall not be unreasonably withheld. Any assignment or transfer in violation of this section shall be void.
If you don't have much bargaining power and the other party wants freedom to transfer to affiliates or new owners, you can use a provision such as the one below.
EXAMPLE: Assignability-Consent Not Needed for Affiliates Or New Owners
This Agreement shall bind each party's heirs, successors and assigns. Receiving Party may not assign or transfer its rights or obligations pursuant to this Agreement without the prior written consent of Disclosing Party. However, no consent is required for an assignment or transfer that occurs: (a) to an entity in which Receiving Party owns more than fifty percent of the assets; or (b) as part of a transfer of all or substantially all of the assets of Receiving Party to any party. Any assignment or transfer in violation of this Section shall be void.
When you are disclosing information to a company and you are concerned about dissemination within the company you have two choices. You can have everyone who will have access to your trade secrets sign your nondisclosure agreement or you can have an executive or officer of the company sign it and include a requirement that all of the company's employees and contractors who are exposed to the trade secrets be bound by similar agreements.
If each person exposed to the information signs your agreement, you can sue each person individually in the event of a breach. This option is better suited for small entities such as sole proprietorships or a partnership-business forms in which each signatory can be individually liable. The second option is better for larger businesses that operate as corporations or LLCs and are usually only liable as a corporate entity. You can sue only the company for breaking its promise not to disclose; you cannot sue the individual who disclosed the information. It is the one used in the sample agreement with this language.
"Receiving Party shall carefully restrict access to Confidential Information to employees, contractors and third parties as is reasonably required and shall require those persons to sign nondisclosure restrictions at least as protective as those in this Agreement."
Under the Defend Trade Secrets Act, employers are now required to include a
Notice of Immunity provision. "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." (The notice should also be included in agreements for independent contractors as well.) An employer who fails to include the provision is prohibited from recovering exemplary (double) damages and attorney fees from the employee or IC. The failure to include the provision does not prevent filing in federal court under the DTSA.
Under the Defend Trade Secrets Act, employers are now required to include a Notice of Immunity provision. "in any contract or agreement with an employee that governs the use of a trade secret or other confidential information." (The notice should also be included in agreements for independent contractors as well.) An employer who fails to include the provision is prohibited from recovering exemplary (double) damages and attorney fees from the employee or IC. The failure to include the provision does not prevent filing in federal court under the DTSA.
EXAMPLE: Notice of Immunity Provision
Notice of Immunity from Liability. An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (i) files any document containing the trade secret under seal; and (ii) does not disclose the trade secret, except pursuant to court order.
Instead of creating an NDA from scratch, you may wish to include nondisclosure requirements in a form agreement that you use regularly in your business. An entire nondisclosure agreement can be compressed into one provision, which you can insert in any agreement under which trade secrets will be disclosed. For example, you can insert the provision below into a license, option or service contract.
However, if you are adding confidentiality provisions to an agreement for an employee or independent contractor you should also consider adding the Notice of Immunity (above).
EXAMPLE: Confidentiality Provision
(a) Confidential Information. The parties acknowledge that each may receive or have access to confidential information (the "Confidential Information"). For purposes of this Agreement, "Confidential Information" shall include all information or material that has or could have commercial value or other utility in the business in which the party part disclosing the information ("Disclosing Party") is engaged. In the event that Confidential Information is in written form, Disclosing Party shall label or stamp the materials with the word "Confidential" or some similar warning. In the event that Confidential Information is transmitted orally, the Disclosing Party shall promptly provide a writing indicating that such oral communication constituted Confidential Information.
(b) Exclusions from Confidential Information. The party receiving the Confidential Information ("Receiving Party) shall not be obligated to preserve the confidentiality of any information that is: (a) publicly known at the time of disclosure under this Agreement or subsequently becomes publicly known through no fault of Receiving Party; (b) discovered or created by Receiving Party prior to the time of disclosure by Disclosing Party; or (c) otherwise learned by Receiving Party through legitimate means other than from Disclosing Party or anyone connected with Disclosing Party.
(c) Obligations of Receiving Party. Receiving Party shall hold and maintain the Confidential Information of the other party in strictest confidence for the sole and exclusive benefit of Disclosing Party. Receiving Party shall carefully restrict access to any such Confidential Information to persons bound by this Agreement, only on a need-to-know basis. Receiving Party shall not, without prior written approval of Disclosing Party, use for Receiving Party's own benefit, publish, copy, or otherwise disclose to others, or permit the use by others for their benefit or to the detriment of Disclosing Party, any of the Confidential Information. The Receiving Party shall return to Disclosing Party any and all records, notes, and other written, printed, or tangible materials in its possession pertaining to the Confidential Information immediately on the written request of Disclosing Party.
(d) Time Period. This Agreement and Receiving Party's duty to hold Disclosing Party's Confidential Information in confidence shall remain in effect until [include year].
(e) Survival. The nondisclosure provisions of this Agreement shall survive the termination of any relationship between Disclosing Party and Receiving Party.
You can modify this provision to define trade secrets specifically and you can make the time period unlimited