Nondisclosure Agreements (NDAs) are one of the core legal documents that most, if not all, startup companies should have available. NDAs are typically concise in nature and may be assumed to be a simple agreement. However, in our experience, NDAs are quite versatile in nature and should be considered for a number of different use scenarios encountered by a medtech startup. These use scenarios can be classified as “external” or “internal” in nature.
From the external use perspective, NDAs are key contracts that should be considered whenever a medtech startup has any type of discussion or interaction with external companies (e.g., finance companies, vendor, partners, contractors, etc.). NDAs typically mark the beginning of third-party interactions and will often define the behaviors and goals of the parties. Additionally, NDAs are a key tool to establish confidentiality procedures between the parties that are essential for the preservation of trade secrets.
From the internal use perspective, NDAs can help a startup define its own internal framework for exchanging information (both incoming and outgoing). For example, NDAs can define what a startup considers to be confidential/proprietary information and the manner in which that is disclosed to other parties. NDAs can further define how a startup receives confidential/proprietary information and maintains its confidential nature. The definition and subsequent adherence to such procedure may be key in future potential disputes, such as trade secret misappropriation allegations.
A Single NDA Does Not Satisfy All Needs
One key misconception we often encounter is that a single, standard NDA will work sufficiently in all scenarios. In that regard, many companies have adopted standard language or forms for NDAs. Having some type of standardized language for NDAs can provide efficiencies and consistency that has great benefits. However, the nature of interactions between parties can vary sufficiently, requiring changes to “standard” NDAs.
Language that may be preferred for a particular interaction may give rise to challenges or unexpected outcomes for a different interaction. For example, a unilateral exchange of information (e.g., only one party is disclosing information and one party is receiving) allows for highly customized terminology that fits the nature of the one-sided disclosure. Similarly, a bi-lateral exchange of information may often require more general terminology to cover the disclosure activities of both parties, or specific sections for each party. In another example, the nature of information disclosure for a third-party vendor implementing a well-defined task may be more limited than the nature of disclosure for a joint venture partner or investor. A well thought-out and specific NDA will most likely yield best results and avoid potential missteps created by standardized, generic terms.
Who Are the Parties to an NDA?
Generally, only the parties that have some form of obligation under an NDA are required to sign the NDA. Accordingly, one important point early in discussions is to clearly define each party’s proposed obligations under the NDA. Not only will this establish which entities need to be signatories to the NDA, but it will also serve to clearly identify what actions/scenarios need to be addressed in the NDA.
Defining Scope: The Key to an Effective NDA
Each term and clause in an NDA should be carefully reviewed. Depending on the parties involved, the nature of their relationship and anticipated interactions, even some of the most innocuous terms and clauses can have a meaningful impact. However, from our experience, the definition of the scope of the NDA has the greatest impact on most, if not all, of the other terms/clauses.
At first blush, it would seem that an approach to keep the definition of scope very broad would be an effective strategy. However, an overbroad definition of scope can lead to potential disputes between the parties, perhaps unintentionally. For example, disputes can arise regarding IP and technology licenses granted by the disclosing party beyond the technology at issue in an NDA. In another example, disputes can arise as to residuals and feedback rights and obligations of the receiving party, especially if the scope is very broad. Additionally, an overbroad definition of scope can be a lost opportunity to carefully define the subject matter that will be included or excluded in the NDA and for the parties to build appropriate procedures/processes to adhere to such designations.
Challenges in Negotiations: Residual and Feedback Clauses
Residual and feedback clauses, which govern the behavior of parties after they have received information from the other party, are important components to consider including in an NDA. They can also be some of the most challenging to define and negotiate. For example, a residual clause can allow a receiving party to utilize residual knowledge gained from the information exchange and remain compliant with the terms of an NDA. A feedback clause can govern use rights for suggestions or improvements provided by the other party.
The tricky part for residual clauses and feedback clauses is getting the parties to agree to the terms and subsequently building in the processes/workflows to ensure adherence. For example, if a disclosing party agrees that all suggestions or feedback provided to the other party with regard to the other party’s technology will be considered licensed and without any obligation, the disclosing party may have to implement training and controls so that feedback is deliberately and knowingly provided. This avoids the ad-hoc, friendly suggestion (e.g., a hallway suggestion) that may result in disputes regarding additional licensed technology under the NDA by the disclosing party.
Selecting a Term Length
There is no standard or required term for an NDA. At a minimum, the initial term (or associated renewal process) should be sufficient to cover the anticipated timeframe for the parties’ interactions. A shorter term or duration can be beneficial in allowing the parties to revisit key considerations, especially when circumstances can be volatile or rapidly changing. For example, keeping the term to one or two years with a renewal mechanism may provide the parties an opportunity to revisit key terms, such as scope, granted licenses, etc. For relationships or projects that may have a longer duration or in scenarios in which the parties do not wish to have a renewal mechanism, a longer term may be helpful to avoid situations in which interactions unintentionally continue past the term of the NDA. For example, if an NDA accompanies some type of Master Services Agreement (MSA) that may involve numerous projects defined in Statements of Work (SOW), the NDA may need to have an open‑ended term that runs with the last SOW or a term that is sufficiently long enough to cover the anticipated last SOW.
NDAs are contracts that will be interpreted according to the laws of the state in which they are signed. The parties to an NDA can specify which state law will govern the language of the contract. While there is a lot of consistency in the laws of each state, there are some key areas where state regulations and case law can vary significantly. This is especially true for specific language covering exclusions to confidential information. Therefore, care should be given regarding compliance with individual applicable state laws.
I always like to say that the best-case scenario for an NDA is that it is never needs to be enforced. The hidden value of an NDA is the opportunity to clearly establish the accepted behaviors and procedures to be implemented by each party. In that regard, the creation of and compliance with an NDA can bring great value to both parties.