Demystifying Legalese in Contracts, Part III: Non-Disclosure Provisions

Posted by: Stacy Perman on August 28, 2009

This is a post by guest blogger Jonathan I. Ezor.

jonathan_ezor.jpgThe first blog in this series discussed how while some words do have legal weight, agreements should still be written in clear, understandable language in order to do what they’re meant to. The second blog in this series examined warranties.

One of the biggest mysteries of any business relationship is the non-disclosure provision, aka the confidentiality clause, mostly because people aren’t sure what it means, and what it requires them to do (and not do). Here’s the first, mission-critical concept: whatever the contract says, a non-disclosure agreement or provision cannot prevent your company’s information from leaking out, but only prohibit unauthorized disclosures. Just like the old saying, a secret shared is no longer a secret. If a piece of information is that potentially damaging to your company, whether in the hands of your business partner or the outside world, do not disclose it. You should also explore other legal protections both for the secret and your right to keep others from exploiting it, like patents.

That said, non-disclosure agreements and provisions are and should be part of most contractual relationships, whether as standalone documents or as provisions of broader agreements, because they set a tone of trust (and provide remedies if that trust is broken). They also help business partners talk, communicate and brainstorm more freely, since they’re not worried about watching everything they are saying. Not every industry uses them (venture capitalists, for example, rarely sign them, and attorneys and physicians are already covered by legal obligations to keep information confidential), but for those that do, they can be a helpful addition to the “toolbox,” provided they are written in clear and understandable language.


Again, let’s look at the sample Web development agreement to demystify a typical, two-way non-disclosure provision:

During the term of this Agreement, each party hereto (the “Disclosing Party”) may disclose to the other party (“Recipient”) information in connection with the performance of this Agreement, and Recipient may otherwise discover information about the Disclosing Party in connection with this Agreement. All such information about the Disclosing Party, including but not limited to technical and business information relating to the Disclosing Party’s products, research and development, production, costs, engineering processes, profit or margin information, finances, customers, marketing, and future business plans, shall be deemed “Confidential Information.” All Confidential Information shall remain the sole property of Disclosing Party and Recipient shall have no rights to or in the Confidential Information. Recipient shall hold the Confidential Information in strict confidence. Recipient shall not make any disclosure of the Confidential Information (including methods or concepts utilized in the Confidential Information) to anyone without the express written consent of Disclosing Party, except to employees, consultants or agents to whom disclosure is necessary to the performance of this Agreement and who shall be bound by the terms hereof, or to the extent it is required to disclose such information in the context of any administrative or judicial proceeding, provided that prior written notice of such disclosure and an opportunity to oppose or limit disclosure is given to Disclosing Party.

Notwithstanding the foregoing, Recipient shall have no obligation under this Agreement with respect to any Confidential Information disclosed to it which:

(a) Recipient can demonstrate was already known to it at the time of its receipt hereunder;

(b) is or becomes generally available to the public other than by means of Recipient’s breach of its obligations under this Agreement;

(c) is independently obtained from a third party whose disclosure violates no duty of confidentiality; or

(d) is independently developed by or on behalf of Recipient without use of or reliance on any Confidential

Information furnished to it under this Agreement.

As with previous blogs, it's helpful to break this long provision into pieces.

During the term of this Agreement, each party hereto (the “Disclosing Party”) may disclose to the other party (“Recipient”) information in connection with the performance of this Agreement, and Recipient may otherwise discover information about the Disclosing Party in connection with this Agreement.

This means that the secrecy requirements will cover both information that one party means to tell the other, as well as information the other party just learns in connection with the business relationship in the contract (such as during a visit to the first party's offices).


All such information about the Disclosing Party, including but not limited to technical and business information relating to the Disclosing Party’s products, research and development, production, costs, engineering processes, profit or margin information, finances, customers, marketing, and future business plans, shall be deemed “Confidential Information.” All Confidential Information shall remain the sole property of Disclosing Party and Recipient shall have no rights to or in the Confidential Information. Recipient shall hold the Confidential Information in strict confidence.

This is key: all information is deemed confidential, not just that with a big red CONFIDENTIAL label. If you want to limit the obligations to just those things that are labeled, you need to say so in the contract. Of course, that also means that, if the provision is reciprocal, both parties have to label their disclosures (and figure out what to do with spoken information) for them to be protected. The above language makes it easier to just treat everything as confidential (unless it falls under an exception, like those below).


Recipient shall not make any disclosure of the Confidential Information (including methods or concepts utilized in the Confidential Information) to anyone without the express written consent of Disclosing Party, except to employees, consultants or agents to whom disclosure is necessary to the performance of this Agreement and who shall be bound by the terms hereof, or to the extent it is required to disclose such information in the context of any administrative or judicial proceeding, provided that prior written notice of such disclosure and an opportunity to oppose or limit disclosure is given to Disclosing Party.


This means that the obligation covers not only employees but anyone else to whom a party tells the others' secrets when "necessary to the performance of the Agreement." Note that it also says that those outsiders "shall be bound by the terms hereof." That could mean that they must sign or otherwise be covered by this specific agreement, rather than just a general overall non-disclosure agreement. The provision also allows for situations where one party may disclose the other party's information in court or another proceeding (with prior notice to the other party and a chance to object), which avoids being caught between a legal reporting obligation or sworn oath and this contract.


Now come the exceptions: what isn't covered by this obligation? Notwithstanding the foregoing, Recipient shall have no obligation under this Agreement with respect to any Confidential Information disclosed to it which:

(a) Recipient can demonstrate was already known to it at the time of its receipt hereunder;

If Company A already had certain information before Company B provided it to Company A, this NDA wouldn't retroactively cover that information.

(b) is or becomes generally available to the public other than by means of Recipient’s breach of its obligations under this Agreement;

Once it's out, it's no longer secret, unless it gets out because the other party allowed it to get out.

(c) is independently obtained from a third party whose disclosure violates no duty of confidentiality; or

If Company C tells Company A the same information as did Company B, and didn't break an NDA with B to tell it, that information is not covered by A's agreement with B.

(d) is independently developed by or on behalf of Recipient without use of or reliance on any Confidential Information furnished to it under this Agreement.

This one makes sense, given that two different companies (even partners) can independently come up with the same or similar ideas. The problem, though, is proof, especially once information sharing has begun. It can be difficult for Company A to prove that its researchers did not talk to the team working with Company B before making their "new" discovery.

Final thought: whenever you are presented with a non-disclosure agreement, remember to read it carefully. If it's meant to protect your information, examine issues like whether you must label information to have it covered. Watch out as well for "residual clauses" that carve out any information that the other party remembers without documenting it; employees can have very good memories. Some NDAs are one-way, meaning that only one party's information is protected. If you are presented with one, consider whether you will be revealing information as well, and if so, ask for a mutual non-disclosure provision instead. Finally, consider when the obligation ends; if the clause is part of the contract, its
obligations end when the contract does, unless something in writing makes those obligations survive termination of the agreement or last for a particular length of time, and also consider what you must do at the end of the obligation (return or destroy the information, etc.)

Jonathan I. Ezor is the director of the Touro Law Center Institute for Business, Law and Technology, and an assistant professor of law and technology. He also serves as special counsel to The Lustigman Firm, a marketing and advertising law firm based in Manhattan. A technology attorney for more than 15 years, Ezor has represented advertising agencies, software developers, banks, retailers, and Internet service providers, and has been in-house counsel to an online retailer, an Internet-based document printing firm, and a multinational Web and software development company.

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