IN YEARS PAST, most funders had unique forms of nondisclosure agreements (NDAs). Funders would find themselves negotiating before a business relationship even started and the routine process of getting NDAs signed became more difficult. A decade or so ago, the industry moved to some very common provisions and NDA forms. Recently, a number of challenging provisions have resurfaced. This article identifies a few of the more material issues and suggests solutions. The goal is to efficiently conclude NDA negotiations so the parties can move on to the important thing, doing business together.
NDA Terms. Most funders take confidentiality very seriously and develop processes to protect confidential information. Understandably, funders want to limit NDA terms rather than having indefinite obligations. Truth be told, much confidential information grows stale over time. This is especially true for certain financial data (but would not be true for a company’s secret sauce recipe). Therefore, lengthy terms are often not needed. However, in some instances a 1-year term may be insufficient. Finding the balance is an art, but 2- or 3-year terms are commonly used. If certain information has particular sensitivity, a separate timeframe should be considered.
Scope. When determining the scope of confidentiality, most funders prefer a limited scope of information to be exchanged (and therefore protected under the NDA), namely, only the most salient information. This would typically include financials, relevant data and other business analyses that would be most relevant to begin discussions. Many NDAs, however, have become incredibly inclusive and contemplate trade secrets, patent applications, manufacturing technology, etc. For funders, information with such a broad scope is not only irrelevant, but also burdensome to keep confidential. A practical solution is to narrow the scope to only information reasonably needed to begin discussions. Later, if needed, the scope can always be amended.
Destruction of Information. At the end of the NDA term, it is commonplace to have the parties destroy or return confidential information to the counterparty. In this digital age, however, it is practically impossible to destroy all copies of information, especially copies backed up in the ordinary course of business, whether in a cloud or hard drive. Companies are not only protective about information, but also wary of losing it. Perhaps due to an abundance of caution, files are duplicated on a regular basis to ensure that no important information is lost. A practical middle ground is to maintain the confidentiality of any data automatically backed-up on IT servers in the ordinary course. Such information would remain subject to the NDA for so long as such information is retained.
Trade Secrets. Companies view trade secrets as sacrosanct and want them always protected. However, indefinite periods are problematic for funders. One solution is to simply carve out trade secrets from the information to be disclosed. The NDA term would thus not be an issue. Another option is to require that all confidential information be marked as “confidential.” The parties can then monitor that trade secrets are not actually exchanged. A third option is to use a separate term for trade secrets (e.g., a 2-year term generally, but with a longer term for trade secrets). The funder can then build operational processes around protecting this limited bucket of information.
Specific Performance. Another sensitive topic involves injunctive relief. An injunction is a court order requiring an individual/entity to do or not do some action. A typical provision provides that any threatened NDA violation may cause irreparable injury to the other party, entitling such party to seek an injunction in addition to legal remedies. Some parties seek to change “may” to “shall.” This confuses the underlying rationale for an injunction. It is a discretionary remedy used in very limited cases to change or maintain the status quo to prevent irreparable harm. The court weighs whether the harm is irreparable and can be later compensated with damages. This is very fact-specific and focuses on the foregoing balance. Requesting a party to agree up front that a threatened violation categorically will cause irreparable injury is putting the cart before the horse. This is a tough one to resolve because there is not much middle ground between “may” and “shall.” However, if both parties are openly communicating, the above rationale may be sufficient to allow the parties to be comfortable retaining the “may” language. Suffice it to say, this one word is not merely legal wordsmithing.
Non-solicitation of Employees. Non-solicitation clauses have found their way into NDAs, even though non-solicitation has little to do with the actual disclosure of information. Similar to the unauthorized disclosure of confidential information, the solicitation of employees by a counterparty is problematic to say the least. When an opportunity arises at the start of a new business relationship, one party may be tempted to reach out to a counterparty’s employee to secure a specific (and sometimes tough-to-find skillset). Hence, the wish to include a non-solicitation clause is understandable, despite its somewhat awkward inclusion in the NDA. A practical solution is to leave the provision in, but to include carve-outs that allow employers to hire without jeopardizing the business relationship. Carve-outs can include, for example, job postings made public and directed at a large audience and third-party firms retained for the purposes of a general search.
The goal is to efficiently conclude NDA negotiations so the parties can move on to the important thing, doing business together.
Binding on Employees/Agents versus Personal Liability. Typically, NDAs (i) restrict access to confidential information to a party’s authorized persons (employees, directors, officers, representatives, and agents) and (ii) require that the receiving party remains liable for any breach by its authorized persons. The authorized persons are informed of the confidentiality of the information and are directed to comply. The disclosing party is expressly protected for breaches by the receiving party’s authorized persons. Therefore, requests to make authorized persons personally liable for breaches, or even that authorized persons sign individual NDAs (even without personal liability), are not needed and, frankly, unreasonable. Strong and clear NDAs are critical for negotiations and information sharing. However, requiring that employees put their own personal assets at risk should be completely out of bounds in virtually every scenario.
Disclosure to Governmental Agencies. For funders, and especially banks, another hot topic involves granting access to governmental agencies. Financial institutions are heavily regulated. Regulators want to maintain a level of control and perhaps even an element of surprise prior to an audit. A common carve-out is to allow the receiving party to grant access to confidential information to regulators given that the disclosure is regulatory-based and not something initiated by the receiving party. If the other party objects, one solution is to include terms which indicate generality and nothing specifically directed at a party’s confidential information. For example, terms such as “in the ordinary course” and “not specifically directed” would imply that audits apply to a broad portfolio, without singling out any one party. Single, or direct, demands for a party’s information, by contrast, might trigger a requirement from the other party to provide notice to the disclosing party and an opportunity for the disclosing party to respond to governmental demands for information. Of course, any such notice to the disclosing party should be conditioned by “to the extent permitted by applicable law.” Anyone subject to regulatory review knows that government agencies typically do not give much notice and want immediate access to the files they deem necessary.
In conclusion, NDAs are critical in the equipment leasing industry. However, no client wants to hear that a new opportunity was lost due to lawyers haggling over the NDA. NDAs raise legitimate concerns to both sides. By keeping an open dialogue, there is no reason why the parties cannot come to terms with the NDA in a mutually beneficial manner and move on to getting deals done.
