Limitations of Non-Disclosure Agreements

Non-Disclosure PhotoI recently read an article entitled “The scope and limitations of Non-Disclosure Agreements”.  The article explained that a non-disclosure agreement is an agreement in which a party receiving information (Receiving Party) agrees to take reasonable precautions to protect from disclosure information received from a party disclosing information (Disclosing Party).   The article then went on to list a series of matters that must be addressed in a well drafted non-disclosure agreement, including: identifying the information that is to be protected, identifying that the information is being disclosed in order to permit the Receiving Party to complete a specified task for the Disclosing Party, setting forth rules regarding disclosure to employees and safe storage of the information while the task is being undertaken and  requiring the destruction or return of the information when the Receiving Party has completed the specified task.  The article also touched upon remedies available to the Disclosing Party in the event of a breach of the agreement.  Although the article was well written, in my opinion, the author neglected to touch upon a significant limitation of non-disclosure agreements.   Most non-disclosure agreements contain the following provision: “The Receiving Party shall have no obligation with respect to such information where the information has become publicly known through no wrongful act of the Receiving Party”.   Entrepreneurs carefully go around and have non-disclosure agreements signed by parties who are assisting them by manufacturing and supplying components.   Non-disclosure agreements are also signed by parties who are assisting in the preparation of business plans, creating brand names and logos, setting up websites, and setting up marketing plans.  Finally, non-disclosure agreements are signed by parties being approached for investment capital and by parties being approached to assist in marketing and wholesale distribution.   Then on the day of the launch of the product or service, all of the Receiving Parties who signed non-disclosure agreements are released from their obligations, as the Disclosing Party has publicly released the information and thus that information has become “publicly known through no wrongful act of the Receiving Party”.     Non-disclosure agreements are fine for having preliminary discussions, but  once the Receiving Party is working with you, a further agreement needs to be put in place that prevents the Receiving Party from competing with you while they are working with you and for a period of time (for example 2 years) after they cease working with you.  As a practical matter, one or more of the parties you are relying upon as a member of your team may have better connections and more resources than you do.  Once they are released from their obligations under the non-disclosure agreement by your public disclosure, they may come to the realization that they are in an excellent position to deliver the product or service and they no longer need you.  Of course, they will delay acting until they have the opportunity to gauge the market response to your new product or service.  Get the additional agreements signed.  After you have taken all the risks and proven there is a market for the product or service, there will be imitators.  Make sure the imitators are not parties who you thought were members of your team.