What is a NCND Agreement?
Non-Circumvention, Non-Disclosure (NCND) agreements are tools commonly used in the United States and abroad which can be a vital element of any business transaction. An NCND is generally utilized by parties when the parties intend to engage in negotiations and/or discussions concerning a possible transaction (or where a party anticipates sending certain confidential information to another party for the purpose of evaluating such a possible transaction), is for the purpose of preventing the other party from disclosing confidential or proprietary information, or from utilizing confidential or proprietary information for a competing purpose (typically without compensating the source of the information) . Non-Circumvention, Non-Disclosure agreements are often used in a wide variety of transactions, including: mergers and acquisitions, real estate sales and purchases, joint ventures, strategic alliances, private equity and venture capital financings, license and distribution arrangements, and technology transfers.
Essential Elements of a NCND Agreement
The fundamental elements of NCND agreements include the non-circumvention provision, which typically prohibits the disclosure of each party’s identity to a third party, and a confidentiality or non-disclosure clause. Certain NCND agreements may even contain exclusive dealing clauses, commission clauses, and non-solicitation clauses. Depending on the nature of any assets sought by either party, the NCND can be tailored to include exclusivity with other specific provision(s) that might apply to any one or more of the parties, including restrictions concerning investment in competitors. It is common in this kind of agreement for the party seeking the prospective transaction to furnish certain information to the other party or parties. In general, this requirement for disclosure obligates a disclosing party to furnish only essential and preliminary information about its outline of the transaction. However, it is not unusual for either party to give additional information, whether or not it is requested by another party. A NCND conventionally includes that it cease to be binding after a certain period of time, generally six months to one year.
The Advantages of Using a NCND Agreement
Both the disclosing party and the receiving party stand to benefit from the execution of an NCND Agreement. For the disclosing party, it can serve several purposes. First, it opens a door to a prospective relationship without having to provide confidential information. Sometimes it is more beneficial to hammer out a deal first, talking about terms together, before providing further details revealing the inner workings of a business. An NCND Agreement serves as temporary door that will only remain open long enough to determine if it is worth proceeding.
Another purpose for the disclosing party is that, when pursuing one or several opportunities at the same time, it can be beneficial to preclude the opportunity from being offered and accepted elsewhere. This allows the disclosing party to dominate the stage, in advance, without worry of having the curtain brought down early by a competitor.
For the receiving party, an NCND Agreement allows it to determine whether pursuing the opportunity makes sense for its business without forcing it to provide its own confidential information. As well, while an NCND Agreement needs not identify what information is considered confidential, an NCND Agreement is also helpful to a potential buyer who is concerned that full disclosure of the sellers’ confidential information will "leak out" into a competing market. An NCND Agreement provides an initial level of security that confidentiality will be protected.
Last, an NCND Agreement will often provide both parties with better comfort in discussing creative terms, to create a complete agreement.
When a NCND Agreement is Appropriate
A NCND would be appropriate in many instances, including:
— During negotiations for a merger or acquisition , as NCND agreements allow parties to talk with each other without worry of their private information being released to the public.
— When selling a business or making reasonable due diligence inquiries regarding a prospective acquisition; NCNDs are particularly useful for protecting proprietary and confidential business information such as client names or customer lists.
— When an employer wishes to discuss job openings with a prospective employee prior to the job offer being extended. NCND agreements protect the employer against disclosure by the new employee of his/her prior employer’s trade secrets.
— When a licensor or franchisor wishes to provide proprietary information before entering into a license or franchise agreement.
— When a developer plans to discuss trade secrets with a potential investor or investor group.
Legal Implications in NCND Agreements
The legal enforceability of an NCND is a hotly debated topic and one that can vary significantly across jurisdictions. In many common law jurisdictions, the courts have routinely agreed that an NCND is not legally enforceable, relying instead on the axiom that parties must look after their own interests when entering into agreements with one another. In particular, given that an NCND is based upon the waiver or mutual non-reliance of the parties, the courts have historically adopted a very independent stance marrying the doctrine of privity with that of freedom to contract. Having said that, this does not mean that an NCND cannot be enforced if the need arises. Indeed, several provisions within an NCND remain legally enforceable and, depending on jurisdiction, some provisions will be virtually effortless to enforce. For instance, the parties will be held to any confidentiality obligations that they may have entered into and will also be precluded from making misrepresentations (undoable for ‘innocent’ misrepresentations). Products that have been collated for the purposes of the information exchange will be protected under intellectual property laws and be subject to other potential remedies such as injunctive relief. Otherwise, the mere lack of enforceability may not preclude reporting requirements (if applicable) imposed by multilateral regulatory guidelines.
Tips for Creating a Robust NCND Agreement
When drafting an NCND agreement, it is critically important that the agreement not be overly broad. The concern is that if the agreement is found to be overly broad, the entire agreement could be beaned and hold no legal weight, even the provisions that would otherwise withstand scrutiny. In most states, courts will only ignore an entire agreement if the unreasonably broad provision is not "severable from the rest of the contract." Penalty Kick Mgmt., Ltd. v. Watson, 300 F. Supp. 3d 943, 951 (N.D. Ill. 2018). Even if the overly broad term is separable, the provision eliminating that term could be ignored too if it is found as also being overly broad . Id.
The best practice is to define the specific information you are trying to protect, and only include the protections you need to protect your information. Striking this perfect balance between strict protection of your proprietary information and overly restrictive terms can be a tricky endeavor. The goal should be to strike the right balance that protects your business without hindering it.
As such, the best practice in this instance is to speak to an experienced business lawyer to help draft a mutually agreeable contract that balances your interests with the other party.
