Points to note regarding non-disclosure agreements

There are many situations in which companies should consider concluding a non-disclosure agreement (NDA), such as when various transactions and information sharing therefor at the preparatory stage is planned.

The following describes some basic things that must be kept in mind when preparing and considering an NDA.

1. Scope of confidential information

NDAs usually demarcate the range of information that is subject to confidentiality obligations by (1) defining confidential information (or similar terms), and (2) excluding information that does not require stereotypical confidentiality obligations, such as publicly known information.

• Definitions

The methods of defining are broadly classified according to whether or not the information is limited to that specified by the disclosing party.

Unlimited definitions are advantageous to the disclosing party in that there is no risk of information leakage due to omissions in designation, and limited definitions are advantageous to the receiving party in that the confidentiality obligation is reduced. In a bilateral NDA, it is necessary to compare the amount and importance of the information to be disclosed and the information to be received to determine which is more advantageous.

With regards to unlimited definitions, it may be remarked that the scope of the confidential information becomes unclear, which in turn leads to incomplete management of the confidential information, but since it is possible for the disclosing party or the receiving party in such cases to voluntarily take measures such as attaching labels indicating that the information is confidential, such remarks do not necessarily apply.

In addition, the existence and content of the NDA may be added to the definition.

• Exclusions

The content of the regulations is mostly standardized. From the disclosing party’s standpoint, it is preferable to clearly state that the receiving party has the burden of proof of the applicability of the reasons for exclusion.

2. Obligations of the receiving party

In the NDA, the obligations of the receiving party regarding the confidential information are generally as follows: (1) managing and retaining it as confidential, (2) prohibiting unintended use (if the purpose of disclosure is provided), (3) prohibiting disclosure to third parties, (4) prohibiting copying, duplication and other prohibited acts, and (5) returning it to the disclosing party or disposing of it (at the very least, items (2), (3) and (5) can be said to be mandatory).

• Managing and retaining as confidential

There are examples of specific provisions regarding information management methods and systems, but it is not uncommon that they are limited to abstract provisions such as the due care of a prudent manager.

• Prohibiting unintended use

Prohibiting unintended use is essential to prevent the misappropriation of confidential information. Also, the more limited the purpose, the stronger the protection of confidential information.

For example, if the purpose is stipulated as evaluating and determining the feasibility of future transactions and collaborations between the parties, the receiving party’s use of the confidential information it received from the other party for research and development, manufacturing and the sale of its own product will be prohibited as unintended use.

• Prohibiting disclosure to third parties

Prohibiting disclosure to third parties is indispensable for preventing the leakage of confidential information, and if this is not stipulated, it cannot be said to be an NDA.

In many cases, there are exception clauses, but attention must be paid to the content and wording of those provisions. In other words, it is often stipulated that disclosure to the receiving party’s executives

and employees and some other third parties is possible, but in view of preventing leakage of confidential information, it is important to demarcate the scope of the parties to which it is disclosed to the minimum extent possible, and hold the receiving party responsible for observing the confidentiality obligations.

One particular problem is when the parties to which it is disclosed include the parent company, subsidiary or other affiliated company of the receiving party. Even if terms such as “parent company”, “subsidiary” and “affiliated company” are defined according to the presence or absence of control or the degree of control, considering that the extent may fluctuate due to changes in capital relationships, it is preferable to list the company names in a limited manner to clarify the scope of the parties to which it is disclosed in view of confidentiality.

In addition, permission to disclose confidential information at the request of government agencies and courts is often provided for. Since confidential information does not become publicly known information just because there is a request for disclosure, it is inappropriate to stipulate the aforementioned permission to disclose in the same line as the exclusion in 1 (2) above.

• Prohibited acts

Prohibitions may be placed on the actions of the receiving party that may lead to the leakage of confidential information. For example, in addition to copying and duplicating confidential information, modification, analysis and reverse engineering of confidential information may be considered as prohibited acts.

From the receiving party’s point of view, care must be taken to ensure that the prohibitions are not excessively broad.

• Return and disposal

It is customary to stipulate that confidential information should be returned to the disclosing party or destroyed at the request of the disclosing party or at the end of the term of agreement.

3. Remedies for breach of confidentiality

Remedies for breaches of confidentiality include (1) claims for damages, and (2) injunctions for violations, but in order to ensure that these remedies can be adopted, it

should be stipulated that (1) and (2) are possible, at least when foreign law is the governing law.

However, with regard to claims for damages, it is often difficult to prove the occurrence and amount of the damages and a legally sufficient cause between the breach and damages, and it is highly likely that the relief will not be sufficient, while there is a risk that it will not be a sufficient deterrent against information leakage.

Therefore, from the standpoint of protecting the disclosing party, it is conceivable to specify the schedule for penalties or damages.

4. Intellectual property rights

Confidential information often includes intellectual property rights such as know-how. Therefore, it is sometimes clearly stipulated that the disclosing party does not grant or license intellectual property rights or any other rights by disclosing the confidential information.

Moreover, if the receiving party makes an invention or device based on the confidential information, the attribution may be stipulated (usually it is no problem legally if the confidentiality agreement stipulates that it belongs to the disclosing party).

5. No guarantee / denial of promise

It is sometimes clearly stipulated that the disclosing party does not guarantee to the receiving party the accuracy, merchantability, fitness for a particular purpose, non-infringement of third-party rights or any other guarantee regarding the confidential information, nor does it promise the disclosure of confidential information and initiation of negotiations or transactions.

6. Dispute resolution clause

This stipulates the court having jurisdiction over the agreement for domestic companies, and governing law and arbitration agreements for contracts with foreign companies.

In general, arbitral awards are more reliable and easier to enforce in other countries than trials (it is necessary to be a member to the New York Convention, although most major countries are). In addition, arbitration is suitable for confidentiality because it is fundamentally private, unlike trials.

Accordingly, for contracts with foreign companies, it is generally better to choose arbitration over court trials, at least from the standpoint of the disclosing party.

7. Term

In an NDA, it is common to specify the contract period, although the confidentiality period does not have to match the contract period, and in view of protecting confidentiality, it is often important for the confidentiality obligation to survive for a fixed period or indefinitely even after the contract period ends.

In addition to the confidentiality obligation, there are many reasonable provisions such as those concerning 3 to 6 above that allow it to survive after the contract ends.

The following can be considered an adverse effect of not stipulating the contract period.

That is, if the contract period is not stipulated, it may be understood that one party can terminate the contract at any time. Information exchanged between the parties after termination is highly likely to be understood as not subject to confidentiality obligations. Therefore, if the other party insists on terminating when the contract period is not stipulated, there is a possibility that there will be a dispute over whether the information disclosed immediately before or after the timing of the termination claimed by the other party is subject to protection.

8. Other

In addition to the above, prohibitions on the transfer of rights and obligations, separation clauses and complete agreement may be stipulated. Note that NDAs usually do not require a termination clause.