Confidentiality and Non-Disclosure Agreements – Key Things to Keep in Mind before Disclosing Confidential Information

All health-focused businesses, whether of pharmaceuticals, medical devices, food & beverages, cosmetics or healthcare, hold a large amount of information that is confidential or proprietary to the business. While soliciting investments from investors, or in the course of finding the right business partners, it becomes vital to disclose or share such information for validation. At that time, there is some hesitation to disclose confidential or proprietary information – what if the data fell in a competitor’s hand? What if the information is used against the owner?

Contrary to general perception, it is possible to retain full control over the use of confidential or proprietary information even after it has been disclosed in the course of business. It is also possible to force the receiving party to permanently delete the information from its systems, so that there is no scope of its misuse. The legal instrument that allows a business to have control over the use and disclosure of its confidential and proprietary information is called a Non-Disclosure Agreement (commonly referred to as NDA).

It is easy to source an NDA template because they are very readily available on the internet. Most businesses that have been around for some time usually have an NDA template of their own. However, before actually signing an NDA, health-focused businesses should ensure that their NDA template checks the following essential boxes:

Wide definition of confidential information: Ideally, any information that is shared by disclosing party to receiving party should be treated as confidential under an NDA. This leaves no scope for ambiguity between the disclosing party and receiving party with regards to the information shared by the dislosing party. It may also be a good idea to add language which clarifies the scope of confidential information, for instance, that confidential information covers customer list, regulatory information, pricing information etc. as it serves as a reminder to the receiving party that use and disclosure of such information is to be taken very seriously.

Clear identification of purpose: The real objective behind signing an NDA is to control the use and disclosure of confidential or proprietary information. The use of such information can be regulated only if the NDA clearly identifies the purpose behind sharing of the information. If the purpose is clearly defined, it is easy to establish whether the information that was disclosed was used or misused. Any use of the information beyond the purpose of its disclosure would amount to misuse of the information, which will be prohibited (see section on Non-Disclosure below). Therefore, it is very critical for the effectiveness of an NDA that the purpose of the disclosure is clearly identified within the NDA.

Existence of a non-disclosure clause: The language that imposes restriction on use and further disclosure of the confidential and proprietary information is, perhaps, the most critical part of an NDA. It is very important to properly define the limitations for use and disclosure of the information. Ideally, the information disclosed should not be used (a) for purposes other than the defined purposes; (b) by parties other than the receiving party; (c) by persons other than those for whom it is absolutely necessary to know about the information and who are in direct employment of the receiving party  and (d) beyond a stipulated time-period for any purpose whatsoever (usually the term of the NDA).

Protection against competition from receiving party: These days, it is fairly common to have non-compete provisions built into an NDA. A non-compete clause is a negative covenant by which the receiving party agrees not to enter into a business that competes with the business of the disclosing party. Such a provision  becomes necessary to include in the NDA when the receiving party is in same or similar business, and can capitalize on the disclosed information to compete with the disclosing party in a short span of time. While it is fairly simple to contractually impose such an obligation on the receiving party, it is not easy to enforce non-compete obligation before the Indian courts. The Indian courts have held that non-compete provisions will be binding during the currency of the contract, but its enforceability after expiry or termination of the contract is a moot point which will be decided on a case to case basis. Therefore, many times, the term of the NDA is deliberately stretched (up to 10 years!) in order to improve chances of enforcement of the non-compete. If the term of the NDA cannot be stretched, then in order to improve the chances of enforcement of a non-compete obligation, the disclosing party should record in the NDA that the receiving party has given assurance to it that it would not compete with the disclosing party and only on the basis of such assurance the disclosing party has agreed to disclose the information.

Additional protection from non-circumvention: Sometimes, a receiving party is tempted to bypass the disclosing party and explore business opportunities within the business network of the disclosing party without involving the disclosing party. This may not, strictly speaking, amount to ‘using’ the confidential information. Therefore, it is important to address the possibility of such a ‘circumvention’ in the NDA. This form of ‘circumvention’ is particularly common in business relationships where the disclosing party is not the actual manufacturer/supplier of goods and services, but is instead a facilitator. To address any risk of such circumvention, the NDA should compel the receiving party to refrain from circumvention, avoidance or by-passing of the disclosing party in order to avoid signing of a contract (for investment, fee, commission etc.).

Stipulation of remedies: Monetary compensation may not always be an adequate remedy in case of breach of the NDA. Ideally, the receiving party should be stopped from using any information that is confidential or proprietary to the disclosing party. However, until the disclosing party is able to prove that the monetary compensation is not going to be adequate remedy for breach of NDA, Indian courts will not issue an order that stops the receiving party from doing so. Therefore, in the NDA, it is important to record that the remedy of specific performance and injunctive relief will be available to receiving party in addition to monetary compensation, because monetary compensation alone may not be adequate remedy to disclosing party in case of breach of the NDA.

Governing law and jurisdiction: An NDA between two domestic parties is always regulated by domestic law. However, that may not be the case when one of the parties is a foreign party. When there is no clear stipulation of governing law in an ‘international’ NDA, then in the unfortunate event of a dispute, the receiving party may take up the defence of non-application of domestic law (or foreign law, depending on where the action is instituted!) in an enforcement action before a Court. This could delay the remedy for disclosing party that is otherwise stipulated and agreed to in the NDA. Therefore, it is important to clearly stipulate the governing law of the agreement in the NDA. Separately, as a disclosing party, it is natural to prefer domestic law as governing law of the NDA. However, this may actually be counter-productive if the receiving party is a foreign party because a large number of countries do not directly recognize the orders of Indian courts. In case of perceived or actual breach of NDA, time is of essence, and therefore the quickest option to secure relief is to go to the courts which have jurisdiction over the foreign receiving party and ask for urgent relief. Now, in order to be able to do so, it is preferred that the governing law of the contract is actually the domestic law of the foreign party and not the domestic law of the disclosing party. On the same note, it is equally important to identify which court will have jurisdiction over any breach or dispute arising out of the NDA, so that the opposite party does not institute a counter-action in another court and objects to the jurisdiction of the court that has been approached by the disclosing party for relief.

Sometimes, in order to avoid ‘forum shopping’, the parties agree to resolve any dispute by way of an arbitration seated in a neutral country whose orders would be directly enforced by courts in the country of the disclosing party as well as the receiving party.

Survival clause: Last but not the least, it is important to verify whether the NDA has a survival clause or not. If the NDA does not have a survival clause, then its effect will cease after expiry of the term of the NDA, or early termination of the NDA by either party. The disclosing party should ensure that certain obligations such as that of confidentiality and dispute resolution (disputes can happen even after expiry of the NDA because the disclosing party may not become aware of the breach for a long time) survive the expiration or termination of the NDA.

Happy signing!