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!
