Understanding NDAs: The Recipient's Core Confidentiality Obligations Under an NDA

A key aspect of any Non-Disclosure Agreement (NDA) is the recipient's obligations regarding confidential information. While the focus is often on the disclosing party, the receiving party also carries significant responsibilities. Here’s what recipients need to consider when reviewing an NDA:

1.    Confidentiality Obligations and Standard of Care 🔒🛡️

  • NDAs typically require recipients to apply a specific standard of carewhen handling confidential information.
  • This can include a reasonable care standard, requiring precautions a prudent entity would take under similar circumstances. 🧐
  • Some NDAs impose a same-level-of-protection standard, requiring recipients to safeguard disclosed information as they would their own confidential data. 🔐
  • In highly regulated industrieslike finance or healthcare, the standard of care may be even stricter. 📈⚕️
  • ⚠️Failing to meet the required standard—such as by allowing unauthorized access or failing to implement safeguards—can constitute a breach of the NDA. 🚨

2.    Purpose and Use of Confidential Information 🎯📑

  • NDAs limitthe recipient’s use of confidential information to a specific purpose, such as evaluating, negotiating, and implementing a potential transaction.
  • ⚠️Unauthorized use—such as for competitive advantage or personal gain—can lead to legal claims, injunctions, and damages.
  • Some NDAs specify that all derivative materials(e.g., reports, analyses) created using confidential information remain subject to the NDA. 📜
  • A recipient should carefully check such detrimental use provisions, especially if the recipient is a competitorof the disclosing party.

3.    Obligations Regarding Representatives 🏢👥

Recipients often need to share confidential information with employees, advisors, or affiliates. These individuals, referred to as Representatives, must also comply with the NDA.

(a)   Obligation to Ensure Compliance ✅

  • Some NDAs require recipients to ensure that Representatives comply with the NDA. 📌
  • ⚠️ This can be problematic, as recipients often lack full control over Representatives, especially external Representatives like advisors or consultants.
  • Despite this, recipients remain liable if a Representative breaches the NDA. 🚨

(b)   Accession of Representatives 📝⏳

  • Some NDAs require Representatives to formally accedeto the NDA before receiving confidential information.
  • ⚠️ This can be onerous and time-consuming, as Representatives may need to review and negotiate the entire NDA.
  • 🔄 This process can cause delays and added complexity, and may not be beneficial for the disclosing party, which would need to manage multiple NDAsinstead of a single NDA with one counterparty.

(c)    Obligation to Direct Representatives to Comply 🏛️📢

  • Many NDAs only require recipients to direct their Representatives to comply, rather than ensuring compliance. 📜
  • This is a less burdensomeapproach, as it does not require controlling third-party actions.
  • Back-to-Back NDAs (B2B NDAs): To mitigate risk, recipients often enter into back-to-back NDAswith external Representatives (except professionals like lawyers, who are subject to professional confidentiality obligations). This ensures contractual recourse in case of a breach. 🔁📄
  • Internal Representatives(such as employees and directors) are typically subject to implied and/or express confidentiality obligations towards the recipient.

Final Takeaway ✅💡

✔ Apply the agreed-upon standard of care when handling confidential information. 🔐📊

✔ Use the information only for the permitted purpose and avoid any unauthorized use. 🚫⚖️

✔ Clearly instruct Representatives to comply with the NDA and understand that liability remains with the recipient.

✔ Enter into back-to-back NDAswith external Representatives for added protection. ⚖️🔁

⚠️ Avoid an obligation to ensure compliance of Representatives—the fact that recipients remain liable for a Representative’s breach should be sufficient.

⚠️ Avoid an obligation to ensure that Representatives accede to the NDA. 🚧

📖 This is the third part of my series on essential NDA considerations. Stay tuned for the next topic: Non-solicitation provisions in NDAs. 📚✨

🔗 Check out the previous part of this series on defining confidential information: Understanding NDAs: Part 2 

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