IP Tech Knowledgy

In most circumstances, agreeing to a mutual NDA is inadvisable and potentially damaging. When a company explores a potential business relationship with a partner, consultant, manufacturer, buyer, or customer,  executing a confidentiality or nondisclosure agreement (NDA) is a critical first step. An NDA protects the company's proprietary information and intellectual property (IP) from unauthorized disclosure or misuse. However, pitfalls can arise when the other party requests or insists upon a mutual NDA. 

In the vast majority of relationships, the company will be the disclosing party sharing confidential business information, technology, and know-how so that the other party can perform its services effectively. The other party, by contrast, typically has no legitimate need to share its own confidential information with the company.

Despite this asymmetry, counterparties frequently present mutual NDAs or ask that the company's standard one-way NDA be converted into a reciprocal agreement. Consider whether this is truly necessary.

The practical risk is significant: a mutual NDA creates the inference — or at least the opportunity to argue — that confidential information is flowing in both directions. Even if little or no proprietary information will actually be exchanged from the other party to the company, the existence of a mutual NDA gives the other party contractual footholds for later claims. The other party could claim that the company received the other party's confidential information and/or that the company's IP was derived from, or influenced by, that information, or even assert ownership rights in the company's own IP. The other party could leverage these claims to extract concessions, delay transactions, or seek monetary damages, any of which could be a difficult and costly claim to defeat.

The risk is especially acute when engaging independent contractors or consultants. It is entirely reasonable — and often necessary — for a company to share confidential information with a consultant so that the consultant can understand the company's business, products, technology, and IP well enough to perform the work. That flow of information from the company to the consultant is expected and appropriate.

The company should strictly avoid the reverse and expressly prohibit the consultant from introducing any of the consultant's own proprietary information, IP, or third-party confidential information into the engagement. This boundary serves to eliminate the factual predicate for any future ownership claim by the consultant, and ensures the company is not inadvertently exposed to third-party IP that could create independent infringement liability.

The stakes extend well beyond the immediate business relationship. Any prospective investor or acquiror conducting due diligence will scrutinize the company's IP ownership — and rightfully so. Clean, unencumbered ownership of the company's technology and intellectual property is typically a threshold requirement for closing any significant transaction.

Even a single unresolved ownership dispute, or a poorly drafted agreement that creates ambiguity about IP provenance, can derail an otherwise viable deal. Investors and acquirors are risk-averse on this point; they will not assume title defects in IP that form the core value of the business. A mutual NDA that enabled a contractor's ownership claim — however tenuous — represents exactly this kind of cloud on title.

The NDA itself is the first line of defense, but it should not be the last. The ultimate services agreement or engagement letter with any contractor should include an explicit work-for-hire and IP assignment provision stating, without qualification, that (i) all work product, deliverables, inventions, and developments created by the contractor in connection with the engagement are the sole and exclusive property of the company; and (ii) the contractor irrevocably assigns to the company any rights the contractor might otherwise claim in such work product. This provision, combined with a properly structured one-way NDA, closes the loop and significantly reduces the risk of future ownership disputes.

Mutual NDAs may seem like a reasonable accommodation and a gesture of reciprocity toward a business partner. In practice, however, they create asymmetric legal risk that can have serious and lasting consequences for a company's IP ownership, its negotiating position, and its ability to execute future transactions. 
 

Abba D. Poliakoff
410-576-4067 • apoliakoff@gfrlaw.com