Problems with Nondisclosure Agreements: Lack of Subject Matter Limits

Can you send me a form Nondislcosure Agreement (NDA)? Lawyers get this question often. But, ideally you don’t want a form NDA, you want one or more NDAs tailored to the situations where they will be used.

People often sign NDAs without thinking too much about them. But not all NDAs are the same. And there are situations where an NDA can come back to bite you in ways you might not expect. Let’s look at the subject matter scope of an NDA.

Many form NDAs will have very broad definitions of what is considered confidential information that should not be disclosed. You might see something like:

Confidential Information shall mean any data or information that is competitively sensitive material and not generally known to the public, including, but not limited to, information  relating to any of the following: product development, inventions, product plans, marketing strategies, documentation, reports, data, database, customer lists, customer relationships, customer profiles, business plans and results relating to past, present or future business activities.

This provision provides no limitation on the subject matter that is confidential. That is, it does not limit the confidentiality obligations to a particular technical field or product.

The lack of a subject matter limitation could be a problem if the other party to the NDA starts disclosing confidential information to you in a field that you have an interest in entering. If so, that party might effectively block you from entering a given field merely by disclosing confidential information directed to that field or product. This problem can be avoided by providing field or product subject matter limitations in the NDA.

Take, for example, the case of ConFold Pacific, Inc. v. Polaris Industries, 433 F.3d 952 (7th Cir. 2006). Polaris hired Confold to conduct a reverse logistics analysis of Polaris’ shipping needs to determine how best to deal with goods returned by customers. This was conducted under an agreement titled “Mutual Non-Disclosure Agreement–Logistics Consulting Version.”

After the agreement was signed Polaris requested proposals, from Confold and 8 other firms, for designs of returnable shipping containers to replace its disposable shipping containers. Polaris did not accept any of the proposals. But a few years later Polaris designed a returnable container and began having it manufactured by another firm.

ConFold sued Polaris for breach of the NDA alleging that Polaris’s returnable container was based on the container that ConFold submitted. But the court found that, among other things, (1) the NDA title suggested that the scope of the NDA was confined to reverse logistics analysis, and (2) that the limiting language of the NDA of “ConFold has information relating to its proprietary software systems, documentation, and related consulting services which it considers to be proprietary,” and “software systems, documentation, and related consulting services” referred to the reverse logistics analysis itself. The court concluded that the language of the NDA limited the confidential subject matter to the reverse logistics consulting. And, the returnable shipping container design was outside of that scope.

Further, evidence showed that ConFold had a form NDA “specific for design” but it did not ask Polaris to sign it.

If Polaris signed an NDA without any subject matter limits, it could have been on the hook to ConFold for the returnable shipping container design. This probably was not what Polaris intended when it hired ConFold for the reverse logistics consulting.

Providing subject matter limits in an NDA is an important step to prevent the NDA from covering subjects that you didn’t intended to cover and from blocking your future product development or business efforts.