USING NON-DISCLOSURE AGREEMENTS ANDCONFIDENTIALITY AGREEMENTS EFFECTIVELY

September 30, 2015

LOCATION McMillan LLP - Ottawa OfficesBentall Boardroom A50 O'Connor Street, Suite 300

CPD HOURS1.5 Substantive Hours

Your Instructors

Sandra Sbrocchi

McMillan LLPPatricia Bood

Former SVP & General Counsel,

Brookfield Renewable

Chase Irwin

McMillan LLP

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Overview• Introduction and overview ; the importance of NDAs/CAs

• Initial Considerations� Simple vs complex covenants

� when to use mutual vs unilateral obligations

• Typical provisions for NDAs, including drafting and negotiating tips (both from the receiving and disclosing party’s perspective)� Scope

� Recipient Representatives

� Term

� Recipient Use / Confidentiality Obligations; No obligation to disclose

� Required Disclosure / Legal Compliance

� No reps/warranties / no agreement

� Liability

� Remedies

• Other threshold issues – Restrictive Covenants / Residual Clauses

• Return or destruction of confidential information

• Practical tips for in­house counsel

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INTRODUCTION

IMPORTANCE OF NDAs

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INITIAL CONSIDERATIONS &

CONTEXT

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First determine the context of the arrangement and ask yourself:

� Do you want to receive confidential information from this party?

� Do you even need an NDA (i.e. is the data/information protected under an

existing agreement; will no significant data be disclosed until a service

agreement is in place)?

� Who is the counterparty? Is it a potential competitor? Public or private

company?

� Purpose / Proposed arrangement? – simple or complex?

� Unilateral or mutual? Differences in parties’ obligations?

� Scope – how sensitive is the information being disclosed?

� How long should the term run for?

� What other “typical” provisions do we need?

Initial Considerations and Context

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Simple vs Complex• Examples:

� Contractor only working alongside staff of the corporation – Only simple

confidentiality agreement required

� Technology/IP exchange or in connection with an acquisition – More

complex agreement may be required

• Complex covenants are generally safer and afford the parties

more protections

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Mutual vs. Unilateral• Ask yourself: Are both parties going to provide information

to each other?

• Mutual –� Most commonly used

� Negotiation of mutual agreements will likely be quicker and more fair

� Allows for later role reversal, rather than negotiating a new

agreement

• Unilateral –� Used when disclosing party does not require information from

recipient

� Gives disclosing party more flexibility

� Disclosing party may not want to be obligated to treat receiving

party’s information as confidential and wants to minimize obligations

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TYPICAL PROVISIONS

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Typical Provisions for NDAs• Scope

� Definition of confidential information

� Exceptions to that information

� Recipients / Representatives

• Term• Recipient use/confidentiality obligations

� No obligation to disclose

• Required disclosure/legal compliance• No representations and warranties / no agreement• Liability• Remedies for breach – injunction/specific performance• Other threshold issues – restrictive covenants / residual clauses • Return/Destruction of Confidential Information

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Scope of “Confidential Information”

• Depends on sensitivity and the type of information being

disclosed.

• From the discloser’s perspective – Broad application to as much information possible� All information regarding the discloser held by the recipient, not just

provided by the seller

• From the recipient’s perspective – Narrow� Should only apply to information provided by the discloser

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“Confidential Information” –Breaking it all Down

What Could be Considered Confidential Information?

• General Examples (written and verbal)� Trade secrets

� Proprietary information

� Know­how

� Business plans; financial information

� Customer/vendor lists

� Marketing strategies

� Secret formulas; communications

� Business practices and strategies, etc.

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“Confidential Information” shall mean any and all information,

data or know­how, whether technical or non­technical, as well as

any sample or model, which relates to the Receiving Party’s

products and is disclosed pursuant to this Agreement by the

Receiving Party.

Confidential Information (cont’d)

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• Confidential Information means all information (whether obtained in

writing, verbally, by observation or otherwise), [aside from Excluded Information – i.e. your standard exclusions or explicitly carved­out], of

or relating to the Discloser [relating to the Business Purpose] [that the Discloser designates as being confidential] , including information

relating to the Discloser’s business opportunities, customers, marketing,

personnel, salaries, operations, business plans, costs, sales, income,

profit, profitability, pricing, ideas, know­how, designs, developments,

creations, inventions, works, trade secrets, demonstrations, programs,

software, codes, routines, computer systems, technical information,

data, formulas, analyses, methods, processes, techniques, drawings,

sketches, experiments, moulds, jigs, dies, prototypes, samples,

products, equipment, tools, machines, research and development.

Confidential Information (cont’d)

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• Standard Exceptions:

� Information in the public domain (other than as a result of disclosure

by the Recipient or its Representatives)

� Information already known or independently developed by the

recipient or its representatives without access or use of confidential

information

� Information subsequently disclosed by a third party in good faith who

is lawfully in possession of the information and not in breach of any

obligation

� Disclosure compelled by law or court order (or exchange rules with

public companies – i.e. material changes, etc.)

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Confidential Information (cont’d)

• From the discloser’s perspective

� Should limit who is allowed to see the confidential information (only representatives) and anyone viewing the information should be bound by the terms of the confidentiality agreement.

� Consider whether information could be disclosed to affiliates, lender’s counsel, third party investors (i.e. private equity), etc.

• From the recipient’s perspective

� Should be allowed to disclose the information to anyone necessary to complete the transaction (e.g. legal counsel, financial advisors or accountants, lenders, co­investors – anyone who may provide financing to the recipient), without a direct agreement between them and the discloser vis­à­vis confidentiality.

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Recipient Representatives

• Options to bind Representative to terms of the NDA:

� Each third party Representative executes an NDA in “substantially similar form” as the subject/master NDA, or a counterpart/joinder thereto

� Each Representative executes a short agreement acknowledging familiarity with the NDA and agrees to act in accordance with its terms

� Recipient is required to make its Representatives aware of the confidential nature of the confidential information

• Recipient is typically liable for breaches of the agreement by

its Representatives.

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Recipient Representatives (Cont’d)

Putting It All Together1. Confidential Information. Except as set forth in Section 2 below, “Confidential Information” means all non­public, confidential or proprietary information [designated as such by the Disclosing Party] disclosed [before], on or after the Effective Date, by either Party (a “Disclosing Party”) to the other Party (a “Recipient”) or its affiliates, or to any of such Recipient’s or its affiliates’ employees, officers, directors, partners, shareholders, agents, attorney, accountants, or advisors [on a strictly need­to­know basis] (collectively, “Representatives”), [whether disclosed orally or disclosed or accessed in written, electronic or other form of media, and whether or not marked, designated or otherwise identified as “confidential,”] [including, without limitation:

� all information concerning the Disclosing Party’s and its affiliates’, and their customers’, suppliers’ and other third parties’ past, present and future business affairs including, without limitation, finances, customer information, supplier information, products, services, organizational structure and internal practices, forecasts, sales and other financial results, records and budgets, and business, marketing, development, sales and other commercial strategies;

� the Disclosing Party’s unpatented inventions, ideas, methods and discoveries, trade secrets, know­how, unpublished patent applications and other confidential intellectual property;

� all designs, specifications, documentations, components, source code, object code, images, icons, audio­visual components and objects, schematics, drawings, protocols, processes, and other visual depictions, in whole or in part, of any of the foregoing;

� any confidential information included with, or incorporated in, any information provided by the Disclosing Party to the Recipient or its Representatives; and

� all notes, analyses, compilations, reports, forecasts, studies, samples, data, statistics, summaries, interpretations, and other materials (the “Notes”) prepared by or for the Recipient or its Representatives that contain, are based on, or otherwise reflect or are derived from, in whole or in part, any of the foregoing.]

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2. Exclusions from Confidential Information. Except as required by applicable federal, provincial or

local law or regulation, the term “Confidential Information” as used in this Agreement shall not

include information that:

� at the time of disclosure is, or thereafter becomes, generally available to and known by the

public other than as a result of, directly or indirectly, any violation of this Agreement by the

Recipient or any of its Representatives;

� at the time of disclosure is, or thereafter becomes, available to the Recipient [on a non­confidential basis] from a third­party source, provided that such third party is not and was

not [(or who the recipient does not know is)] [(or who the recipient has no reason to believe is)] prohibited from disclosing such Confidential Information to the Recipient by a

[legal, fiduciary or] contractual obligation [to the Disclosing Party];

� was known by or in the possession of the Recipient or its Representatives, as established by

documentary evidence, prior to being disclosed by or on behalf of the Disclosing Party

pursuant to this Agreement; or

� was or is independently developed by the Recipient, as established by documentary

evidence, without reference to or use of, in whole or in part, any of the Disclosing Party’s

Confidential Information.

Putting It All Together (cont’d)

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• Can be as long as the parties want (1 year, 2 years, 3+ years)

• Discloser will prefer to keep information confidential indefinitely

• Personal information should be kept confidential indefinitely

• Certain covenants within the NDA may have a shorter/longer

duration (i.e. non­solicitation and non­compete provisions)

• Ensure that the term of the agreement as a whole does not get

confused with any other terms that may be provided for (e.g. a

shorter or longer standstill provision or non­solicitation clause)

• Every NDA should specify the parties’ obligations upon termination

of the NDA

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Term

“This Agreement shall remain in full force and effect for a period of[two] years from the Effective Date (the "Termination Date") and shallapply in respect of Confidential Information accessed and disclosed[before], on or after the Effective Date.”

“The obligations of this Agreement shall be continuing until theConfidential Information disclosed to the Recipient is no longerconfidential.”

Term and Termination

Term (cont’d)

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Recipient Use and Confidentiality Obligations / Purpose

• One of the most important features of the confidentiality

agreement is a specific description of the purposes for which

confidential information may be used

• Typical uses may include: carrying out specified professional

services; exploring the terms of a potential joint venture or

other business opportunity; etc.

• Is the recipient permitted to copy or reproduce the

confidential information? (if not allowed, recipient will argue

this isn't practical)

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• Permitted Use: The Recipient may use the Confidential

Information only ...

• … in ordinary course of carrying out its duties in Project [XX].

• … in the operation of the Licensed Software Program for its own

internal purposes.

• … for evaluating the proposed joint venture.

• … for evaluating the possible acquisition of assets.

Recipient Use / Purpose (cont’d)

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• Take such precautions to hold the Confidential Information in the strictest confidence

• Protect and safeguard the confidentiality of all such Confidential Information with at least the same degree of care as the Receiving Party would protect its own confidential information

• Take all reasonable measures available to it, and in any event not less than those used to protect its own confidential information, to keep the Confidential Information in the strictest confidence. [Provided that the Receiving Party has taken all such reasonable steps, it shall not be responsible if any of the Confidential Information should be divulged to any third party whether by reason of honest mistake, dishonest appropriation or otherwise.]

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Confidentiality Obligations

• The discloser does not want to be obligated to disclose any information by virtue of the fact it has entered into a confidentiality agreement with the recipient.

• A party may want to include a clause restricting the other party from disclosing the existence of the NDA or the prospective arrangement being discussed with that party.

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No Obligation to Disclose

“Notwithstanding anything to the contrary, this Agreement shall notobligate the Disclosing Party to disclose or otherwise provide access toany particular Confidential Information or any particular portionthereof and such disclosure or access, if any, is discretionary.”

Putting It All TogetherDisclosure and Use Restrictions• 1.1 The Receiving Party agrees that it shall:

a) [use the Confidential Information solely to the extent required to fulfill the Purpose] [OR]

[use the Confidential Information where such disclosure or use is expressly approved in advance and in writing by the Disclosing Party in each instance];

b) take all reasonable precautions, [in accordance with industry standards] and in any event

not less than those precautions used to protect his or her own confidential information, and

to keep the Confidential Information in the strictest confidence and to protect it from

disclosure;

c) Not reproduce or copy in any medium in whole or in part any of the Confidential Information without the written approval of the Disclosing Party in each instance; and

d) not use the Confidential Information in any manner that may be detrimental to the Disclosing Party nor in the furtherance of the Receiving Party’s own business, profit or advantage.

• 1.2 The Receiving Party shall promptly notify the Disclosing Party of any unauthorized use,

possession or disclosure of the Confidential Information of which it becomes aware.

• 1.3 Notwithstanding anything to the contrary, this Agreement shall not obligate the Disclosing

Party to disclose or otherwise provide access to any particular Confidential Information or any

particular portion thereof and such disclosure or access, if any, is discretionary.

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Required Disclosure/Legal ComplianceRequired disclosure could result from:• A lawsuit in which the recipient is involved, either as plaintiff or

defendant• An investigation made by a regulatory body pursuant to:

� Competition Act, Investment Canada Act, Securities Act (Ontario), etc.

Considerations?• Should the recipient have to provide the discloser with notice in

advance of disclosure (or notice at all) to allow discloser to seek a protective order?

• Should the discloser be entitled to oppose the disclosure and should the recipient be obliged to assist the discloser in doing so?� Will the recipient/discloser share or bear the cost?

• Should the recipient be obliged to obtain the advice of counsel before disclosing any confidential information?

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No Representations and Warranties/No Agreement• The discloser does not want the disclosure of Confidential

Information to a recipient to constitute a representation or warranty by the discloser about facts regarding the discloser

• A confidentiality agreement is not an agreement or guarantee that a contract or business arrangement will proceed

• The discloser wants to retain the right to reject a recipient’s proposal or even terminate the contract/arrangement discussions, without giving the recipient a right to make a claim against the discloser

• The recipient should only have a claim against the discloser if there is a definitive agreement that provides for such claim, and a definitive agreement should be in writing and should be more than an executed letter of intent

No Agreement

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Liability• From the discloser’s perspective

� Wants the recipient to be liable for all costs, including legal fees on a

substantial indemnity basis, and indemnification for any breach of the

agreement

� Liability and indemnity extend to all actions of recipient representatives

� Discloser is a trustee of the indemnity and can enforce it on behalf of

the discloser’s representatives

� Acknowledgment that disclosing party may or will suffer irreparable

damage if Confidential Information is disclosed and that monetary

damage would be difficult to establish and can seek equitable relief (in

addition to other remedies) upon breach

• From the recipient’s perspective� Liability should exclude economic loss and consequential damages

� Legal fees should be limited to reasonable fees

� No indemnity language (especially for third parties). Allow for action for

damages instead

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The Receiving Party shall indemnify and hold the Disclosing Partyharmless from and against any and all claims, suits, losses, damages,costs or expenses, including reasonable attorney fees, incurred orsuffered by the Receiving Party as a result of his or her use ordisclosure of the Confidential Information other than in accordancewith this Agreement, whether such disclosure is done negligently orotherwise.

Liability and Indemnity for Breach

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Liability (Cont’d)

Remedies• Breach of a confidentiality agreement may cause irreparable

harm• Difficult to quantify damages for a breach of contract

argument• Injunctive Relief Clauses

� Not binding on a court� Injunctions are an equitable remedy granted at the discretion of the court

� The presence of an injunctive relief clause can emphasize to the

recipient the seriousness of any unauthorized disclosure of the

discloser’s confidential information

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Injunctive Relief

The Disclosing Party will be entitled to any injunction and/or specificenforcement of the terms hereof in addition to any other remedy towhich such member may be entitled, at law or in equity, in respect ofany breach or threatened breach of this Agreement.

Remedies (Cont’d)

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• Injunctive Relief: The parties acknowledge and agree that a breach of this

Agreement will result in irreparable and continuing harm to the Disclosing Party for

which monetary damages will not fully compensate the Disclosing Party. Therefore,

in the event of a breach or a threatened or intended breach of this Agreement by

the Receiving Party, the Receiving Party hereby consents to the granting of, and the

Disclosing Party shall be entitled, in addition to such monetary relief as may be

recoverable and without deposit of security, posting of any bond or showing or

proving any actual damages being sustained by the Disclosing Party, to equitable

relief (including interim or interlocutory injunctions unilaterally without notice, and

final injunctions with notice), enjoining and restraining such breach, or threatened

or intended breach, enjoining the Disclosing Party to specifically perform the

Agreement and to such other rights and remedies as are available at law or in

equity to the Disclosing Party.

• Remedies: Each Party agrees that any violation or threatened violation of this

Agreement may cause irreparable harm to the Disclosing Party, entitling the

Disclosing Party to seek injunctive relief in addition to all other legal and equitable

remedies.

Remedies (Cont’d)

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Other Threshold Issues

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Non-solicitationConsiderations• How long should the prohibition last?

• Who should it apply to?� The recipient alone? The recipient’s representatives and

affiliates?

� All the discloser’s employees? Senior Management only? Only

those individuals the recipient meets during the process?

• Reasonable exceptions / carve-outs of non-solicitation / no-

hire clauses:� General solicitations (responding to a newspaper or online ad, or

through the activities of a search firm)

� Persons who approach the buyer on their own initiative / unsolicited

inquiries from employees

� Persons formerly employed by the Company

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• “For a period of [eighteen (18) months] from the date hereof, each party agrees that neither it [nor its affiliates] will, directly or indirectly, employ or solicit to employ any [executive officer, senior manager or other employee or officer] of the other party with whom such party has had any contact, or of whom such party has become aware, [in connection with its consideration of the Business Opportunity]. The foregoing prohibitions shall not be deemed violated by virtue of general advertising or solicitations of employment by any party not specifically directed toward such persons of the other party described in the foregoing sentence.”

Non-solicitation

Non-solicitation (Cont’d)

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Residual Clauses“Notwithstanding anything to the contrary herein, the receiving party may use Residuals for any purpose, including without limitation, use in development, manufacture, promotion, sale and maintenance of its products and services. "Residuals" means any information retained in the unaided memories of the receiving party's employees who have had access to the disclosing party’s confidential information pursuant to the terms of the Agreement.”

“Notwithstanding the confidentiality obligations contained in Section [ ] hereof, the receiving party may, during and after the term hereof, use in its business any Residual Information. “Residual Information” means the ideas, know­how and techniques that would be retained in the unaided memory of an ordinary person skilled in the art, not intent on appropriating the proprietary information of the disclosing party, as a result of such person’s access to, use, review, evaluation, or testing of the Confidential Information of the disclosing party for the purposes described herein. An employee's memory is unaided if the employee has not intentionally memorized the confidential information for the purpose of retaining and subsequently using or disclosing it. Nothing in this paragraph, however, shall be deemed to grant to the receiving party a license under the disclosing party’s intellectual property rights.”

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Return or Destruction of Confidential Information

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Return/Destruction of Confidential Information• NDA should contain a provision which deals with either the return or

destruction of confidential information (and, with destruction, the

recipient should certify its destruction)

• Disclosing party may want it to be automatic. Receiving party will want

the requirement to be triggered only if receive notice as it helps with

compliance and reduces administrative burden.

• Provision should contain for Survivability – NDA should survive even

after return/destruction (especially if a copy of information is allowed to

be retained).

• Receiving party will want to exclude having to destroy any electronic files

that have been archived and cannot be easily deleted.

• Receiving party will want the right to retain one copy for legal or audit

purposes, to be held in a secure location by the legal department.

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Return/Destruction of Confidential Information – Sample Complex Provision

• Return of Confidential Information. The Confidential Information of or relating to a Discloser remains the exclusive property of the Discloser at all times. Subject to the following sentence, the Recipient shall deliver all such Confidential Information, including all Copies, in the Recipient’s (or a Recipient’s Representative’s) possession or control to the Discloser within [five] business days after [the date a final determination is made by either party to discontinue negotiations concerning the Business Purpose]. The Recipient shall destroy or irretrievably erase, or cause to be destroyed or irretrievably erased, all documents, memoranda, notes and analyses (regardless of the form, medium or device on or in which they are written, recorded, stored or reproduced) derived from such Confidential Information and which were prepared by the Recipient or by a Recipient’s Representative, and all Copies, if any, prepared by the Recipient or by a Recipient’s Representative, which Copies cannot because of the device on which they are stored be delivered to the Discloser, [such destruction or erasure to be certified to the Discloser in writing by an officer of the Recipient within such five business day period.] [Notwithstanding the foregoing, each party may retain copies of such Confidential Information as reasonably necessary for business archive or litigation purposes.]

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Checklist for Return of Confidential Information• Check agreement for obligations. [Validity, dates, destruction, retention,

info in company­created reports / spreadsheets; etc.]

• Prepare draft email explaining requirements to employees and explaining what to do.

• Send email to key employees (and IT department if you need their help).

• Determine if other employees and third parties (advisors, board, investors) received information. Check emails and data room access if relevant to validate. Send same request.

• Gather data. Obtain employee certificates / acknowledgements (optional).

• Destroy data as permitted. Secure any retained information.

• Return data, if required.

• Include an officer certificate if required. Discuss with third party if certificate needs to be modified to be accurate to explain the issue.

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Practical tips for In­House Counsel

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Practical tips for In­House Counsel• Templates – develop a couple of templates for the most commonly

used NDAs or confidentiality provisions, depending on your business

need. Try to use your templates whenever possible, especially if you

are the disclosing party.

• Checklist – if you often review third party NDAs, consider developing

a checklist rather than merely reviewing language against your

template. It can be used to focus on key issues vs wish list issues,

articulate the rationale for changes, and push some of the work to

law clerks or less lawyers.

• Risk ­ Focus on issues that really matter (and are relevant to your

position as disclosing party vs receiving party). Prefect drafting is

usually a time waste and antagonistic to the other side (and your

business colleagues). Be firm on key issues, especially if you are

confident that your terms are “market” and there is a real risk of non­

compliance or the information is vital to your business.

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Practical Tips (Cont’d)• Keep your business colleague informed on material issues

that you are raising (without all of the detail). Why? � They may have a perspective that could be valuable to the issue.

� They could inadvertently undermine your efforts with the third

party.

� They will look foolish if uninformed.

� They may need to make the final call on the business risk if an issue

cannot be negotiated to your satisfaction.

• Return of Confidential Information:� Disclosing party – remember to request destruction of confidential

information, especially if it was trade secrets, important pricing

methodology or personal information.

� Receiving party ­ prepare a checklist to assist with complying with

requests for return of confidentiality agreements. (see slide #41).

For major transactions / activity, consider maintain a list of

recipients.

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Practical Tips (Cont’d)• Non­solicitation clauses – Maintain a list of such clauses so

that the HR group can help manage this.

• Education – Educate your business colleagues about any unusual provisions and restrictions such as non­solicitation clauses so that they don’t inadvertently violate the agreements.

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Conclusions and Key Take­Aways• NDA often starts the business arrangement/

transaction/business discussions and is key to facilitating and

progressing that process.

• There is no one­size­fits­all approach and no one boilerplate

template to use for all situations. Each situation is unique

and different arrangements and clients will have different

sensitivities and interests.

• Both internal and external counsel need to inform key

business decision­makers and their clients to the significance

of NDAs and the implications and liabilities that can arise

from them.

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Questions?

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Thank You

� Sandra Sbrocchi sandra.sbrocchi@mcmillan.ca

� Chase Irwinchase.irwin@mcmillan.ca

� Patricia Boodpatricia_bood@yahoo.ca

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