Watch wording in nondisclosure pacts

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted July 4, 2005.

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Recently, a physician client of mine received a letter from another physician's attorney alleging that my client violated a nondisclosure agreement, often referred to as an NDA.

NDAs, also called confidential disclosure agreements, are contracts between two parties that protect confidential documents and information, including inventions and software, that the parties want to share with one another for specific purposes. Other confidential information covered by NDAs might include copyrighted materials and intellectual property. NDAs enable the parties to restrict disclosure of such information to third parties, or for general use by the recipient.

An NDA can allow both parties to have open discussion while also affording protection against disclosure of or unauthorized use of confidential information and documents. It can be signed before a business relationship is consummated, if the purpose is to protect negotiations. Or one can be signed afterward, if the purpose is to protect specifics in the relationship. Often, practices have their employees sign NDAs to restrict the use and disclosure of the practice's confidential information or property.

If you are approached to sign an NDA or are presenting an NDA to another party, you should consider including certain language in the contract to protect your rights and not unduly restrict your present and future activities. Make sure that you carefully review how confidential information is defined in the NDA.

Most NDAs will include a laundry list of the types of items which are considered confidential. The definition of confidential information will also include exclusions.

Usually, exceptions to the use of confidential information or documents are appropriate if the recipient had prior knowledge of the confidential information or documents, or if the recipient gained subsequent knowledge of those items from another source. Other exceptions are if the confidential information or documents are generally available to the public, were obtained illegally, or are subject to a subpoena.

A pitfall that some doctors discover after signing an NDA is that the contract does not contain a specific length of time that the NDA is in effect. Prior to executing an NDA, make sure there is a specific length of time identified, as well as what event would trigger return of the confidential information or property.

You should also have a statement of purpose in your agreement that includes language that the NDA is being executed in connection with discussions and other exchanges of information that the doctors have had, or will have, to evaluate the possibility of entering into a business relationship.

Also consider how the confidential information or documents will be returned to the disclosing party upon termination of the NDA. And if you are disclosing confidential information to another physician, you want to ensure that the receiving physician cannot claim he relied upon your information to his detriment.

Precise wording is a must, because without it, you could be in a situation similar to that of my physician client, who was accused of violating an NDA.

In this case, my physician client and other physicians met six months ago to discuss development of a practice data management system and durable medical equipment. The NDA sought to protect the software and equipment developed by the physicians so that my client could make a decision whether he wanted to pursue a business relationship.

The signed NDA did not contain a description of the actual confidential information and proprietary property to be reviewed and protected. The attorney's letter alleged that my client exploited the data management system in violation of the signed NDA and further alleged there was an unauthorized disclosure of the system and related information to another practice group.

While my client did not exploit the data management system or disclose any confidential information to a third party, the NDA gave the other physician some basis for alleging an unauthorized disclosure because of vaguely worded contract provisions.

The attorney's letter also alleged infringement of proprietary rights and breach of contractual restrictions pursuant to the NDA.

The letter stated that if his clients instituted legal proceedings to enforce the NDA, they would seek disgorgement of all profits generated from the alleged commercial exploitation of the data management system, recovery of attorneys' fees and costs, temporary and permanent injunctive relief, and out-of-pocket costs and expenses incurred in connection with enforcement of the NDA.

After several discussions and letters, I was able to convince the other attorney that the NDA was not breached and his clients did not have viable claims against my client.

Still, it was a hassle that could have been prevented. Make sure you carefully review all NDAs to ensure that there are clear parameters and safeguards for the use, disclosure, and return of confidential information and documents.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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