Can an NDA With a Foreign Company Prevent Trade Secret Theft?

A nondisclosure agreement (NDA) won't keep anyone from stealing your idea whether in the U.S. or abroad. Business agreements don't prevent wrongdoing; they merely establish the rules if wrongdoing occurs—and an NDA is no different.

So how do NDAs work with international businesses and what should your NDA include?

What Is an NDA?

An NDA, also called a "confidentiality agreement" is an agreement by one or both sides to not share (disclose) the other side's confidential information to anyone else without the disclosing party's consent. NDAs typically cover trade secrets and other information that a company holds confidential.

What Should Your NDA Include?

In general, your NDA should cover:

• what information is considered confidential
• what information isn't considered confidential
• how the party receiving the confidential information should treat that information
• when the party receiving the confidential information can legally disclose it to others
• the disclosing party's rights to the confidential information
• how long the receiving party must keep the confidential information secret, and
• boilerplate contract provisions.

Your NDA should also include provisions that cover what happens when one side breaches the contract—that is, when one side discloses the confidential information without proper authorization. For example, your NDA might establish:

• the location of the lawsuit
• whether the winner gets attorneys' fees
• whether arbitration is mandatory, and
• the ease with which you can get an injunction (a court order to stop the other party from sharing your secrets).

It might be a good idea to consult with a business lawyer when drafting an NDA or reviewing an NDA that's been sent to you. An attorney can make sure the agreement provides the best dispute resolution procedures for your business.

One-Way vs. Two-Way NDAs

With an NDA, one side or both sides might be sworn to secrecy depending on the information being shared. If only one side shares confidential information, then only one side needs to agree to keep the disclosing party's confidential information secret. But if both sides share confidential information, the agreement to secrecy should go both ways.

For example, suppose Capsule Corp is a U.S. technology business with a couple of new inventions that it plans to release soon. Now suppose Capsule Corp starts working with Endeavor Agency, a Japanese company, to manufacture and sell Capsule Corp's new inventions. In their business dealings, Capsule Corp shares with Endeavor Agency trade secrets and confidential information related to how the inventions are designed and function. Endeavor Agency doesn't share any confidential information with Capsule Corp about its business. In this case, the NDA between the two companies would likely be one-sided with Endeavor Agency agreeing to keep Capsule Corp's confidential information secret.

However, suppose during these dealings that Endeavor Agency shares its own confidential information with Capsule Corp, including marketing information, customer lists, and manufacturing processes. In that case, the NDA should go both ways. Capsule Corp. should agree to keep Endeavor Agency's confidential information secret and Endeavor Agency should agree to keep Capsule Corp's confidential information secret.

What Does an NDA Protect?

Keep in mind that a nondisclosure will only protect against the disclosure of confidential information. Once your patent is published, it's no longer confidential. (See our article on how to protect your patent when pitching it for more details and guidance.)

Your NDA should also protect trade secrets and proprietary information that's not generally known to the public and is either specified to be or you'd reasonably expect to be confidential.

For instance, your NDA might define "Confidential Information" in the following way:

For purposes of this Agreement, "Confidential Information" shall include all information or material, including trade secrets and proprietary information, that is not generally known to the public and that is disclosed to be or appears to a reasonable person to be proprietary or confidential. Confidential Information includes:

• Any and all information concerning Disclosing Party's current, future, or proposed products, including, but not limited to, formulas, processes, methods, designs, devices, inventions, proprietary technologies, computer code, drawings, specifications, notebook entries, technical notes and graphs, computer printouts, technical memoranda and correspondence, product development agreements, and related agreements.
• Information, and materials relating to Disclosing Party's purchasing, accounting, and marketing, including, but not limited to, marketing plans, sales data, business methods, unpublished promotional material, cost and pricing information, customer lists, and prospective client engagements and projects.
• Information of the type described above which Disclosing Party obtained from another party and which Disclosing Party treats as confidential, whether or not owned or developed by Disclosing Party.

Talk to a business attorney to craft the best definition of confidential information for your business.

NDAs: U.S. vs. Foreign Businesses

NDAs enforced in the U.S. usually have a predictable outcome. But once you leave American jurisdiction, the results of enforcement aren't as predictable and the costs of enforcement are far more expensive. As a result of these factors, the odds that your NDA will be breached increase.

For example, a foreign manufacturer might:

• duplicate molds
• copy packaging, and
• send knockoffs out the backdoor and into countries where you have no intellectual property rights.

(See our articles on trademark infringement outside the U.S. and international patent protection for more guidance on intellectual property rights outside the U.S.)

Most foreign manufacturers rely on their credibility and trustworthiness to keep getting new business. So your first goal is to do your homework and try to figure out which ones are reliable and which ones are opportunists. The resources, below, can help you.

Drafting an NDA Specific to Foreign Businesses

Your lawyer (or you, if you draft your NDA on your own) should include provisions that'll help you in a foreign deal. Here are some things to consider when drafting an NDA meant to cover an international deal:

• Jurisdiction. The best way to get a foreign business into a U.S. court—unless the company does substantial business in the States—is to include a provision in the NDA that requires the foreign business to consent to U.S. jurisdiction. This paragraph of your agreement might prove difficult to negotiate (and to enforce), as foreign businesses are often hesitant about submitting to the U.S. judicial system.
• Choice of law. Every country has laws as to how contracts are interpreted. You'd want the NDA to be interpreted according to U.S. law. (Read our choice of law provisions article for more details.)
• Arbitration. Arbitration is similar to litigation but with less formality and expense. You'll usually benefit by agreeing to have disputes arbitrated. Hopefully, the foreign business will agree to arbitrate the matter in the United States. If not, there are three popular (though expensive) spots for international arbitration: London (the London Court of International Arbitration), Paris (the International Court of Arbitration of the International Chamber of Commerce), and Stockholm (the Arbitration Institute of the Stockholm Chamber of Commerce). Also, if possible, your agreement should award attorneys' fees to the victor in the arbitration.

While a dispute might never come up during your contract term, these provisions are still essential. As a business owner, you should hope for the best but plan for the worst. Negotiating dispute resolution terms that are favorable to your business can save you significant time, money, and resources.

Resources for Drafting an NDA for International Business

These resources can help you sort out manufacturers in foreign countries:

• The U.S. Department of Commerce (DOC) and the U.S. Small Business Administration (SBA) are interested in helping the sales of U.S. goods overseas.
• Check out the DOC's International Trade Administration website, particularly the export solutions page.
• The Bureau of Industry and Security, part of the DOC, has information about exports, including regulations and licensing.
• You can also look at the Tools for Business webpage on the U.S. Department of State website for additional resources.

As mentioned before, it's recommended that you consult with a business attorney when drafting an NDA with a non-U.S. business. Work with an attorney who has experience drafting these kinds of agreements, particularly between U.S. and foreign businesses.