What is a 3-Way Non Disclosure Agreement?
Unlike a traditional two-party non disclosure agreement, (or NDA), a three-party NDA comprises three parties. While a two-party NDA is an agreement between two companies to protect confidential information that one company provides to the other, a three-party non disclosure agreement is an agreement between three companies to protect confidential information that one party discloses to both of the other companies. So you can see a potential problem. Each party is likely to want to limit the disclosure of the information it provides to the other parties, right?
Now imagine that you are one of the parties in this situation. Let’s say you are providing confidential information to your non competitor , and your non-competitor is providing confidential information to you. So far, so good. But what if your non competitor discloses confidential information to the third party, and then the third party discloses that confidential information to its boss disclosing the same information supplied by your company.
This three-way disclosure of confidential information is a breach of the non disclosure agreements. But how does the party that has supplied confidential information protect itself from a "spill over" incident where confidential information disclosed to your non competitor is not protected from disclosure to your company?
The answer to the problem is a three party non disclosure agreement that appropriately limits the rights of disclosure for all three companies.
Key Components of a 3-Way NDA
For a 3-way non disclosure agreement to effectively accomplish its purpose, it must include several key elements. As mentioned above, the number of parties to the agreement are one of those elements. In addition, however, the agreement must also have a clear definition of the confidential information being protected. One of the most common problems associated with non disclosure agreements is that the definition of the confidential information in the agreement is too broad so that it ends up being used to protect things that were never really "confidential" to begin with. Then, even though the information was not really confidential in nature, the recipient of the information may be liable for breaching the agreement when he uses or discloses the information to a third party. Having a clear and explicit definition of the confidential information being protected will help avoid this situation by ensuring that only information that truly needs protection is included in the agreement. The agreement should also include a clear description of the obligations of the parties. For example, the parties should be required to maintain the information confidential, to limit the disclosure of the information to authorized individuals only, to take reasonable precautions to protect the information from loss and unauthorized disclosure, and to return or destroy the information upon demand. These obligations will help to ensure that the confidential information only remains confidential for as long as necessary and that it will be protected properly while it is in the possession of the parties. Finally, the agreement should require the parties to promptly notify each other of any unauthorized use or discovery of the confidential information. This requirement is important because the longer the confidential information is used in any unauthorized manner or is exposed to others, the more damage the unauthorized disclosure could have on its value. Limiting the "life" of the breach and protecting against further unauthorized use is therefore essential to any effective non disclosure agreement. By including these various elements, the 3-way non disclosure agreement will not only protect the parties’ confidential information, it will also help to ensure that the information is used responsibly and only by those entitled to do so.
Advantages of a 3-Way Nondisclosure Agreement
A 3-way nondisclosure agreement that is designed for confidentiality purposes grants specific protections to its signing parties. For example, if an individual or company wishes to conduct business with a third party but has to reveal proprietary information through this arrangement, confidentiality is further enhanced through these types of agreements to protect the project or relationship as it grows and develops.
Any type of business association is subject to the standard threat of a competitor infiltrating the system to gain access to intellectual property or secrets that could benefit the other entity. However, the benefit of using a three-way NDA is protection of all parties participating in the activity, so it is often considered with potential clients upfront. The protection it affords can protect a company from the threat of exposure from competing industries as well as maintaining current investors and clients.
Specific details, stipulations and clauses included within the document should be further explained to those involved in the transaction as needed to ensure a thorough understanding of its implications.
Considerations and Challenges
In drafting 3-Way NDAs, challenges may arise in drafting and enforcing the agreements to balance interests of both the investor and the company subject to an NDA when the Subject Company desires investor confidentiality. Factors such as the location of the Subject Company, the jurisdiction of the parties and the expenses that may be incurred in the event of a breach or enforcement should be considered. A well drafted 3-Way NDA will ensure that, in the event of a dispute, the three parties have clearly agreed to be bound by the final agreement. Where one party is in a foreign jurisdiction, and may not be subject to the jurisdiction over their activities in another jurisdiction, having a well drafted agreement is even more important.
In establishing jurisdiction, the parties may consider the factors of convenience, fairness and effectiveness to determine whether an agreement has a sufficient relationship or contact with the forum where the legal action is being brought either in terms of the parties, the subject matter or the occurrence of events giving rise to the action.
How to Draft a 3-Way Non Disclosure Agreement: Essential Tips
When it comes to drafting a 3-way NDA, there are some best practices that I recommend based on my experience both as a litigator and as a counselor to companies who regularly engage in complex, sensitive transactions. These practices include:
Consider whether you need a 3-way NDA at all. Sometimes it’s not necessary or advantageous for a company to clutch your invention or business concept to its bosom and promise special confidentiality protections. Even if you need to enter into an NDA, a much simpler 2-way agreement might be more practical. Also, instead of a 3-way NDA, consider simply having two separate 2-way NDAs, and then relying on a robust mutual third-party disclaimer agreement. In certain business contexts, such as where all parties know the other parties will not mishandle their confidential information and all parties are disclosing the same confidential information to each other, a well-crafted mutual non-reliance or third-party disclaimer agreement can provide the same or close to the same level of protection of the sort typically associated with a 3-way NDA.
Be clear about the nature of the deal. Define what information is deemed confidential, and which of the three parties will have access to it, and define who will ultimately be bound by it. For example, if Employer A will be disclosing to Company B a New Product that incorporates Confidential Information that Company A has disclosed to Company A, and Company C will be the ultimate beneficiary of the project , make sure that all three parties understand their relative positions and responsibilities. Protections are lost if the agreement is unclear on these points.
Define your terms clearly. "Confidential Information" should be defined in complete detail, including a definition of what is not confidential. The parties’ rights as to use and disclosure should be clearly spelled out, for example, will there be restrictions only on copying, or also on making a competing product?
Establish responsibility. Decide early on whether Company C will be able to disseminate Confidential Information it receives from A or B to its employees and contractors without further consent, or whether it must first seek further consent from A or B, or whether it will be strictly limited to A or B employees.
Establish rules for succession. Will the obligations survive a sale or transfer of shares or a company? How many parties, up and down the chain, will ultimately be bound?
Implications of failure to use local laws. If litigation occurs in a jurisdiction that does not allow for injunctive relief and specific performance because they are seen as penalties, you may want to adopt such a provision. Consider also whether the 3-way NDA will be enforceable in your target jurisdiction.
Review and revise. Finally, review and revise your 3-way NDA with counsel where appropriate to make sure it meets your needs and is tailored to be as protective as possible.
Applications and Case Examples
The 3-way non disclosure has been utilized in various industries, including technology development, joint ventures in environmental projects, and pharmaceutical research. In one prominent case, a technology company developed a groundbreaking software solution that required the expertise of two industry partners for its success. By signing a 3-way non disclosure agreement, all parties involved were able to share proprietary information, analyze product synergies, and establish a strategic roadmap without concerns about sensitive data being used outside the scope of the project.
In another case, a green energy firm collaborated with an engineering company and a financial investor to develop a new renewable energy project. The 3-way non disclosure agreement facilitated open discussions about design, financing options, and technology risk management. This agreement ensured protected information remained confidential throughout the project’s early development stages, giving all parties the necessary security to plan their future involvement in a more detailed phase.
A pharmaceutical company entering into a strategic partnership to test new treatment protocols also illustrates the usefulness of 3-way non disclosure agreements. In this scenario, one partner had done significant preliminary clinical research while another had extensive experience in regulatory affairs. A 3-way non disclosure agreement allowed for both the information on test results and the development methodology to be shared freely between the partners, ensuring each could navigate their specific segments of the FDA approval process as efficiently as possible, without secrets slipping out to third parties.
These examples show how the 3-way non disclosure agreement can successfully protect sensitive information while opening the door to fruitful collaborations.
Wrapping Up: The Significance of a 3-Way NDA in the Business World
As the modern business landscape continues to evolve, collaborative projects increasingly necessitate the involvement of more than two entities. In such complex scenarios, a 3-way Non Disclosure Agreement (NDA) serves not just as a tool for safeguarding trade secrets and sensitive information, but also as a contractual safeguard that can curtail competitive threats in the marketplace. The strategic use of a comprehensive yet tightly-written 3-way NDA can be paramount in protecting valuable intellectual property and other proprietary assets in a multi-party context.
It is essential for entities to understand the broader value of a 3-way NDA. Companies should carefully assess their business partnerships to determine whether they would benefit from a 3-way NDA that all parties can sign on to. When multiple parties are involved in a single project or ongoing business arrangement, a well-structured 3-way NDA is an invaluable asset in the due diligence process .
While a traditional 2-way NDA provides a comprehensive outline of each party’s duties, responsibilities and rights in a potentially confidential relationship, a 3-way NDA goes a step further by defining and regulating each party’s obligations and restrictions with respect to every other participant in the arrangement. A carefully-crafted 3-way NDA thus forms a cohesive agreement that aligns the interests of all parties involved.
Although there are many specific considerations that need to be taken into account when negotiating a 3-way NDA, one thing is clear: maintaining the confidentiality of proprietary information is a top priority for all entities involved in any sort of business activity. Through the use of 3-way NDAs, companies can ensure an added layer of confidentiality and protection from any potential loss of trade secrets, proprietary information or intellectual property.
With the likelihood of confidential relationships expanding in the future, the 3-way NDA has become an indispensable tool in modern business operations. To maximize its opportunities and ward off competitive threats in a rapidly-evolving business landscape, it is essential for all businesses to thoughtfully consider the pros and cons of using 3-way NDAs.