My client emailed about a potential business opportunity with a competitor (the “Competitor”). The basic idea was to incorporate my client’s product into the Competitor’s product, and the enhanced product would be sold by the Competitor to the Competitor’s customers.
Per prudent practice, the Competitor asked my client to review and sign a Non-Disclosure and Non-Circumvention Agreement before continuing their discussions about the proposed deal.
You may know what a Non-Disclosure Agreement (“NDA”) is (it’s a restrictive covenant intended to protect confidential information shared by one or both parties). But, do you know what a Non-Circumvention Agreement is and how it differs from an NDA? Knowing when it’s appropriate to use a covenant restricting circumvention, who should be the restricted party(s), and how long the NCA should apply, depends heavily on understanding the nature of the deal.
What is a Non-Circumvention Agreement (“NCA”)?
A NCA is a legally binding agreement, ensuring the protected party isn’t left out of a transaction with the other party’s suppliers, distributors, customers, contractors, and/or vendors (collectively, “Suppliers and Customers”). It’s often used when two companies in the same industry provide each other with business opportunities. A NCA is appropriate for referral arrangements, where the party doing the work pays a fee to the party who made the referral, to ensure compensation is paid.
In the draft I was tasked to review, only my client was bound and restricted by the covenant, agreeing not to circumvent, avoid, bypass or obviate the Competitor in any transaction, either directly or indirectly, with any of my client’s Suppliers and Customers. But that didn’t make sense, since it was the Competitor who would be selling the enhanced product. I thought this must be an error or simply the “wrong form” was provided, so I revised to make the NCA mutual, applicable to both parties. For some unclear reason, the Competitor rejected mutuality.
Additionally, the NCA never terminated because it survived any termination of the Agreement indefinitely. I proposed that the covenants of confidentiality, non-disclosure and non-circumvention should survive for the earlier of: (i) two years, or (ii) the date the parties entered into a definitive agreement relating to the transaction. That way, they would burn off after two years if the parties were unable to enter into a commercial agreement to do business together. If they did enter into a commercial agreement, a similar restriction would be included in the definitive agreement. My proposal was rejected.
Unless the restriction was applied mutually to both parties, it didn’t seem reasonable that during preliminary negotiations, my client should agree to be restricted indefinitely from doing business with anyone and/or from bypassing the Competitor, unless and UNTIL there was a commercial agreement between them. In my opinion, the timing and survivability of a one-sided NCA was all wrong.
We went a few rounds discussing why the proposed NCA was over-reaching. Eventually, the deal fell through because, among other things, the NCA simply didn’t work at the NDA stage, and I successfully prevented my client from losing out on future business opportunities.
Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.
Aimee B. Davis Law P.C.
917-617-2243
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Brooklyn, NY 11201
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