The medical sector is still seeing robust transactional activity notwithstanding the current market conditions and overall economic slowdown. The unprecedented activity of the segment during 2021 keeps going and the demand for medical offices continues to be strong during 2022. Although there has been some worry about the industry slowing down in recent quarters due to rising interest rates and the overall economic downturn, this has not yet been seen in the sales and supply figures of medical practices. The segment known for its stability and resistance to recessions once again demonstrates its comparatively safe and secure quality.

Similarly, even though retail space demand has been declining, the same cannot be said about healthcare facilities and related entities such as surgery centers and endoscopy centers. According to CommercialEdge[1], a commercial real estate brokerage platform, the Philadelphia metro area is third in the national vacancy rates among major real estate markets for healthcare, behind only Boston and Miami. In such a vibrant environment where healthcare office space remains in high demand and low supply, investors often turn to existing practice acquisitions and drive the prices up. That is why healthcare practitioners are naturally becoming more interested in merging or selling their medical practices. And whether it’s a lucrative deal that presented itself or time to retire, it is hugely important to make sure the sensitive information is protected. This is where a non-disclosure agreement, or NDA, becomes integral to your medical practice sale, merger or other transaction where confidential information is shared.

What is an NDA?

NDAs, also known as confidentiality agreements, confidentiality disclosure agreements, or proprietary information agreements, are legally binding and enforceable agreements that establish a “confidential relationship” between the owner of sensitive information and the signatory who gets access to it. It is no secret that between the initiation of a transaction and the actual closing there is a considerable gap filled with information sharing and analysis. These analyses determine which direction the transaction will ultimately go, and it is not always that they lead to the successful closing of a deal. In some situations, parties to the transaction split and every so often the potential buyer gets to keep some of the seller’s sensitive information

Under these circumstances, an NDA allows the practice owner to safely share sensitive and protected business information with the potential other party prior to the transaction closing in order to provide a party to do its due diligence to evaluate a practice’s worth and ensure an informed decision. The document protects the owner of proprietary information from unauthorized disclosure or misappropriation by the receiving signatory party and allows courts to issue legal relief upon breach. And since the information shared is often further shared with advisers and other business associates, it is ultimately that party’s responsibility to make sure that the said proprietary information is protected under the terms of the NDA.

What information can an NDA protect?

One may include a wide range of sensitive information into the NDA with broad categories and subcategories to be protected under its terms. Anything from financial information, patients count, trade secrets, operations methods and pricing data, existing supply sources and marketing strategies, to future business development and expansion plans may be included. One may also limit the other party’s ability to share protected confidential information with others, such as advisors or financiers, as well as define the length of time for validity of the agreement. In other words, NDA protects the type of information and in a manner  prescribed for the other party to keep secret.

It is important to get an NDA executed before any confidential information is shared. Also, be sure to have an NDA reviewed by a capable healthcare transactional attorney before signing. We have seen some NDAs which include language encompassing more that just non-disclosure. One example is a provision calling for exclusive negotiation rights between the parties for a specific period of time. This may not be what a client of ours  wants. The bottom line is to understand what the document says and determine whether it is acceptable or not.

There are generally two types of non-disclosure agreements: unilateral and mutual. The fundamental difference is that unilateral NDAs only protect one side, whereas mutual NDAs protect both sides of the contract relative to confidentiality

Unilateral NDA: Unilateral NDAs are the more common type and require only one party to the agreement to disclose sensitive information to the other party and require such information to be kept secret. This is the only information protected. Any data going in the other direction is normally not protected and cannot be required or expected to be kept confidential.

Mutual NDA: Mutual NDAs are the other type. They call for both parties to the agreement to share certain protected information with each other and require both parties to keep such information confidential according to the terms of the agreement. Mutual NDAs are common during mergers and acquisitions where parties are expected to share proprietary business secrets “both ways” during the negotiation process.

Is an NDA a complicated document in medical transactions?

An NDA can be complicated, and, depending on the scale of the transaction and amount or gravity of information shared, it may certainly reach several pages. Nevertheless, it is very important to make sure every bit of confidential and sensitive information is protected before it is transmitted to the other party. Therefore, it is strongly advised to start the transaction with requiring the signing of an NDA before any further substantive negotiations take place.

What happens if there is a breach of an NDA?

What does the NDA state relative to remedies? If a party breaches the NDA, the non-breaching party is generally entitled to an injunction, a judicial order to restrain a party from continuing the wrongful action. The non-breaching party may also be entitled to monetary damages, that may potentially include attorney fees or supplemental remedial expenses under certain circumstances, including pursuant to Defend Trade Secrets Act of 2016. Other actions designed to protect the non-breaching party may also be available as a remedy, depending on circumstances and the terms of the agreement.

In other words, an NDA serves as both a “legal sword” that empowers one to enforce compliance of the other party relative and pursuant to the terms of the NDA  in case of a breach, as well as as a “legal shield” that provides a considerable deterrence for the other party to even consider a potential non-authorized disclosure or misappropriation of proprietary business or private information during, or, in many cases even after the transaction.  This task may be  be achieved by a knowledgeable legal counsel who is familiar with not only the nature of the transaction but, most importantly, the actual field in question to avoid generalized boilerplate agreements and address  issues relevant to the healthcare transaction at hand.

In conclusion

Even though there are, of course, limitations to what an NDA can achieve, such as inability to protect  non-covered public information or a court’s interpretation of the agreement language in a way not contemplated by the parties, it is without doubt much safer to have a signed NDA before sharing any confidential information rather than relying on good faith. In many cases, shared information gets an additional layer of effort to protect the trusted information when an NDA is signed, even if the party with whom one shares the information has no intention of misuse of the confidential information.

Click here to view the article in the Chester County Medicine Publication.

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Vasilios J. (Bill) Kalogredis, Esq. has been exclusively advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

Art Sharbatyan has extensive real life practical experience in the healthcare field with particular concentration in dental practice groups. He represents healthcare providers in their business and legal needs at Lamb McErlane, PC’s Health Law Department. asharbatyan@lambmcerlane.com; (610) 701-4416.

[1] Source: CommercialEdge. Life Sciences Continue Driving Demand for Office – Data as of August 2022. National listing rate is an average of the top 50 markets. https://www.commercialedge.com/blog/national-office-report/

The Chester County Medical Society is thought to be the oldest county medical society in the State. The Medical Society is involved in all aspects of healthcare policy, practice, and education and serves to advance the health of the community and to protect and expand the healthcare resources available to its citizens in Pennsylvania.