Non-Disclosure Agreements (NDAs) – Part 1: When & Why

You’ve been presented with a non-disclosure agreement. Should you sign? How do you respond to the statement:  “If you’re not going to steal my ideas, you’ll sign!”?

Flip side.

You present an NDA to someone.  When is it legitimate for them not to sign? How do you answer their response of: “I never sign NDAs” or “What? You obviously don’t trust me!”?

Non-disclosure agreements (NDAs), also known as confidentiality agreements, are used when information needs protection. The need arises because the information is an asset that has value in the hands of its owner – only to the extent that this information is not commonly known to competitors or the public.  Every business owner must understand what company information has such value and how to protect it.  Failure to do so can have disastrous consequences.  An experienced business attorney can help you identify this information and how best to protect it.

I’ll answer the opening questions in a moment.  But first let’s start by listing a few categories of information that might need protection and the situations in which an NDA might provide that protection.

  • Owners selling their businesses use NDAs to protect against the use of financial and competitive information such as customer lists by their acquirer or others should the deal not go through.
  • Manufacturers hiring sub-contractors may need to disclose proprietary information about their processes for the subcontractor to perform their work and assist the manufacturer.
  • Technology companies frequently need to protect information as they collaborate with each other to create a new product.
  • Employers might include confidentiality provisions in an employee’s employment agreement to protect strategic plans or other proprietary information from competitors should the employee change jobs.
  • Vendors may need to know the confidential information of a customer in order to tell the customer the correct product or solution for the customer’s needs.

What these examples all have in common are two parties, the possession by one party of nonpublic information not known by the other party, and the need to share that information in order to accomplish a business objective.  All NDAs describe what information is protected, who is to protect it, how long they’re responsible for protecting it, and what are the permitted uses of the information.

NDAs are often signed casually without much thought or concern — sometimes without being read. You’ll hear this often from me: always keep in mind that anyone can be sued by anybody at any time for any reason.  Any legal document drafted for a business transaction can potentially represent a collection of expensive claims about which you can be sued or need to sue if that document is signed without reading, careful consideration, or advice from a knowledgeable business attorney.

I have recently seen actual NDAs proposed that contained provisions that variously would have obligated the party who didn’t draft the NDA to:

  • pay the attorney’s fees of the other party under all circumstances regardless of who brought suit or why;
  • be sued in a non-U.S. jurisdiction; and
  • allow termination of the protection of the confidential information by the party receiving it at any time for any reason – largely cancelling the point of the NDA in the first place!

Each of these is ridiculous and unacceptable under almost all circumstances.

So, if you’re presented with an NDA and are pressed to sign it on the spot, simply say something like,

“I think it’s reasonable for me to read through this, make sure that I understand it, and perhaps consult my attorney.  I’ll get back to you.”

If the deal or the other business person can’t tolerate such a reasonable request, then something is wrong with either the deal or the other business person.  Neither you nor the other person should assume that the NDA which has been presented is automatically fair to you in your circumstances.

Also, consider whether you need access to the confidential information at all.  In order for you to do your part in whatever transaction is proposed, do you need to see the recipe (the “How”) or do you just need to see the cookie (the “What”)?  Recipes typically need protection.  The existence and a viewing of (think demonstration) of the cookie typically don’t need protection.  If you just need to know what and not how, an NDA may not be needed.  Discuss this with the party sharing the information – and an experienced business attorney if there’s a question.

This thinking is also valuable if you are the one sharing your information.  When is it legitimate for them not to sign?  Perhaps when they only need the “What is it,” and not the “How do you do it.”  With potential investors, in reality they are typically more concerned with finding a good entrepreneur than a good idea (regardless of how truly great your idea is).

With everyone else, protect your “How.”  Trust isn’t a part of it.  You’re being an irresponsible business owner if you don’t protect your valuable information.  NDAs are standard operating procedure for well-run companies.  If the other party doesn’t get that, either suggest that they ask an attorney to help them work through the issues, or perhaps they aren’t someone with whom you should share your confidential information.

In future posts, I’ll discuss provisions that NDAs must have and other terms that they sometimes have.  The latter category often includes one or more of the “Non’s”:  non-compete, non-solicitation, non-disparagement…  I’ll describe different types of NDAs and when an NDA should be a unilateral versus a mutual or reciprocal agreement.  I’ll also show you how to think about NDAs using the Journalism 101 trick of asking Who, What, Where, When, Why and How.

Until then, have a great day.

John H. Walker

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