Nondisclosure agreements (NDAs) are key to successful deals. For some, they can also appear straight forward and scare off a potential buyer or seller to a deal. Let’s take a look at two scenarios:
You were presented with a nondisclosure agreement. Should you sign? How do you respond to the statement: “If you’re not going to steal my ideas, you’ll sign!”?
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!”?
Nondisclosure Agreements and the Information Needing Protection
Nondisclosure agreements (NDAs), also known as confidentiality agreements, are used when information needs protection. The need arises because the private information is an asset that has value in the hands of its owner. 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.
Confidential Information That Needs Protection
I’ll answer the opening scenario 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 nondisclosure agreements 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.
Why you Should Actually Read the NDA (and Hire an Attorney to Review)
Nondisclosure agreements are often signed casually without much thought or concern, even 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. You can be sued or need to sue on these claims 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.
Is an NDA is Needed or Not?
Also, consider whether you need access to the confidential information at all. Intentionally ask yourself: “do I need to see the recipe (the “How”)” or “do I just need to see the cookie (the “What”)?” Recipes typically need protection. The existence and a viewing (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. Nondisclosure agreements 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. For now, please review this video highlighting information in this article about why NDAs are important.
Until then, have a great day.
John H. Walker