Non-Disclosure Agreements (NDAs)
Friday, April 07, 2006
Let's say for argument sake that I have an idea for a cool new Internet based application. I want to get this idea off the ground but I don't feel I have all of the skills necessary to make it happen. I want to contact some people with skills in generating investor interest and quite possibly software developers to build a prototype. I could sign non-disclosure agreements with such people so that I could tell them what my idea is and how they can help me make it happen.
In an effort to gain a little further understanding of NDAs themselves and how I should go about creating them for my own purposes I began an Internet research effort. The first site I read over was the page on NDAs I found on Wikipedia. Wikipedia says:
Of course this makes it pretty apparent that I'm going to have to get a lawyer involved in the drafting of the NDA. I have contacted LegalZoom.com's customer service in an effort to answer some additional questions. I'm basically interested in finding out whether I can produce an NDA myself once I've had a template looked over by a laywer or whether I'll need to get a lawyer involved every time I develop a new relationship with a prospective partner.NDAs are commonly signed when two companies or individuals are considering doing business together and need to understand the processes used in one another's businesses solely for the purpose of evaluating the potential business relationship. NDAs can be "mutual", meaning both parties are restricted in their use of the materials provided, or they can only restrict a single party.
Unilateral NDAs are often not legally binding due to a common drafting error. Any contract must state valid consideration to be binding, which is an exchange of promises between parties. If one party promises to protect secrets, and the other party promises to do nothing, the NDA is invalid for lack of consideration. A mutual NDA does not have this problem, since both parties are promising to keep material confidential.
It is also possible for an employee to sign an NDA or NDA-like agreement with a company at the time of hiring, in fact some employment agreements will include a clause restricting "confidential information" in general.
While waiting for LegalZoom to respond I also found an interesting artcile on GigaLaw.com from a lawyer by the name of Jay Hollander. He concentrates his law practice on software and Internet businesses. In his article he makes the following interesting point:
So in other words, if one wants to protect trade secrets he/she must not only get a lawyer involved in the development of an NDA or NDA process but he/she must also ensure that a process is in place for protecting the information themselves. Coming from a military background this is something I have a fair amount of experience with. I think it's important that if I'm to begin to build a business around an idea for an Internet based application that I work to employ strong security measures into the way I work. I want to remain flexible but strike a good balance between flexibility and security. That sounds like a good topic for a future post.The most important thing about NDAs doesn't concern the actual agreement itself. Instead, the most important consideration for companies with confidential information lies in how the company protects its own secrets across the board.
The number one defense to a claimed violation of an NDA is that the allegedly secret information wasn't so secret and was, in fact, disclosed to others by the company, however inadvertently or occasionally.
In the end, an NDA is only part -- albeit an important one -- of a more comprehensive trade secret program. Companies wishing to protect their trade secrets must act like they, themselves, protect their trade secrets. They must have a policy for identifying, tracking and policing their trade secrets internally, so they can credibly expect and require strong preventative measures to be taken by parties with which they enter into NDAs.
Only in this way can parties maximize their chances of getting what they expect from NDAs and protecting what might be their most valuable assets from dangerous and unauthorized disclosure.
