Generic and cliched NDAs are taking their significance away from them. In this article, Sarang Khanna, Marketing Executive at iPleaders, writes about why NDAs are starting to become useless and how we can change that by making effective Non-Disclosure Agreements.
As a lawyer, my job is to advice my clients to make legally sound decisions, and to protect them in case they don’t. However, many years back during the start-up boom in India, when I was still a student, I remember having a conversation with a practicing intellectual property lawyer about the infamous Non-Disclosure Agreements (NDAs), and his words stuck with me for life. Upon asking if I should be suspicious about signing NDAs, he said and I quote “Sign anything. Just anything. I’ll get you out of it, if it comes to that.”
His words changed two things in me – first, made me gain confidence in the practice of law, and second, made me lose confidence in NDAs. So well, are confidentiality agreements really so useless? Are they even worth the paper they are printed on? That is really not an uncommon question regarding NDAs today, at least outside the context of employment agreements, where they are still acceptable.
It is understandable that an employer would want an employee to keep trade secrets secret. It also gives the employer more leverage to threaten with a lawsuit if the contract is violated. However, in the business world it is never too clear as to what can and cannot be disclosed, and to whom, and who exactly “owns” what piece of information.
The increasing unenforceability of Non-Disclosure Agreements have made everyone skeptical about the purpose and validity of NDAs.
So Should You Even Bother With An NDA?
In my honest opinion, the answer would still be a definite YES! Imagine a simple scenario where you discuss your business secret with a friend over a casual chat and they spill the beans in front of someone, or even worse, use the secrets only to show up as your competitor in no time? This is an extremely common scenario and signing an NDA in advance does save you the hassle of proving a lot of unnecessary things.
A carefully and cleverly drafted confidentiality agreement can save you the hassle of proving the ownership over certain information. It will also go ahead and establish your prudence in furtherance of trying to protect that information, and help your lawyer to immediately and effectively deal with a breach.
Moreover, you don’t have to depend on a lawyer for your confidentiality agreement. They are cheap and can be drafted on your own. In fact several online resources can help you draft any legal contracts for yourself or your business on your own without ever needing a lawyer. NDAs have some basic outline clauses (talked about later in the article) that are stationary in all agreements. Drafting your own NDA is not as intimidating as it sounds
These are the typical good reasons to still stick to NDAs :
- They provide written evidence of the factors talked about above. So, the more clearly the NDA actually describes the information to be protected, the better, as there is less room for doubt.
- NDAs are contracts, and you can always sue for breach.
- Finally, an NDA can include extra clauses that go beyond confidentiality, like non-compete or non-solicitation clauses. Having confidentiality obligations can help you enforce these clauses even if the other party might argue they are illegal restraint of trade.
Should You Ask Potential Investors To Sign Your NDA?
Firstly, you must realize that ideas amount to nothing. They are like cabs doing numbers of a crowded street on a busy Monday morning – you will see one after another. Even if you consider your idea to be novel and worth protection, it is important to realize that investors come across business ideas every day, several of which are tremendously similar. God help the investor if he signs an NDA for all. Hence, it is only the execution of an idea that will ever get any real credit.
Good luck asking your investor to sign your NDA as the first thing in your pitch. Sometimes, just by mentioning the NDA you might risk losing all interest in you from any potential investors whatsoever. You might also look like an amateur and newbie if you mention the NDA right off the bat. So, proceed with caution.
So, what to do? Well, for starters, it will help if you don’t walk around waving your NDA like you’re a king with a sword. Use it after you have built an interest in knowing you and your product further. “I have a product that will not only make cow’s milk taste like ice cream but also prevent diseases like cancer in them.” Keep your opening pitch intriguing and informative. If you establish real interest and when the discussions proceed, ask for an NDA before you reveal proprietary information.
Also, building trust with someone you are asking money from is important, and NDAs can sometimes kill any possibility of that. Otherwise as well, VCs and investors are always reluctant to sign confidentiality agreements. However, exceptions are always there, and in circumstances where you possess extremely confidential agreement such as patents or other forms of already registered intellectual property, confidentiality agreements are completely justified.
How To Draft An Effective NDA? What Are The Points To Keep In Mind?
As a business or as the possessor of any confidential information, striking the balance between collaborating with people and risking the misuse of your information is important. Whenever possible, it is best to share your secrets with people who have sufficient character and capability to protect your information.
It is even more difficult for start ups and young business to legitimize their demand of an NDA due to lack of experience and reputation. This is where your skill of negotiation and drafting will come into picture to get your potential partners to sign that agreement that indemnifies you against a breach. Be it raising investment, financing smaller projects, or the use and monetization of your company’s intellectual property, you will need contracts and confidentiality agreements for everything. Know how to draft an undeniable contract before you ask and get rejected.
It is also always great to have non-public information at your disposal to justify your NDA and make it foolproof. Where the nature of the information is a little more complicated, it is advisable to have a detailed schedule describing the subject-matter at length. The schedule can later be updated with mutual consent, without going through the hassle of redrafting the entire NDA.
When the information is obtained from another outside source for both parties, it is best to add it to the NDA with an additional clause that mandates noticing if anytime that information is to be relied on. This defeats the argument of the other party that it already had the said information at an earlier date. Smartly anticipated clauses are the spine of any NDA; let us look at a few extremely essential clauses that must always be present in every NDA.
What to include:
The definition of “Confidential Information”: Undoubtedly, this is the foremost important clause in your NDA. This clause must clearly spell out the information that demands protection. The information that may not be considered confidential must also be pointed out. The more comprehensive this clause is, the more credible your NDA will become. However, you must also develop strong internal company policies in furtherance of such protection. For instance, letting employees take information home or make copies can show lack of diligence and can invalidate an agreement.
Term of Confidentiality: A clearly defined time frame is essential as well. For how long does the confidential agreement stay confidential? Be it 10 years or 20 months, include your intended duration in the contract. Although it is important to keep in mind that courts won’t enforce an unrealistic time limit when it comes to NDAs. To add, very few sponsors or parties will even sign an NDA that has a long time duration, so this one is important.
Use of Confidential information: This clause should state the purpose of sharing the information and where all it could be used. All third parties should mandatorily be named in this clause if they will, during the course of this agreement, be required to deal with the confidential agreement.
Legal obligation to disclose: Sometimes, the parties may be legally obligated to disclose the confidential information that forms the part of your non-disclosure agreement. This clause acts as a measure to protect both parties, and considers such disclosure as not a violation. Language in this article should also ensure that the confidential information still stays confidential, and is not made public during the legal proceedings.
Return of information: Another must have clause is of due return of information after the expiry of the NDA. This clause can call for return, deletion or even destruction of the confidential information, as per the convenience of the parties. It is more crucial in times of such technological advances and increased usage of hard drive, email and other electronic media. Also, the clause must also specifically mention the exact time for such return, deletion or destruction of such information.
What to exclude:
The common exceptions in a confidential agreement pertain to the definition of confidential information.
(i) Information publicly known or in the public domain prior to the time of disclosure,
(ii) Information publicly known and made generally available after disclosure through no action or inaction of the recipient,
(iii) Information already in the possession of recipient, without confidentiality restrictions,
(iv) Information obtained by the receiver from a third party without a breach of confidentiality, and
(v) Information independently developed by the recipient.
The discloser of the information will always try to limit the exceptions. It is important to understand that the exception for an information that is required to be disclosed by law, is an exception to the duty to not disclose, and not an exception to the definition of confidential information.
Exceptions are important, and the courts are likely to invalidate an NDA that have no exceptions or appear to be too difficult to adhere to.
Its is your hands to ensure that your confidentiality agreement is not just a formality but also respected by the gainer of the information. It is always better that you don’t have to indulge in a litigation to get your NDA enforced, because then how good is that $ 500,000 that you raised if you have to spend almost half of it just on legal fees? You need to be smarter in your approach right from the start of initiating your NDA. Know how to draft an impeccable agreement without always relying on a lawyer and paying hefty fees. For inside out knowledge of business strategies and industry secrets, you can always take this online course and be one of the several success stories this course has been the reason for.
Till then, keep negotiating!