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Mark Grossman

Nondisclosure Agreements Are Tricky

30 August 2001

In the world of tech deals — more than other types of deals — my clients want to sign nondisclosure agreements quickly. I'm sure that many people will disagree with me on this one, but I like to avoid NDAs in the early stages of a deal. My feeling is that you shouldn't be exchanging secrets with strangers and that doesn't change no matter what they've signed.

Experience tells me that most deals at the "initial feeler" stage never reach fruition. It's a long way from that first lunch to a closing and a bottle of champagne. I say skip the paperwork and legal entanglements until you've at least gone as far as thinking: "This is getting interesting and serious." In the meantime, keep your secrets to yourself.

Usually, you can get through the early stages of a negotiation with a demonstration of what "it" can do without revealing how it does it. Of course, if what it does is as much a secret as how it does it, then my generalization may not be true for you.

In case you're not familiar with NDAs, the idea behind them is that you'll reveal confidential information only if the other side agrees not to improperly disclose or use the information. Right here it starts getting tricky because you have to decide to whom they can disclose it and for what use.

Watch out for a form with a line for your company name. If you're tempted to sign it, I have some simple advice: Don't. Not ever.

Every NDA is customized. Since tech lawyers see NDAs constantly, writing a good one should never be an exercise in reinventing the wheel. Still, they do require some thought.

For example, even the common name "Nondisclosure Agreement" is a bit deceptive because you not only want them to keep your secrets, you also don't want them to use them for their own benefit.

I'll typically include a provision like, "The company shall use the Secret Information only for the following purposes. . ." I'll then go on to list those purposes, which will vary in every deal, but never include exploiting my client's idea for their own benefit. So, it's not just "nondisclosure," it's also about not using my client's idea.

Make sure the agreement does a good job of distinguishing between confidential information and trade secrets. This is important because most NDAs have an expiration date after which a party is free to reveal the confidential information -- and you never want that with a trade secret.

A trade secret is an idea that derives independent economic value from not being generally known or readily ascertainable by proper means by other persons who could obtain economic value from its disclosure. It must also be the subject of efforts to maintain its secrecy. One most famous example is Coca-Cola's secret ingredient.

While you could argue that the obligation to maintain confidentiality of your secrets should last forever, most people hate to have long-term agreements hanging out there. It's usually reasonable to compromise and come up with an expiration date when we're talking about confidential information that doesn't rise to the level of a trade secret.

Ironically, in the tech world, this expiration date usually doesn't need to be zillions of years in the future because technology evolves so fast that last year's big secret is next year's so-what.

Having said this, if you're revealing a trade secret, the obligation to maintain the secret absolutely must, without exception, last forever. Once the obligation to maintain the secret is gone, so is your trade secret. No court will protect your right in that trade secret after you've consented to it being publicly revealed.

Moreover, by thoughtlessly signing a generic NDA, which mushes everything together, including your trade secret, you just gave away your company's most important asset. Oops.

Nondisclosure Agreements Are Tricky is republished from
Mark Grossman
Mark Grossman