Last year I wrote a couple of articles (see here and here) about the basic mechanics of non-disclosure agreements (NDAs) and some strategic considerations in drafting them. But that all flows from the assumption that an NDA is useful in the first place.
You might still wonder, why in the world should we even bother with an NDA? After all, NDAs cost time and money, so you’ll definitely want to understand the value that you’re getting before you go to the trouble.
WHY ARE NDAS VALUABLE?
NDAs are primarily valuable because they protect the confidentiality of corporate information. To be more precise, an NDA creates a legally enforceable obligation to restrict use and limit disclosure of the information that’s protected by the NDA. Companies of all sizes use NDAs to protect confidential information, and in that regard, the main value of an NDA transcends corporate classifications: market cap, industry sector, growth stage, etc.
As outside patent counsel for several tech startups, I encounter NDAs quite often because my clients’ confidential information (typically a new technology or invention) is often their core asset. So we have to ensure confidentiality when anything is shared with a third party.
But NDAs can be valuable for a few other important reasons that are often less obvious. In fact, an NDA can be valuable even when the disclosing party has no intention of enforcing it and fully trusts the receiving party not to mishandle the confidential information.
Here are a few commonly held myths around NDAs.
“ENFORCING AN NDA IS TOO DIFFICULT AND EXPENSIVE”
Some folks don’t want to bother with an NDA because they believe that, even if the other side breaches, it would be too difficult or expensive to enforce the NDA in court. They may even have an anecdote or two that seems to support their rationale.
But an NDA can have significant value even if it’s never enforced. In particular, an NDA can provide evidence that a disclosure to a third party wasn’t “public” and therefore didn’t create a bar to patentability. Or an NDA may provide evidence that the disclosing party took “reasonable efforts” to maintain the secrecy of the information, which may be required to obtain trade secret protection.
By contrast, if a company discloses information to a third party without an NDA (or other confidentiality obligation), the company might lose the ability to get a patent or claim trade secret status. And an eventual breach of the NDA by the recipient wouldn’t necessarily have the same negative impact, for instance, if the client filed a patent application before the breach.
At the end of the day, it’s usually better to have the option to enforce and not use it, than to have the need to enforce and not have it.
“I DON’T NEED AN NDA — I TRUST THESE GUYS”
Some folks believe that they don’t need a written NDA because they know that the recipient is trustworthy and will keep the information confidential.
But even if that’s true, the NDA still serves a purpose—namely, to document the recipient’s intention to keep the information confidential. Even trustworthy people make mistakes, and a written NDA might be necessary to address an “accidental” disclosure or another type of honest mistake by the receiving party.
For instance, what if the “trusted” recipient accidentally discloses the information to a third party, posts it on the Internet, or includes it in their own patent application? In that scenario, the NDA can serve as a reminder of the parties’ original understanding and prompt the recipient to remedy the situation at their own expense.
And what happens if the “trusted” folks are replaced over time with folks who aren’t so trustworthy? As we all know, interests can diverge and personnel tend to change over time, and a written NDA hedges against some of the negative implications of those possibilities.
“AN NDA WILL SCARE PROSPECTS OFF”
On the brink of a big sale or significant deal, some folks might think that they’ll scare the other side away by asking them to sign an NDA. Ultimately, that’s a business decision that should be made with an understanding of the risk involved. But in reality, asking someone to sign an appropriately-scoped NDA is usually taken as a sign of sophistication and shouldn’t scare anyone off.
Perhaps more importantly, you can often learn a lot about someone’s intentions by how they react to an NDA. If someone truly intends to keep something confidential, they will rarely have an issue signing an appropriately-scoped NDA. And if they do have a legitimate issue, it’s worth knowing that upfront.
DO WE NEED AN NDA?
For any technology company that collaborates with third parties, sells products or services or raises capital—and that’s the vast majority of tech startups, NDAs provide more than a remedy for breach.
Mainly, NDAs can protect the patentability of an invention and the ability to assert trade secret protection for valuable confidential information. Beyond that, an NDA can help a company hedge against honest mistakes and gauge the intentions of potential customers and collaborators.
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Michael K. Henry, Ph.D.
Michael K. Henry, Ph.D., is a principal and the firm’s founding member. He specializes in creating comprehensive, growth-oriented IP strategies for early-stage tech companies.