As Blaier Law LLC works with more startups and small businesses, we notice extremely divergent views regarding non-disclosure/confidentially agreements (NDAs). Some companies love the idea of using an NDA, and others find no use for it or are against it. In this blog post, Blaier Law LLC will break down why we believe it is important to have a confidentiality agreement in place, as well as some concerns among companies we speak with.
What is an NDA? An NDA (or confidentiality agreement) is a binding agreement between two (or more) parties that obligates a party (or parties) to maintain the confidentiality of the information being exchanged between such parties. An NDA also sets the exceptions to such obligations, how long the obligations last, and what happens if someone breaches these obligations. It is widely used, something many startups and small business will come across at least once, and should be in your files and ready to use if necessary.
Arguably the greatest benefit of an NDA revolves around protecting trade secrets. The most interesting part about this intellectual property right (“IPR”) is that you don't need to register it anywhere (unlike patents, trademarks, and copyright). It is essentially the easiest IPR to acquire and maintain (it's free), as long as you meet the requirements of protection, which makes it very unique. Trade Secrets are protected under both state law and federal law in different ways.
The New Jersey Trade Secrets Act defines Trade Secrets as: information, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Unlike New Jersey, New York has not adopted the Uniform Trade Secrets Acts, and thus, trade secrets are protected by common law, under a definition that has been adopted by the courts of New York. The working definition of a trade secret in New York is as follows: "A trade secret consists of a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it."
Simply: independent economic value + maintained secrecy = trade secret.
To put the value of trade secrets into perspective, consider two cases:
In 2016, a trade secret case in Wisconsin had a judgment that totaled $960 million. In the case, Epic Systems Corporation vs. Tata Consultancy Services Limited and Tata America International Corporation (Western District of Wisconsin, Case No. 14-cv-748-wmc), Tata was accused of illicitly downloading documentation connected to Epic's software. Tata was given access by Epic to help Epic install the software on its client's network. The court found Tata in violation of applicable trade secret law.
In 2017, Waymo LLC vs. Uber Technologies, Inc., Ottomotto LLC and Otto Trucking LLC (N.D. Cal. 3:17-cv-00939), Waymo (a Google, now Alphabet company) sued Uber and Otto companies for $2.7 billion for theft of trade secrets. Uber bought the Otto companies, which were owned by an ex-Waymo employee who allegedly downloaded a plethora of confidential information and files from Waymo before leaving. By acquiring this company, Uber potentially opened itself up to liability for theft of trade secrets. The parties settled for $244.8 million in Uber stock.
As you can see, trade secrets can be worth a lot to a company, and keeping them protected is essential. An NDA is a great way to keep this IPR protected from a business's partners/vendors/suppliers, competitors, and even employees. However, one must be careful when drafting an NDA to make sure the trade secret is truly protected. Most NDAs are set to expire after a certain period of time, thus throwing the trade secret protection into jeopardy. An NDA that expires would allow the receiving party to use the information or disclose it, therefore breaking the prong of secrecy. A properly drafted NDA will protect the confidentiality of trade secrets for as long as they remain trade secrets under applicable law.
Aside from trade secret and other IPR protection, an NDA sets the terms for protecting other valuable and confidential information, even if it doesn't qualify for trade secret protection. Even the fact that the transaction is being contemplated between the parties can be held confidential if need be. So if, for example, you don't want other parties knowing you plan to acquire a company, you can add language in the NDA to cover that.
The comments we hear most often (from startups) are that investors won't sign an NDA for several reasons: (1) they review so many companies that it would be impossible to sign an NDA for each; (ii) if they breach a startups trust and divulge confidential information, the startup will discuss within the community and no one will want to work with the investor, so its against their best interest to divulge the info regardless; or (iii) they are stubborn and hold the chips. All three of these reasons are legitimate concerns and/or criticism. However, the pros of protecting this vital information may outweigh the cons of not having an agreement governing disclosure in place. Every situation is different and requires a separate analysis.
Blaier Law LLC would be happy to draft an NDA for your company or discuss strategy and negotiation tactics for investors surrounding confidential information. We believe this (potentially) valuable IPR is a major asset to startups and businesses and is wasted without proper safeguards. Blaier Law LLC has experience drafting, negotiating, and reviewing hundreds of NDAs/confidentiality agreements and can help you protect your most vital assets today. Please contact us to find out more!