Sign before you tell, But before you sign… Know What’s Covered and What’s Not in Your Non-Disclosure Agreement Sharan Leslie Goolsby, Esq. May 18, 2011
Agenda 1. Introduction to NDAs 2. Protecting Intellectual Property Through NDA 3. Types of NDAs 4. Anatomy of an NDA 5. High Points for your consideration - an Overview 6. Hypothetical 7. Q & A
Disclaimer This presentation is for informational purposes only, and is not intended to provide specific legal advice or to establish an attorney-client relationship. 3 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
1 Introduction Stats on NDAs and The Winklevoss Twins 4 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Non-Disclosure Agreements The Problem: It is difficult, if not impossible, to conduct high-tech business discussions without disclosing at least SOME confidential, proprietary, or trade secret information. Yet, disclosing the information often has the effect of giving the information away. The Solution: Enter into a Non-Disclosure Agreement (“NDA”). § NDAs are literally everywhere: a simple Google search yields about 1, 490, 000 results (0. 12 seconds). § Used every day in business and especially in the employment context. BUT COMMON DOESN’T MEAN RISK-FREE … NDAs HAVE FAR-REACHING IMPLICATIONS FOR EVERY ENTREPRENEUR, INVENTOR, AND CREATOR. 5 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
What is an NDA and What is it not? An NDA is a form of a confidentiality agreement. An NDA is a legal contract between at least two parties that: 1. Identifies certain confidential material, knowledge, or information that the parties want to share with one another (“Confidential Information”) and can include: - Confidential or proprietary information; - Trade secrets; and - Other non-public business information. 2. Limits the use of the Confidential Information (limited to specified purpose); 3. Limits or prohibits disclosure (e. g. , only those with a “need to know” within the company receiving the Confidential information); and 4. Creates a confidential relationship between the parties to protect the Confidential Information. An NDA is binding and enforceable. An NDA is NOT a sales contract, license, or other definitive agreement between the parties. 6 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Taken From Headlines: Facebook and The Vinklevosses The Winklevosses learn the consequences of signing on the dotted line NDAs, like other confidentiality agreements, are binding and can have unintended consequences. § Winklevosses signed a confidentiality agreement and a Settlement and Release for $60 M with Facebook. They sued over the validity of the agreement, among other things. They claimed they didn’t realize that they would lose certain claims when they signed the confidentiality agreement. The court rejected their argument and affirmed on appeal that the agreement would stand. Published Ruling: Facebook v. Connectu, Inc. 5: 07 -cv-01389 -JW (9 th Cir. 2011) affirmed lower court’s ruling that the Settlement and Release agreement was binding. “Legal Update - In the News” – Winklevosses seek appeal En Banc. 7 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
2 Protecting Intellectual Property Through An NDA 8 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Why Hassle With the NDA? Your first line of defense for protecting your confidential and trade secret information from the outside world is a well-drafted NDA. § Protected Disclosure: Information disclosed to third parties remains confidential or a trade secret if an NDA requires the recipient not to disclose it. § Unprotected Disclosure: Confidential or trade secret information disclosed without an NDA usually loses its status as being confidential or a trade secret. NDAs are designed to enable people to talk so they can discuss the terms and conditions for doing business together - not to BE the ultimate contract. Optimize Your Protection! The NDA should be properly constructed with a focus on: § the subject matter (what is being disclosed), § the purpose of the intended disclosures (why it is being disclosed), and § the scope of permitted disclosures (who it is being disclosed to). 9 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
What does the NDA protect? An NDA can be used to prevent someone from disclosing or using: § Confidential and proprietary information, including: information that, if disclosed, could harm the market position, detract from a market advantage or reduce the competitive edge that an individual or a company may have over its competitors; and research, inventions, drawings, designs, developments, product plans, hardware, software, code, service offerings, pricing, customer lists, personnel information, markets and market strategies, lists, data compilations, processes, finances, policies, procedures, and agreements; and even terms and conditions within agreements. § Trade Secrets. § Other non-public business information. 10 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
![More About Trade Secrets Trade Secret [Uniform Trade Secrets Act § 1(4)] § Must](https://present5.com/presentation/ce1de5ea97ded3558efe0f5a2e359c35/image-11.jpg "More About Trade Secrets Trade Secret [Uniform Trade Secrets Act § 1(4)] § Must")
More About Trade Secrets Trade Secret [Uniform Trade Secrets Act § 1(4)] § Must not be generally known to the public; § have benefits derived specifically from not being generally known (and not be solely of value because of the information itself); and § be the subject of reasonable efforts to maintain secrecy. The term “trade secret” is generally considered as a “formula, pattern, compilation, program device, method, technique, or process” that is valuable and secret. § Trade secrets are not protected by a patent (that would make it not a secret). § Trade secrets may be patentable, but the inventor/owner has decided for any number of reasons not to patent the invention. Example: Coca-Cola 11 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Distinguishing Trade Secrets from Other Forms of IP Methods of Protection Copyrights and Trademarks: § Protects Written Expression, Not Ideas § Limited Protection Patents: § Protects Ideas and the Expression of the Idea § Public Disclosure Required § Limited Protection Trade Secrets: § Secrecy § Unlimited Protection (if the legal requirements are satisfied) 12 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
What does an NDA really give you? § Legal Recourse. An NDA gives the discloser a right to sue the recipient if the recipient uses or discloses the information. If the discloser discovers that the recipient plans to use or disclose information covered by the NDA, then the discloser go to court and ask the judge to prevent the disclosure. – Temporary Restraining Order – Injunction § Evidence of Trade Secret. § Bargaining Leverage. § Incentive to Avoid Misuse or Improper Disclosure. The recipient of information under an NDA knows the risk of litigation and has an incentive to protect the information to avoid litigation. Enforcing the NDA can be very expensive and time consuming, but having the NDA does create value. 13 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
What if They Refuse to Sign an NDA? If NDA’s provide so much protection, doesn’t everyone agree to sign an NDA or an acceptable NDA? § No. Some investors (including some Venture Capitalists) refuse to sign an NDA. So, what do you do to protect your idea? § Understand the logic behind the refusal to sign an NDA at the beginning: Refusal to sign an NDA doesn’t mean the person is looking to steal your idea! Overlapping Content - Companies and potential investors hear many pitches, often for similar products addressing similar common problems, and don’t want to “buy a pig in a poke” or limit their ability to go with the “best” solution. Limited Disclosure Desired on Initial Presentation = Limited Obligations. § Limit the disclosure to a high-level explanation when making your pitch. The initial presentation and business plan should be tailored to exclude actual intellectual property or confidential information, but reveal enough to entice prospective investors into further evaluation of the idea, business plan, or proposal. § Don’t disclose the details or the essential elements of your idea until AFTER you both sign an NDA. 14 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
3 Types of NDAs 15 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Types of NDAs: Mutual and Unilateral MUTUAL UNILATERAL § Imposes obligations on both parties. § Imposes obligations on one party. § Recommended when: § Recommended when only one party is providing confidential information or trade secrets. Both parties are expected to disclose Both parties may engage in confidential discussions that could or will likely reveal confidential information from both parties If the parties expect the discussions to will continue for an extended period of time § Advantage: Your lawyer won’t be there to monitor the scope of disclosures and the mutual terms reduce the risk of revealing unprotected Trade Secrets. § Intangible Advantage: Mutuality enhances free flow of communication. 16 | Sign before you tell … NDA | May 2011 § Used when the actual information flow matches the unilateral model – One Way Street. § Advantage: Minimizes risks for the solediscloser on future activities relating to any information received from the other party. § Caution: Beware of unintended release of information or Trade Secrets! All Rights Reserved © Alcatel-Lucent 2011
4 Anatomy of an NDA 17 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Digging Deeper: The Anatomy of an NDA Information Covered by the NDA Purpose – What the Information May Be Used For. Duration of Obligations Termination and Effect of Termination Remedies and Limitation of Liabilities Residuals Clauses 18 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Information Covered by the NDA Every NDA contains a description for how to identify what documents and information is to be covered by the agreement: § Documents labeled “Confidential Information” § Electronic and hard copy media § Oral Communications If it contains information that one would expect to be Confidential Information (hard to enforce); or If memorialized in writing within a specified time period (need to implement a process for documenting information). § Exclusions from the Scope Known before disclosure Publically available information Information independently obtained Legal disclosure required 19 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Purpose – What the Information May Be Used For. Most NDAs include a specific purpose for which the information may be used. § The stated “purpose” creates limitations on permitted uses of that information. § The purpose should be sufficiently specific to include the desired uses and to exclude the uses of the most concern. Examples: § “The recipient may only use the information received for discussion purposes, and may not use the information to develop its own products or services. ” BEWARE – BALANCE REQUIRED! 1. Information disclosed that is inconsistent with the purpose could fall out of the NDA. 2. A new NDA may be needed to include new purposes = frustrating and not flexible. 3. BUT, lack of clarity in the purpose gives recipient more opportunity to use or disclose beyond what the discloser wants. 20 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Duration of Obligations: How long is long enough for protection? Finite Perpetual Protect disclosures will typically operate in Obligates the recipient to maintain secrecy one of two ways: for so long as the information remains protectable under applicable law. Depending § (i) the period of protection lasts for a on the type of information to be disclosed, specified period of time from the date of the dangers of not having perpetual disclosure, or protections can be significant (e. g. , if the § (ii) the clock terminating the period of information protected is a Trade Secret). protection starts on termination of the NDA. § Caution: Trade Secret Protection Note: The confidentiality obligations should “survive” termination of the NDA. 21 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
How to decide what the period of obligation should be: Trade Secret Factor ○ If trade secrets are to be disclosed, the disclosing party should insist on protections for perpetual duration. if a perpetual NDA is not acceptable but the disclosure is still desired, then a reduction in the scope of information to be disclosed should be considered. ○ In the event only confidential information is to be disclosed (in this case, information that is confidential, but does not rise to the level of a trade secret), a shorter duration is generally acceptable. The period of protection should be no less than the period of time the information disclosed will have value to the discloser. Common time periods for NDA protection are 2 years, 3 years, and 5 years. Tip: Consider how long will the information will really be valuable in the market place before the market changes and the current information goes stale? 22 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Effect of Termination: Continued Obligations and Administration What happens to the information when the NDA terminates? § The Recipient should return or destroy all information disclosed by the other party. If destroyed, recipient usually provides a certification of destruction. Sometimes the parties agree that each may retain 1 copy for records. § What’s the trigger to return and/or destroy? Automatic Written Notice What about notes and other materials the recipient may have taken or created as a result of the disclosures? Usually the same as the information. Is there a Notice Requirement in the NDA? Notice usually goes to both a business person and a legal representative. 23 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Additional Steps After Termination Track and Communicate Termination Immediately! § All parties should know and understand that protection no longer exists § STOP TALKING AND STOP SHARING ANY INFORMATION Unless there’s a new NDA or a separate agreement containing a confidentiality provision protecting the information, stop sharing confidential information with the recipient. Stop using confidential information received under the NDA. Make sure all unique materials disclosed are either returned or destroyed and destruction is certified or in the case of return. Make sure the return is well-documented. Think! What will be your method of communicating termination with your colleagues, employees and partners? 24 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Limitation of Liability V. Right to Injunctive Relief Should you agree to a limitation of liabilities clause (“LOL”) in an NDA? The answer requires consideration of many factors, including: § What is the value of the information to be disclosed? § In the event of an unauthorized disclosure, what is the potential harm incurred by the disclosing party? (including: a diminution in value for the information disclosed, loss of competitive position, loss of business, loss of reputation) § Does the material to be disclosed contain confidential information of third parties? If so, what are the legal risks and liabilities associated with an unauthorized disclosure of that information (up to, and including, disclosure into the public domain)? § Is there risk associated with a recipient’s illicit use of the information disclosed? As examples: Will develop competing products? Will disclose information to a competitor? 25 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Limitation of Liability V. Right to Injunctive Relief Who will Laugh out Loud if an LOL is included in the NDA? Generally, LOLs limit the very type of damages incurred by the non-breaching party to an NDA: Consequential Damages. § Under an NDA, many of the potential damages that could arise from a breach are consequential in nature and non-disclosure agreements typically do not contemplate or anticipate the payment of fees. Compare to a Typical Business Transaction: Typical in standard transactional agreements and other agreement types limits damages in case the agreement is breached. In the case of a business transaction that arrangement has a value (payment of some kind of fees), generally the LOL is related to the value of the transaction and the LOL excludes certain other kinds of damages known as consequential, indirect, incidental, special, punitive and other related damages. (explanation of these is a subject of another discussion) 26 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Limitation of Liability V. Right to Injunctive Relief Off to Court we go! Money is often not enough to compensate for breach of an NDA. How does money pay for things like: If the recipient takes the ideas, plans, and creations received under an NDA and discloses it to a 3 rd party who can now compete with the discloser, OR If the recipient uses the ideas to create its own competing idea, plan, or creation? To address this problem, many NDAs include language stating that release of the information would cause “irreparable damages” and give the discloser a piece of evidence to present to the Court. Here’s an example: “The Parties acknowledge that Confidential Information is unique and valuable and that disclosure in breach of this Agreement will result in irreparable damages to Disclosing Party for which monetary damages alone would not be an adequate remedy. Therefore, and not withstanding anything to the contrary contained in this Agreement, the Parties agree that in the event of a breach or threatened breach of confidentiality, the Disclosing Party shall be entitled to file for an injunction in any competent court as a remedy for any such breach or anticipated breach. Any such relief shall be in addition to and not in lieu of any appropriate relief in the way of monetary damages. ” 27 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Residuals Provision: Continued Use of the Information “Cerebrally Retained” Common residuals clause: “Residuals” means information of a general nature, such as general knowledge, professional skills, know-how, work experience or techniques, that is retained in the unaided memories (without conscious memorization or subsequent reference to the material in question) of the Receiving Party’s employees who have had access to Proprietary Information. Memory shall be considered unaided if the employee has not intentionally memorized the information contained within the Proprietary Information for the purpose of retaining and subsequently using or disclosing same. 28 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
5 A Hypothetical 29 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Ginormico vs. Babydevco Review and discuss the hypothetical 30 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
What could Ginormico have done? 1. Close-off it’s engineers that have worked with Babydevco similar technology and don’t allow them to work on the Ginormico new and similar technology. 2. Use only engineers that did not participate in the confidential discussions. 3. Use a Residuals Clause in the NDA. Remember: A “residuals clause” provides that anything someone remembers during discussions under a non-disclosure agreement remains outside the scope of protection for that agreement. The recipients can use this “residually retained information” as they please because it’s outside the protection of the NDA ( or course subject to other intellectual property rights such as patents). Typically, these clauses restrict intentionally memorizing disclosed information. 31 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Reality Check on Residuals Clauses…Theory vs. Practice 1. All “Ginormicos” understand the pitfalls of use of the residuals clause and normally are very prepared to walk away if there is persistent push-back to include a clause like that. Ginormicos want to be free to continue to develop products both similar and different from those offered by partnering entities. 2. Ginormicos know that these clauses serve to significantly weaken a disclosure’s protections and they can create the ability to work around, misappropriate or engage in other activities which may reduce the value of the disclosures intellectual property. 3. Some Ginormicos may include anti-residual clauses (meaning anything that is retained by a person after the disclosed materials are returned remains expressly inside the protections of the agreement). 32 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Reality Check: Is winning really Winning? Reality Check—Buzz Kill Sumei’s claims would have been extremely expensive and burdensome to prove. There would have been documents and testimony and expert witnesses and a ton of lawyers participating. Ginormico would not have gone down without a substantial fight. That takes time away from doing business. When these factors are taken in to consideration, winning is actually a true “buzz kill”—your business “buzz” that is. Reality is that it is difficult to get agreement during negotiations to include a residual or anti-residual clause or to significantly change the terms of form NDAs with bigger, more established, companies. Bottom Line: Never reveal the “secret sauce” until a definitive business agreement or license agreement is signed. 33 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
6 Summary and Conclusion 34 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Summary and Conclusion NDAs are all around us and they are a part of every-day business life. They are agreements that require thought and analysis before signing because the implications of signing may be far-reaching. Reviewing some of the high points covered here might help you when it comes time for you to sign on the dotted line. Winning in litigation is sometimes a “White Elephant Prize” in the end. It’s best to avoid litigation, when possible, by being prepared and getting good legal advice. Bottom Line: Don’t expect an NDA to do what it is not designed to do. NDAs are made to facilitate discussions that will get you to the position where you can negotiate the “REAL” agreement. Best Bet: Don’t give away the ‘secret sauce” until you have a definitive agreement in place (e. g. , a development agreement, a license). 35 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
www. alcatel-lucent. com 36 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
BACK-UP SLIDES 37 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
Reference Documents Sample NDA: Sample NDA Form for NDA Presentation 5 -2011. doc Hypothetical: Babydevco vs. Ginormico-Hypo for NDA Presentation. doc Vinklevoss Case: Winklevoss_signed nda 08 -16745. pdf 38 | Sign before you tell … NDA | May 2011 All Rights Reserved © Alcatel-Lucent 2011
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