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Tailoring Nondisclosure Agreements to Client .Tailoring Nondisclosure Agreements to Client Needs

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    By David L. Hoffman and Raben J. Lauson

    Tailoring Nondisclosure Agreements to Client Needs

    In the high-tech

    industry, NDAs

    can prot ect

    inventors a nd


    Nondisclosure agreements, also known as NDAs or co nfid e ntia li ty ag ree-ments, are vi tal to the exchange of technological and bus iness ideas. As recently reported by the Wall Street j ournal, I Silicon Valley conversations-even at coch1ail parLies-often begin with a request: "Sig n t his form. please." Without NDAs, however, inventors or other creators of new "bu siness me thods wo uld be unable to disclose their ideas or information to potential investors. coinventors, executives. buyers. consultants, or developers. 1l1is is especially true in the computer world . where ideas

    NOAs as a result of the boom in the Inte rn e t economy unde r-scores the importance of taking a close look at NOAs.

    Wh cn an inve ntor with an idea-for example, a compu tc r engineer with a business method and new software to implement it-wants to d iscuss business witil a potential investor, business par tn e r, s uppli e r, cus to me r, equipment manufacturer, or con-sultant. he or she will have li ttle prac tical recourse without an NDA Patent laws offer protec-tion, but a patent application t.akes time to prepare and usually t"lkes at least 18 months to issue. In any fast-moving business field , it is not desirable to wait fo r patent protec tion before sta r ting the business. Additionally, the mere fil ing of a patent application docs not provide lights . Until a patent issues , the refore , an NDA may be the only way an inventor can safely solicit help. NDAs bridge the gap between a concept and patent protection.

    uke inventors , can be appropriat-ed ver y quickly.

    ard~~!~:a~~ t ~:lZ~ only ones us ing NDAs. People who need to exchange confidentia l infor-mation employ the NDA as a prelude

    David L. Hoffman and Robert J. Lauson are members of Cislo & Thomas LLP in Santa Monical which handles intellectual property prosecution and litigation.

    ow ners of confi -dential information (trade secrets, CllS-tomer li sts , etc.) need NDAs. If lhe information is dis closed wrongfully. the breach of the NDAcontract may

    to a business deal, settlement, employ-me nt, o r oth e r t ran sac t ion. Altilough NOAs have been in use for some time, many attorneys use them without cons ide ri ng what their terms mean and what protection they do and do no t provide. The increased use of

    be easier to prove than, for example, the tor t of misap-

    propriation of a lrade secret With an NDA, a breach of contract claim may not require proof of the trade secre t s ta tus of the information. An NDA can also provide that attorney's fees will go to the victim of a breach.

    A pleti lO ra of provisions. how-ever, do not improve an NDA. Its typical lise is by non lawyers ini-tiating discussions among pa r-ties cons ide ri ng new ventures, so it should be as simply worded as possible. An onerous, densely worded NDA is not likely to be signed by someone who has no re lationship with the inventor. (By contrast, an NDA that is not in writing is too informal to be worthy of consideration.) Ideally. an NDA should fi t on one page and feature simple, straightfor-ward language. so Ulat the receiv-ing par ty feels confident abou t not having the NDA reviewed by an attorney. If tile receiving party does ask an altorney to review a simple NDA, it should quickly pass Illuster. 'nle purpose of an NPA is to allow the par ties to explore a business relationship, not to inh ibit sllch exploration. With this goal in mind. NDAs are frequently crafted to suit the par-ticulars of different types of nego-tiations.

    For example, one type of NDA binds two parties who want to disclose confidential information to each othe r. Under th is sce-nario. the NOA's te rms clearly ind icate that each par ty is obli-gated not to disclose the confi -dential information received from the other. 'nl is scenario usu

  • proprietary information may not rise to the level of trade secret status.6 The common five-year limit may arise out of a belief that most proprietary information has little value after five years and that it may be difficult to get someone to sign-or a court to enforce-an agreement that extends beyond five years. Furthermore, the typical useful life for com-puter programs is considered to be five years. Nevertheless, practitioners representing the disclosing party should avoid including a five-year or other time limit in an NDA

    Typical Elements of NDAs

    An NDA serves two important legal pur-poses. One is to define the confidential infor-mation, and the other is to set forth the lim-itations on its use. Additionally, NDAs normally feature exceptions to confidentiality and termination provisions.7

    NDAs typically define the confidential sub-ject matter in general terms. For example, an inventor has the idea that online sales could be structured so that a shopper could huy books with a single click and believes that an onlin~ retailer could gain a competitive advan-tage with such an easy-ta-use system. The inventor then designs software to implement the idea. Clearly, the inventor should not explain the details to the retailer if the retailer has not signed the NDA. If the inventor believes that the concept of one-click shop-ping is critical, then the NDA should not men-tion it. Instead, the NDA could describe the idea as a simplified method for purchasing books or other products online. The retailer, in turn, will not want to expose i~1f to liability by signing an NDA that is so broad that nearly any innovation, even one under development in-house, could be covered by the NDA The art of writing a good NDA lies in being spe-cific enough to arouse curiosity and allay fears without being so specific that the inven-tor gives away the idea before the agreement is signed.

    When considering the appropriate level of specificity and the protection of the inven-tor, a review of documentation is important. If the inventor has a p'itent application on file with the U.S. Patent Office, adequate docu-mentation of the invention exists. If the inven-tor has little documentation, the attorney probably should develop documentation or at least counsel the client to document the idea before disclosing it. In the event that the receiving party claims that it already had the confidential information and that the dis-closing party disclosed some other idea, solid documentation will afford the disclosing party some proof that it had the information on a particular date before the disclosure.

    Another consideration when defining the confidential information in the NDA is the


    nature of the deal that is being sought If a business is discussing an alliance, partner-ship, or joint venture with another business, for example, a simple statement that "all busi-ness, technical, and financial information dis-closed" is confidential may be in order. This broad definition, however, may make it diffi-cult to prove the specifics of what was dis-cussed. The attorney should therefore advise the client to list what is disclosed in a meet-ing and to send a briefletter or memorandum to the receiving party that defines each packet of information that was discussed. For exam-ple, the letter could say, 'Today we discussed sales. All sales figures from 1995 to the pres-ent were disclosed. This information is con-fidential, pursuant to the agreement you signed on [date]."

    The definition of confidential information may also be established graphically. This approach has the advantage of certainty and the disadvantage of being cumbersome to administer. Using this approach, the client-inventor marks (with, for example, the legend "confidential") all tangible information; fur-ther, the disclosing party should document that all intangible information shared with the receiving party within a set period is also confidential. Graphical definition creates some practical problems for the client. The client must be careful to

  • ating any written evidence. However, for a simple or easy-to-implement idea-such as the one-dick system-written evidence could be a pivotal requirement for the inventor.

    The inventor's NDAaiso typically grants the recipient an exclusion for information that comes into the possession of the recipi-ent through a third party with no duly of confidentia li ty. It is important to includ e with in this exception the duty of confiden-tiality; otherwise, one recipient of the inven-to r's idea could share the idea with another recipient.

    Finally, the concern of some recipients-that. prior or subsequent to the disclosure, they may develop the inventor's idea inde--penden tly-needs to be addressed with an express exclusion in the NDA. However, the NDA should place the burden of proof of prior development on the rec ipient. I f the recipient is a small company, it may be safe to assume that the inven tion cou ld not be independently developed subsequent to the disclosure. If the company is large, proof of independent deve lopment may be eas ie r. even after the dale of disclosure. For exam-ple. a disclosure to the New York office of a company and the subsequent independent deve lopment by the 1'oh,),o office is a rea-sonab le possibility. Still, the burden of proof should be placed on the recipient to show that the confidentia l information did not reach the Tokyo office before the alleged inde-pendent invention.

    Exclusions may ask for too much from the inventor. Some NDAs. for exam pIc . includc a residuals clause. which essentially allows

    . the recipient to use some residual portion of the inventor's idea that the reci pien~ rcta ins in hi s or her memory. Ostensibly, the resid-