Transcript Sharan Goolsby - The NonDisclosure Agreement

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.
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1
Introduction
Stats on NDAs and The Winklevoss Twins
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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.
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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.
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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 $60M 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 (9th 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.
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2
Protecting Intellectual Property Through An NDA
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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).
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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, products, 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.
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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
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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)
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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.
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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.
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3
Types of NDAs
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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
 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.
 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
 Intangible Advantage: Mutuality
enhances free flow of communication.
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trade secrets.
of information or Trade Secrets!
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4
Anatomy of an NDA
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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
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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
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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.
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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
 (i) the period of protection lasts for a
specified period of time from the date of
disclosure, or
protectable under applicable law. Depending
on the type of information to be disclosed,
the dangers of not having perpetual
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.
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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?
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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.
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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?
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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?
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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)
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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 3rd 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.”
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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.
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5
A Hypothetical
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Ginormico vs. Babydevco
Review and discuss the hypothetical
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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.
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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 workaround,
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).
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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.
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6
Summary and Conclusion
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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).
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www.alcatel-lucent.com
www.alcatel-lucent.com
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BACK-UP SLIDES
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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 nda08-16745.pdf
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