It’s vital to protect yourself, your ideas and your assets through confidentiality agreements, and it’s not as scary as it may sound.
By Olga V. Mack (Startup Lawyer) and Lisa K. Nguyen (Intellectual Property Attorney, Latham & Watkins)
Confidential information is a valuable, if not dominant, asset for many businesses. Its protection should therefore be a priority. Written contractual confidentiality obligations are instrumental in that protection – whether as a free-standing confidentiality agreement a.k.a. a nondisclosure agreement (“NDA”) or clauses within an agreement covering a larger transaction.
Why Should You Have a Written Confidentiality Agreement?
- may be required under certain laws to preserve trade secret protection
- are typically clearer and help avoid misunderstandings because they specifically detail each party’s expectations
- are easier to enforce (this includes confidentiality agreements)
- may implicate issues other than confidentiality (such as certain intellectual property rights, non-solicitation, and others) and help the parties solidify the ultimate goal of their relationship
- can control the dissemination of certain information and provide you with notice as to who has access to certain information
When Should You Have a Written Confidentiality Agreement?
The following are examples of situations where a written confidentiality agreement may be critical. Before entering these situations, raise this issue with your legal provider.
Disclosures to Investors
If you plan to disclose a trade secret to an investor, you must have that investor sign a confidentiality agreement in order to preserve that protection. You may have heard that VCs and angels won’t sign NDAs. That is true if it is your first meeting with a VC or angel and you haven’t caught their attention yet. If so, it is a good idea to share just enough to interest them, but not everything, especially the crown jewels of your technology, business solution, or other confidential information. Once you’ve peeked their interest and are ready to disclose your trade secret to them, you will be in a good position to request that VCs and angels sign NDAs.
Working with Suppliers and Vendors
Do you want to enter a relationship with a supplier or a vendor that also provides services to your competitors? Is the information you provide to your supplier confidential and not to be shared with your competitors? If so, consider putting the agreement in writing, insisting on supplier/vendor staff training about confidentiality, requiring physical segregation from the supplier/vendor staff that serves your competitors, and other protections. In general, suppliers tend to be sensitive and accommodating to such requests and accommodate them frequently.
Preventing Future Competition with Employees and Contractors
Do you have employees or contractors? Employee and contractors may leave to work for a competitor or create ventures that become your competitors. They may incorrectly think that they can take your confidential information with them. If you want to stop that competitor from using your confidential information, it is essential that you have an NDA signed by the former employee. A good time to sign such an NDA is at the beginning of the relationship when your bargaining power at its peak. At the end of the employment or contractor relationship it is a good idea to conduct an exit discussion to remind them about existing NDA and other obligations.
If you are entering a joint venture with a partner, negotiating and structuring the NDA is an important part of defining the relationship. Putting pen to paper will help you and your partner understand what past, current, and future intellectual property is owned by you, your partner, or both, and the obligations of your respective employees working on the joint venture. Considering likely good and bad outcomes is an excellent way to start thinking about the protections you may need. Importantly, there is no better way to avoid litigation than having all the parties’ expectations and agreements down in writing.
Keeping Sweetheart Deals Private
If you’ve entered into a sweetheart deal with a client, you may not want your other clients or competitors to know the terms of that deal. Pricing and details of services or products are often worth protecting to preserve your ability to enter profitable agreements in the future and continue innovating. An NDA will prevent disclosure of those terms to your other clients or competitors, and a notification clause will let you know how far that information has been disseminated (to auditors, government, etc).
Please note: This article is for informational purposes only and no attorney/client relationship is formed by/through this article. It is not legal advice.