In any startup, there’s a great deal of novel ideas, technology, and business models that give the company its value. If this information is shared with the public, there’s nothing to stop another party from stealing those valuable ideas and making their own company on the back of your hard work.
Non-Disclosure Agreements (NDAs) can offer extra protection so that startups can share their ideas with the people they need to (artists, lawyers, programmers, etc.) without having to worry as much about getting their information leaked. This blog covers the basics of NDAs, what to expect, what some common clauses mean, and the NDA’s overall limitations.
There are typically 2 types of NDAs:
This is probably the most important clause in any Non-Disclosure Agreement because it specifies everything that’s being protected. This section should be written broadly and include lots of catch-all terms like “including but not limited to,” or “any and all information related to (your product).” After this section is written, the remainder of the NDA will refer to it as “the information,” and it refers to the entire block list of stuff you mentioned before.
In the legal world, Damages refers to actual money that is paid to the winning party after a lawsuit. During the trial, the winning party must “prove damages,” by convincing the judge or jury that the defendant’s breach of the Non-Disclosure Agreement resulted in $___ worth of harm.
As you can probably imagine, if someone breaches your NDA by disclosing confidential information about your product to someone else who then steals business from you and uses your novel ideas for their own products, the amount of damages can be very difficult to prove.
That’s why the legal world invented a “Liquidated Damages” clause, a wonderful device that says, basically, “because damages are difficult or impossible to prove specifically with regards to this agreement, the parties herein agree that any breach of this agreement will result in liquidated damages in the amount of $200,000.” Then, if someone does decide to go and breach an agreement, you don’t have to convince a jury of the extent of your damages – you’ll get the liquidated damages the parties originally agreed to.
Aside from a damages section, it’s very common to have a clause that allows for “injunctive relief,” which is basically what allows a court to order a person or company to stop distributing your company’s confidential information. Typically, these sections have both parties agreeing that injunctive relief is necessary because, if left unchecked, irreparable injury will occur.
Injunctive relief is crucial for companies sharing their information internationally, as it allows the company to take the agreement, and the injunctive relief clause, to a court in a foreign country and still get that court to stop the other party from further sharing or using your information without your permission. Without an injunctive relief clause, foreign courts are far less likely to help you to stop the public release of your information.
Often when you’re sharing information with another company, it’s in return for confidential information from them. Because these agreements are not one sided like a unilateral NDA, mutual NDAs add strength to your agreement. It gets back to the childhood argument of “well if you tell on me, I’ll tell on you!” Which, believe it or not, is quite powerful in the legal world! With mutual NDAs, each party has more skin in the game, so to speak, and is therefore less likely to release your secret information to others.
It would be wonderful for business worldwide if NDAs were powerful enough to prevent parties from using confidential information anywhere, but the unfortunate truth is that they’re not. While NDAs are quite effective in the US, assuming they were written for US companies and/or signed by US citizens, the second that someone takes the information outside of the US jurisdiction, there are few, if any, US courts or agencies that are going to help you out and enforce the terms of your agreement.
Put simply, if you sign an NDA with someone who then runs to Yemen and starts producing your product illegally, you can certainly sue them in a US court, but there’s very little that a US court can do to stop a defendant in Yemen.
Given this large limitation on enforcing your agreements, you would be well advised to be cautious in releasing any information to a third party that you think could be stolen and used in this way. To the best of your ability, keep outside parties on a “need to know” basis, even if you are using NDAs.
I’m sure your product is amazing, but other people don’t always know that, and/or don’t care about it as much as you do. Let’s call these people “independent contractors.” They need to know a solid amount about your product, but because it’s just a side-job to them, (and not something they are very invested in) it’s more likely that they might divulge your confidential info at a dinner party, for example.Thankfully, getting independent contractors to sign an NDA from the start does a great job of warning them that said dinner party topics are not to be discussed.
It’s usually best to keep your NDAs going even after the person you gave the information to has completed their work for you. In legal terms, this is referred to as “survivability,” and it can be added to an NDA by basically saying “all agreements herein shall survive termination or expiration of this agreement…”
While they can’t offer complete protection, NDAs can help warn third parties that you are sharing your secret information with that the information is, indeed, confidential. If the third party is a US citizen/company, it’s much easier to get a US court to stop them from further releasing your trade secrets, or using them for their own competing business. Due to the nature of secret information, mutual NDAs are usually more helpful than unilateral ones because breaching them allows the other party to breach as well, disclosing your confidential information in harmful ways.
Are there any blog topics you’d like to see? Any legal questions you’d like answered? Please feel free to leave them in the comments section or shoot me an email. I’d be happy to help out.
– Jonathan Sparks, Esq.