NDA’s Are Not Magic Bullets
One of the acronyms that gets thrown around a lot in business is “NDA”. It of course stands for non-disclosure agreement, sometimes called a confidentiality agreement, and is a staple in technology companies. Almost every business runs into them, though, and they seem like a good thing to have.
True, they are a good idea in many cases. The problem with NDA’s is that they are not magic bullets. Like any good thing, failing to recognize their weaknesses can cause severe problems. They are not a substitute for maintaining the highest possible secrecy.
The classic NDA use is when two parties are trying to set up some kind of agreement or partnership without knowing everything that is involved. For example, a person might have a great idea they think a manufacturing company could help with. Ultimately, there would be a license agreement to produce the product or perhaps a sale of the intellectual property. A formal contract would then be prepared to document the deal and protect the parties. But how can an agreement be reached, or how can the parties even assess the value of the product, without sharing details beforehand?
An NDA seems to provide the answer. Wording varies but usually the agreement will say that information is being shared on certain conditions. Those conditions might be that unless the parties can agree on a deal and formalize it through a full agreement the recipient cannot use the information in any way. If they do, or if they disclose the information to someone else, damages will be payable. An NDA just creates a contract right.
There are two big problems with NDA’s. The first is proving a breach. Suppose I tell Big Company Ltd. about my great product idea in the hope they will buy it from me. We sign an NDA restricting use of the information if we cannot come to a deal. The negotiations fall apart and so we go our separate ways. A couple of months later I find that a company with ties to BCL is producing something very similar to what I disclosed.
Clearly the situation might stink to high heaven but that is not the same as proving there was a breach of the NDA. I must show there was actually disclosure from BCL (who is a party to the contract and therefore subject to a breach of contract claim) to the other company. I usually cannot just sue the other company because I have no contract with them. Needless to say it could be impossible to prove that chain of disclosure. Many NDA actions fall apart for just this reason.
Another problem with NDA’s is judgement-proof parties. A judgment-proof party is not someone with magical powers to resist courts. The term refers to anyone who cannot be forced to pay a judgment. For example, someone who declares or might declare bankruptcy could be judgment-proof. Or they may have enough exemptions to shield all their assets from enforcement. You can sue them, wind through the court proceedings, win a verdict and get a judgment and what do you have? A piece of paper. If the party has no money that will be the end of things and your multi-million dollar idea is now in the public domain for anyone to use.
Judgment-proof parties are everywhere. For instance, it is common for companies that own intellectual property to have their employees sign NDA’s and prevent them revealing business information to others. But think about the problem of a $100 million idea and a clerk making $25,000 a year. If that clerk violates the NDA, sure you might be able to go through the court system and get a judgment. But how will someone making $25,000 annually pay $100 million? The simple answer is that they cannot and will not. They will declare bankruptcy or their exemptions from asset seizure will mean you collect little or nothing of your judgment.
These are big problems. I have not even mentioned the situation where companies will not sign NDA’s in the first place. They do not want to restrict themselves from competing in a market niche in the future and so you must trust them to act honourably with your information. They might but…
Keep this in mind the next time you are dealing with confidential information. Don’t ignore NDA’s altogether – sometimes they are necessary and the best tool to help. But too often they are inadequate and your best solution might be maintaining absolute secrecy. It can be harder to work with but the alternative could be the total loss of your intellectual property.