NDA’s – Am I Protected?

Shannon DeRouselle — Fri, 22 Jan 2010 23:12:00 +0000

My neighbor is a good guy. Very smart and ambitious. We discuss things. Recently, as he described his new venture to me, he mentioned that he had been using a Non-disclosure Agreement (NDA or Confidentiality Agreement) that he found on the web. I knew that it was time to add a blog entry on this topic.

Requests for NDA’s are among the most frequent inquiries that I receive. NDA’s are commonly used, normally short in length, and serve the ostensible function of proscribing the revelation of certain information. Most of the time, a client who asks for an NDA is on the right track, since that client is at least considering the handling of important information that has value to either the client or another party.

Sometimes, however, a party chooses to utilize a “form” NDA found on the Internet. This act is not necessarily cataclysmic — I have found useful forms on the net; also, the party may not want to pay a lawyer to draft an NDA.

At other junctures, a party may sign another party’s NDA, perhaps as a result of either an assumption that the NDA covers both parties’ interests, or a simple lack of negotiation power.

Whether you are an actual client, or an ambitious web user, take note: a single NDA template is not appropriate for all circumstances, and to better protect your valuable information, a properly drafted NDA is necessary.

NDA’s are worded differently depending on the intended use of the document. For instance, certain language may be appropriate for discussions with a potential new client, but may not properly address the handling of information when evaluating a potential sale of the company. Similarly, the specific language used in an NDA might vary according to whether you are disclosing or receiving confidential information. Moreover, how the term “Confidential Information” is defined in an NDA can vary widely, as can exceptions to confidentiality obligations, the duration for which such obligations are in effect, and the remedies for breach of the agreement. NDA’s can be very sophisticated.

An NDA is an important step in safeguarding valuable information. Like any contract, however, an NDA is not foolproof and does not guarantee that your information will not be misappropriated or misused. For absolutely security, you must never reveal information at all – not very practicable for business (in fact, sometimes the measured disclosure of information is customary, such as in discussions with VC’s and investors who do not normally sign NDA’s when evaluating potential investments).

My neighbor will be fine: while I have not revealed any confidences, and have received his blessing for this note, the NDA form that he uses is the most restrictive that I have ever seen, and, presumably as a result, no one has yet agreed to sign it.

Small Business and Intellectual Property

Shannon DeRouselle — Thu, 14 Jan 2010 18:50:40 +0000

A few months ago, the multi-billion dollar legal dispute between eBay and the founders of Skype highlighted a legal axiom that is overlooked by small companies all too often: “Own thine intellectual property.”

eBay had purchased Skype for billions but, for some unspoken business reason, did not acquire absolute rights to a core component of the intellectual property behind the Skype technology, which was retained by the Skype founders and licensed to eBay. Subsequently, when eBay tried to sell the Skype business to a group of investors, the Skype founders, who had initially stayed on with Skype after the sale to eBay but eventually left the company, sued eBay for violating the terms of their licensing agreement. Although eBay and the Skype founders ultimately settled their disagreement, the legal embroilment resulted in costly litigation and nearly obstructed eBay’s sale of Skype.

The eBay/Skype anecdote illustrates an important lesson.

Companies often assume that the company owns the intellectual property created by founders, employees, and independent contractors. However, unless the intellectual property developed by these individuals has actually been contributed to the company through an assignment or similar legal agreement, the individual, rather than the company, retains ownership (in the case of an employee, the transfer may be imposed by law depending on the nature of the intellectual property created; nonetheless, it is customary for employees to assign their rights to the company through written agreement).

Small business, albeit on a lesser dollar scale relative to the eBay/Skype incident, frequently encounter similar situations. Who owns the company software? Logo? Business name? Customer lists? Website design and source files? Content? These examples are typical scenarios where a company would be wise to clear up any uncertainties over intellectual property ownership.

Why does it matter?

First, hostage situations (this is only an example!): would your company be affected if your webmaster shut your website down and demanded that you immediately pay $10,000 if you ever wanted to see the website code or applications again? If yes, then work out who owns what before that unlikely plot develops.

Next, clarifying the appropriate ownership of company intellectual property is a big deal to potential investors and buyers, who do not want the value of their asset to be subject to the later actions or claims of a third-party owner of IP. As seen in the eBay/Skype scenario, the Skype founders created significant leverage for themselves — at the detriment to eBay — by retaining ownership of a piece of the Skype technology. While the Skype founders likely walked away with a handsome financial premium, the potential Skype buyer surely contemplated walking away from the deal with eBay altogether.

For the inventor/author/creator: Because there may be situations when a blanket assignment is not appropriate, you must ensure that the assignment that you sign is appropriately limited in scope so as not to include intellectual property that you do not intend to contribute to the company. For instance, you may be developing intellectual property on your own time and with your own resources that should not be the property of the company.

Florida Small Business Law » Intellectual Property

NDA’s – Am I Protected?

Small Business and Intellectual Property