If I am asked to sign a non-disclosure agreement, what should I watch out for?
Often, when you are asked to sign a non-disclosure agreement, by virtue of the fact that you are being asked, you often do not have sufficient leverage to control the terms of the agreement. It is always preferable, if you can, to provide your own non-disclosure agreement in a non-disclosure situation. If you agree with the receiving party to execute a non-disclosure agreement, offer to draft the agreement and provide an agreement for signature. Having an agreement ready and at hand during these situations can increase the likelihood that your agreement will be used.
If, however, you are in a situation where you lack the bargaining power to either provide your own agreement or to substantively affect the terms of the agreement provided, at least be aware of what you are signing and make sure that whatever agreements you make are reasonable under the circumstances. Generally, any mutual non-disclosure agreement, in which both parties reciprocally agree to all of the terms in the non-disclosure agreement, are the most fair and equitable. My view in negotiating a non-disclosure agreement is that I am generally willing to accept any term that you are willing to accept, provided that we are both contributing secrets or confidential information during the disclosure. Particularly when the non-disclosure agreement is a unilateral agreement, that is, when only one person is promising to keep the secret, then there are three general areas or terms that I suggest keeping an eye out for. I amusingly refer to these three terms as “stink bombs” in non-disclosure agreements, mostly because these terms are first noticed because something about the language of the agreement just does not smell right.
Stinkbomb #1: General Permission
The first stink bomb to watch out for is a general permission term. This is a term in which you grant permission by virtue of the non-disclosure agreement for the receiving party to use your idea in some way. In essence, this permission is the equivalent of a license. That is, by virtue of signing this non-disclosure agreement, you are allowing the receiving party not only to learn of the confidential information, but you are granting permission for them to use the confidential information in some general or specific way. If, for example, you have a patent on your technology, this term in the non-disclosure agreement might even rise to the level of a license to use your patent for some unspecified period of time. So be aware for the use of permission-type language in which you are granting the right of the receiving party not only to learn of your trade secret or confidential information, but also to use it.
Stinkbomb #2: Exclusivity
The second stink bomb is the exclusivity clause. The exclusivity clause is language in the agreement in which, by virtue of signing the non-disclosure agreement, you not only share your confidential information but you also agree not to share your confidential information with anybody else for some specified or unspecified period time. In effect, by executing a non-disclosure agreement containing this clause, you have rendered your confidential information worthless except to a deal that would be done with the receiving party. Of course, once the receiving party has exclusive right to learn of this confidential information, your bargaining power for a later negotiating value on this technology is greatly reduced.
Stinkbomb #3: Doesn't Pass the Smell Test
The final stink bomb to be aware of is any clause in the agreement that just seems unreasonable or makes you nervous. If it does not smell right, then it is not right for you. Trust your instincts when executing contracts. If the contract agreement makes you nervous, do not sign it. It does not cost much for an attorney to take a quick look at a contract and can save you lots of grief down the road.
One more thing about non-disclosure agreements is that I have found that large, publicly held companies generally have fair non-disclosure agreements. The reason for this is that a standard non-disclosure agreement form is used throughout most corporations. The agreements are form agreements that are drafted by the company’s lawyers and are distributed throughout the company for general use. Deviating from the terms of a standard non-disclosure agreement in most large publicly held companies generally involves delay and oversight by a legal department. Consequently, although large company non-disclosure agreements are often wordy and seemingly complex, my experience has been that these are generally safe to execute, but nevertheless, no matter what you sign you should read it, understand it, and feel comfortable about its contents before signing.
Contact John Ferrell at JFerrell@carrferrell.com if he can further assist you.
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About the Author
John Ferrell is a founding partner of Carr & Ferrell LLP, one of Silicon Valley's foremost technology law firms, and specializes in patent and intellectual property law matters. He is the Chair of the firm's Intellectual Property Practice Group.
jferrell@carrferrell.com
650.812.3408