Are NDAs Worthless? – Ep. 40 [Podcast]

Summary:

Is a non-disclosure agreement or NDA really worth the paper its written on? Is it even worth the trouble of drafting and signing one? Today we’re going to dive in to some personal stories about NDAs.

Transcript: 

Raymond Guarnieri:

Is a non-disclosure agreement or an NDA really worth the paper that it’s written on? Is it even worth the trouble of drafting and signing one? Today, we’re going to dive into some personal stories about non-disclosure agreements. This is Stuff You Should Know About IP. Today’s episode of Stuff You Should Know About IP is brought to you by the Patent Lawyer Magazine. If you want to stay up to date with everything that’s going on in the world of IP and patents, go to www.patentlawyermagazine.com. Each issue is free to read for up to eight weeks. That’s www.patentlawyermagazine.com for global news in the world of patents. All right. Tom, let’s talk about NDAs.

Thomas Colson:

NDAs.

Raymond Guarnieri:

The mothership of NDAs.

Thomas Colson:

Oh yeah. So NDAs, first, just for those of you who don’t know what an NDA is, I think everybody knows what an NDA is, but essentially it is a document, a contract that governs the rights and obligations of the parties in connection with confidential disclosures that they make to one another in connection with the relationship. So that’s-

Raymond Guarnieri:

Oh, whoa, whoa. What?

Thomas Colson:

Yeah. Yeah. So I’m going to of disclose to you. You’re going to disclose to me. The NDA essentially tells us how we have to protect those documents. That’s it. NDA-

Raymond Guarnieri:

I’m going to tell you a secret, so let’s sign a deal. You won’t tell anyone else that secret.

Thomas Colson:

Yeah. Right. And it’s just about confidential records. It’s not about employment agreements and assignment of intellectual property rights. It’s just governing the disclosure relationship, the confidential disclosure relationship with the parties. So I was thinking about this podcast this morning on my way back from my swim workout, because I was thinking about this crazy NDA discussion I had recently with respect to a friend of mine. So a friend of mine calls me up as this… It happens all the time. I get phone calls every week from somebody. They want free legal advice, right? So this friend of mine calls me and he says, “Hey, could you review this NDA? I’m trying to become a vendor to this company.” And I said, “Sure. Send me the NDA.” So I read it and it’s one of these classic obnoxious NDAs that often are provided by big companies to little companies, right? Because they have all the leverage.

Thomas Colson:

And this NDA essentially says any disclosures they make… And by the way, it’s one-way NDA. It’s disclosures from them to my friend. Any disclosures they make are protected. They could be written with no markings. They could be oral disclosures with no reduction to writing and mark. In other words, any disclosures, and they don’t even have to tell this guy when the disclosures are confidential. So I said, “Look, why don’t we schedule a meeting with this person? I’m sure I can have a rational conversation and they will see the error in their weights, right?” So he sets up a meeting and this woman, who’s the chief council for this big company, she gets on the phone. And basically she says, look, and she’s very nice lady. She says, “Look, the reason we do that is because our engineers, we never know what they’re going to say, or we don’t know. So we just want to make sure everything’s protected.”

Thomas Colson:

And I said, “Well, wouldn’t it be easier if you just trained them on NDAs and disclosures and then have them mark confidential records?” And she said, “Oh no, that’d be way too much trouble.” So I said, “So essentially what you’re doing is putting the burden on my friend to know what is confidential and what is not confidential.” And her response is, “No problem. If he has any question, just ask.” So I said, “Wait, wait, wait. So in other words, throughout the course of the day, there’s disclosures. Every single time, my friend is not sure whether it’s a confidential disclosure, he has to stop the conversation and say, ‘Hey, was that confidential?'” And she says, “Well, it doesn’t have to be that extreme, but essentially yes.” And I started to explain very politely how that’s ridiculous, very politely though, because my friend wants to do a deal with them. And then she went from this really nice person to a little bit mean, and she essentially said, “Take it or leave it.” Okay? So-

Raymond Guarnieri:

That it?

Thomas Colson:

Yeah. That was it. I mean, it’s like, “Okay. Understand your objections. I don’t care. If you want to be a vendor to us, sign the document. If you don’t, walk away. I don’t care.” And I’m thinking, “Mom, my God, this is insanity.” So I was thinking about NDAs and the fact that no one reads them, right? Nobody reads… This friend of mine happened to know me or he would’ve just signed it. And by the way, we had to sign it because he needed a deal. So I basically said, “Do you have any flexibility on this oral disclosure, no marking thing?” “Nope. Don’t have any flexibility.” So I said, “Okay, we’ll get back to you with any edits that we have, but you will keep the oral disclosures with no marking in.” So I go back to this friend of mine and I said, “Okay, here’s a new invention. We are going to invent the one-day NDA, okay? The one day NDA.” In fact, it even sounds pretty cool. Right?

Raymond Guarnieri:

Yeah.

Thomas Colson:

And he said, “Wait, what does that mean?” I said, “We’re going to create an NDA that has a one-day disclosure period. So in other words, yeah, they can send us an oral disclosure. They could say something and we’re bound by it, but it’s only going to be one day. And at the end of that day, you’re going to send an email that says, ‘Nothing was disclosed today, just to make sure that we’re clear,’ which will shift the burden to them to then tell us what was confidentially disclosed.” So I edit it, “We’ll accept your oral disclosure thing, but it’s a one-day disclosure period.”

Raymond Guarnieri:

What was it originally?

Thomas Colson:

It was three years.

Raymond Guarnieri:

Three years.

Thomas Colson:

So like a three-year agreement. And by the way, it’s typical. It’s so standard. Yeah. It’s like people just sign these things at whatever. Okay. We’re under NDA. We’re good. We can say anything. So I changed it to one day. We get back on the phone together and she’s says, “This is crazy. Why would we do a one-day disclosure period?” And I said, “It’s not that crazy if you think about it. You could have your people disclose orally. We’re only going to really do a one-day of disclosure anyway. So why don’t we just stick with the day that we’re disclosing and then everybody’s happy?” So finally, we come to an agreement that it’s going to be a two-week disclosure. So we actually signed the document. It’s a two-week disclosure. So I tell my guy, “Look, every single day of this two-week period, just send a very friendly email and say, ‘There were no confidential disclosures made by either party today.'”so he did that every day for two weeks. Never got any email back, right? Because he wasn’t sending them… Oh, go ahead, Ray. What was that?

Raymond Guarnieri:

There’s no confidential information sent.

Thomas Colson:

Right. So he sends an email every day, but he doesn’t send it to the lawyer, okay? Because he’s not working with the lawyer. He’s working with the senior engineers. So he sends them an email every day, very polite, like so soft that you can’t even really tell it’s anything. It’s like, “Hey, great day today. By the way, just so that we’re clear, there was no confidential disclosures made. If there were any, just send us an email back telling us what was disclosed.” So soft and gentle.

Raymond Guarnieri:

So there may have been because those engineers weren’t trained on confidential information and non-disclosures.

Thomas Colson:

Right, right. She already told us they weren’t trained and she wouldn’t train them. So it was too much of a hassle. They won’t listen. So it turns out he doesn’t get one email back through the entire two-week period. And then the disclosure period ends. But here’s the funny thing. They’re not trained at NDAs, right? So they keep disclosing stuff because the relationship goes on for a couple more months, and they’re like they just keep disclosing. That’s the thing. Nobody reads NDAs except the lawyers and the lawyers aren’t involved in the disclosures.

Raymond Guarnieri:

You got to know the important dates in the NDA. And that’s a question that I have for you. There’s the start and the end date, but there’s also… Isn’t there another date that says for how long that information has to be kept secret?

Thomas Colson:

Yeah, you’re absolutely right, Ray. There’s basically three important dates, and by the way, these are disclosure dates, right? When does the disclosure period begin? Because if you start disclosing before the period begins, arguably those disclosures are not protected regardless of what the NDA says. Every once in a while, they’ll say any past disclosures, but that’s a little awkward. Right?

Raymond Guarnieri:

Right.

Thomas Colson:

So number two is when the disclosure period ends, and in our case, it was two weeks. Number three is when the confidentiality period ends, which is how long do you have to keep these confidential, and sometimes it’s three years. Sometimes if they say, if they’re trade secrets, it’s for as long as this is an enforceable trade secret. But yeah, so there’s those three dates. And again, hardly anyone reads them, but what first got me turned on to NDAs… I mean, keep in mind, I’m a lawyer, right? I’ve been a lawyer for decades. I start working at this company Manning & Napier Information Services. Okay? And it’s the predecessor to the company I found at ip.com. And I meet this guy, Don Davis, who was one of those characters that’s in your top 15. Right? We go through our life. We meet thousands of people, but there’s 15 people that you’re like, “This person adds color to the world.” You know what I mean?

Raymond Guarnieri:

Yeah, yeah, yeah.

Thomas Colson:

Flavor. They’re characters. And my friend, Don Davis, who became a lifelong friend… In fact, he died. So technically we were lifelong friends because he died a few years ago, but he was a mentor and a friend, but we first meet on this deal we’re doing. He’s on the other side of it. And we’re dealing with this really eccentric, innovative guy who’s the CEO of his company who he might even be watching because he and I are friends, but I won’t say the name. But anyway, he’s this brilliant innovator guy. Right? And you talk to this guy and he is a ball of energy. A hundred ideas come out of his mouth in an hour. Right? Only 10 of them are good because you got a filter, but 10 of them are great. So I finish a meeting with this energetic ball of fire who’s a CEO. That night, I get an email from Don Davis and he says, he lists all the disclosures that were made. Now mind you, he’s not even at the meeting. Okay? So I called Don who I don’t really know that well at this point, and I’m like “Hey Don, how’s it going? Got this message from you and you list 20 disclosures that were made when I was with your CEO, but I made half of those disclosures to him. Okay? So what are you hoping to gain by this?”

Thomas Colson:

So he’s this all business, nice guy, but all business, he goes, “Tom, it’s no problem. This is why I do this, because I don’t want there to be any confusion downstream about who disclosed what to who, so I wanted you to have this.” And I said, “Yeah, but Don, you’re defaulting as you disclosed everything to me when that’s not true.” So he just pauses. Silence. It’s a good thing you called me back then, isn’t it?” That’s it. And I’m thinking if it wasn’t for the fact that I was a lawyer and a little bit savvy, I’m way more savvy now, but I might have just let it go. And then he has made all these disclosures to me. And now in the future, if I ever use any of my own ideas that I disclosed to them, I’m at risk of breach of an NDA that was in place. So Don, so we work it out that day. And he said, “Well, which ones were yours?” And I tell him, and he says, “Okay, I’ll send you a modified email,” which he does, but he would always send me these memos and I’d always call him. And then we got to be good friends. And then he and I were working together. So now he’s on my side sending these emails, right?

Raymond Guarnieri:

Right.

Thomas Colson:

But Don Davis then, he died a few years ago. But before he died, he calls me one day and he says, “Hey Tom, I want to show you this great NDA I just created.” Because everybody’s got their NDA templates and it’s always funny. When you read an NDA template, there’s a misspelling somewhere. Then you read someone else’s NDA template. There’s the same misspelling. It’s like, they must have shared this document. So Don sends me his ultimate NDA that he wants to use in every case.

Raymond Guarnieri:

The mothership of all NDAs.

Thomas Colson:

The mothership. And I’ll just go through a couple of quick points that I love. First is the natural thing, all disclosures must be marked as confidential. If they’re not marked, they’re not confidential. Second, all oral disclosures must be reduced to writing and marked or they’re not confidential. Now that’s been in NDAs. They’ve seen that before. And sometimes it’s a week or two weeks. He does two days. And his argument is if you don’t do it in two days, stuff’s going to change in your mind. You don’t remember what happened a week ago. Right? It’s going to build in your mind. It’s just like stories we tell, always get better as we get older. So number three is, let’s see, oh yeah, I love this one. You cannot make a disclosure under this NDA unless a disclosure rep, representative, is present at the time of the disclosure. Those disclosures are listed on this NDA. So in other words, if I’m the rep for our company, Executive IP, and you are not, if a disclosure’s made to Ray, but I’m not in the room, it doesn’t fall under the NDA. And his rationale was no one reads these things, so I’m going to be certain that there is a person in the room who is knowledgeable about the NDA such that they’ll know what to do next. Right?

Raymond Guarnieri:

Right.

Thomas Colson:

So I’m like, no one’s going to sign this, but that was in his NDA. It was the NDA rep concept of Don Davis. And then the last one no one would sign either, but I love it, and that is at the end of every session, there will be a conference. Five minutes, 10 minutes, it doesn’t say in the NDA. There will be a conference among the parties to list all the confidential disclosures that were made during that session by each party, and each party signs [inaudible 00:15:31]. Think about how great that would be. You have a meeting. The meeting ends and you say, look, let’s spend five minutes. Let’s agree on what we have disclosed to each other that’s not marked. Right? So if it’s marked and disclosed in writing, no problem. We don’t have to talk about that. But let’s list the oral disclosures that were made during this meeting by who, and let’s agree upon them. Pretty clever idea, right?

Raymond Guarnieri:

Yeah. I love how it… And really kind of all of these ideas, they account for human weakness.

Thomas Colson:

Yes, exactly.

Raymond Guarnieri:

Because we all have the same human weaknesses and these account for them. Why would… Okay. I mean, I know, I think I know the answer to this question, but why wouldn’t anybody sign that?

Thomas Colson:

Yeah. That’s a great question. The reason I say that is here’s what happens in the world of NDAs and every agreement under the sun. That is whoever has more leverage controls the terms of the agreement. Right?

Raymond Guarnieri:

Right.

Thomas Colson:

It’s just like that one deal that that lady said, take it or leave it, because my friend needed them more than they needed him. So when I say no one will ever sign it, here’s what I really mean. One side or the other will have to force the other side to sign it. So if I’m a little guy and I go to you and you’re a big guy and I say, “Here, sign my Don Davis NDA.” You’re going to say, “I’m not signing that.” Because of human weakness, right? Human weakness, what you just said, because my engineers are never going to agree to that, but everybody should sign that document. Everybody should sign the Don Davis document because I mean, think about it, having an NDA rep, all that really means is you’re going to have a lead engineer that is trained on NDAs. And it doesn’t necessarily have to be listed in the contract, but at least at the meeting, everybody says, “Okay, who’s the NDA rep?” It just becomes cultural. Right? You don’t say… Because here’s what always happens, Ray.

Thomas Colson:

You get into the room with a bunch of people and someone says, “Hey, wait, wait, wait, wait, hold on, hold on. Do we have an NDA signed?” And someone vaguely nods yes. That’s enough. Disclose everything you want. Right? Doesn’t matter. Somebody vaguely nodded yes, okay, we’re good. We have an NDA in place. No one’s read it. No one knows whether it’s one-way or two-way. No one knows whether it’s expired. No one knows what the purpose is listed, but everybody just says, “Hey, we have an NDA in place?” “Ah, let’s go ahead.” “Great. We can say anything. We’re free. We can do anything.” But Don’s idea is a good one. “Who’s the NDA rep? Who’s actually read this thing from each side?” “Oh, I read it. And then Jane Doe read it.” Okay, good. We’re good. Okay. Now we know that those people are knowledgeable of the NDA. And then what’s wrong with spending five minutes at the end of a meeting doing what I made my friend do every day anyway for that two-week period? Which is to say, “Okay, do we agree there was no oral disclosures that were confidential?” “No, no, no. Hold on. I told you about this thing.” We’re like, okay, let’s just click, click, click. Okay. Then we just send it around, email back. Yep. That was said. Put it in a PDF. We’re all good.

Raymond Guarnieri:

See if I were the CEO or the general council of one of these big companies, I would have a… And we had a lot of people signing NDAs all the time, who probably weren’t reading them.

Thomas Colson:

Right. Or storing them.

Raymond Guarnieri:

Or storing, right. I would have an executive summary, one paragraph, that’s attached to the front of the NDA that explains in plain English how you should behave in relation to this NDA and the relationship with the other party, because-

Thomas Colson:

Yeah. That’s a good idea. It’s not included in the contract. It’s just kind of a summary just to say, hey, keep these things in mind because this is more or less what it means and it’s-

Raymond Guarnieri:

Because then they don’t have to read it. They just have to read the executive summary.

Thomas Colson:

Yeah. At least that would be something more than what happens today, which is nothing. Now that executive summary wouldn’t bind somebody, but it would be a nice overview, like okay. And give a little couple key concepts in that summary. What is-

Raymond Guarnieri:

And [crosstalk 00:19:48] everyone.

Thomas Colson:

Yeah. Oh yeah. It would give just a couple quick concepts. What does need to know mean? Right? What are the dates? So then you can just look at the document before you start, dates, disclosure date, end date, oh crap, we need a new NDA. But one idea that I had from Don’s is the day-to-day NDA template. In other words, every single day that you’re going to meet with this other party, you sign a new NDA and it’s for that day, and this way, it’s front and center for everybody every day and you’re never going to have to worry, especially when you’re dealing with trade secret stuff. I mean, my God, you can destroy your trade secrets like that. And then they’re gone, they’re gone. However value… Do you want to be the man or woman or person who disclosed a trade secret without the NDA being relevant? You lose your job.

Raymond Guarnieri:

Aren’t there some cases you can go to jail for that too? Or does it have to be intentional?

Thomas Colson:

It would have to be intentional. Yeah. You wouldn’t… Yeah, but still, I mean, you could lose your job over it. I mean, you’d be humiliated. “You were the one that gave away trade secrets.” “But we had an NDA in place.” “Did you read it?” “Yeah, I did read it.” “Well, did you notice that it was a one-way NDA and it didn’t protect your disclosures?” So ultimately though the leverage thing, so two other things that we can conclude with. One is I have this friend come to me recently and she’s so frustrated because I told her, “Don’t ever disclose confidential information particularly trade secrets without an NDA in place.” And she said, “You always told me that, but I went to a VC recently and I gave them the template that you gave me to get them to sign it and they wouldn’t sign it.” And I said, “Yeah, I’m not saying they’ll sign it. I’m saying don’t disclose unless they do sign it.” And she said, “Yeah, but they won’t sign it. So what am I going to do?”

Thomas Colson:

And I said, “Look, you still can’t disclose. You have to be able to sell your case to them, to give them enough information that makes them want to sign it because they really want to hear what you have to say without giving them so much information that you have disclosed trade secret information without an NDA. That’s your first sales pitch. Your second sales pitch is, invest in my company. Your first sales pitch is get them to sign that NDA.”

Raymond Guarnieri:

Yeah. Yeah. And I’m sure it happens. I mean, it just takes… That’s a you’ve got to be a good salesperson.

Thomas Colson:

Yeah, of course. And if you can’t get them to sign the NDA, you’re not going to get them to give you $5 million. Right?

Raymond Guarnieri:

Right.

Thomas Colson:

So I’ll close with this final story. A friend of mine comes to me with his patentable idea, and he wants to disclose it to me and I give him my normal pitch, “Okay. Did you tell anyone yet?” Because there’s statutory bar dates, right? So I say, “Okay, good. You haven’t told anybody. Do not disclose your idea to anybody without an NDA in place, and it’s got to be the right NDA.” So he is like, “Okay, okay. I buy into that. So can I disclose it to you?” he says. I said, “Yeah, tell me what your idea is if you want.” And he says, “Well, will you sign an NDA first?” I said, “Absolutely not.” He says, “But you just told me, don’t disclose confidential information without an NDA in place.” I said, “I did say that, but I’m not signing it.” “Why won’t you sign it?” I said, “Why would I sign it? I’m doing you a favor. I’m not going to subject myself to getting sued for breach of contract when I’m not even getting paid.” So I said, “It’s the same situation. Convince me. Convince me to sign this NDA,” which he couldn’t do, of course, because I’m just doing the guy favor. I’m not going to sign an NDA. But anyway, it goes to show-

Raymond Guarnieri:

Did he disclose it anyway? And did you [crosstalk 00:23:40]-

Thomas Colson:

Yeah, he disclosed it anyway and he’s a friend. So of course, I wouldn’t disclose it, but just goes to show you, whoever has the leverage, you need to sell them on signing this NDA, then make your other sale.

Raymond Guarnieri:

Right. Yeah. All right. Well, this was awesome. Thanks for sharing these stories. I don’t know why… It is sort of weird saying this out loud, but NDAs are kind of an interesting topic.

Thomas Colson:

Weirdly. I know. I know. Who would’ve thought an NDA would be anything that we could spend, what, 20 minutes talking about?

Raymond Guarnieri:

Yeah. Well, if you, the audience, enjoyed listening to this podcast, Stuff You Should Know About IP, non-disclosure agreements, please share it on LinkedIn, on Twitter and Facebook and wherever you like to hang out on social media. Leave us a comment. Let us know your thoughts, what do you think about NDAs, and hit the like button. Thanks a lot, guys.

Thomas Colson:

Thank you.