In business, information is often the most valuable part of your arsenal, so protecting it is key to business survival. Christopher Schiller sheds light on the non-disclosure agreements, explaining when and why to use an NDA.
Hush, hush. Don’t say a word. Keep it between us. There’s something about keeping secrets that feels a little naughty. Sometimes it is. Sometimes it’s just inconvenient. And sometimes it’s not all it's cracked up to be. Our topic this time is the contractual way of keeping a secret between parties referred to as a non-disclosure agreement or NDA. As always with this column, the straight forward seeming interpretation of an idea has lots of little nuanced and often misunderstood elements that can trip up or outright harm the unwary or unaware.
Non-disclosure agreement defined (sort of)
Let’s start with an accurate, and therefore relatively vague definition:
A non-disclosure agreement or NDA is a specific promise between parties to not disclose to the public certain, specified information being provided by one party to the other under certain, specified conditions for a specified period of time.
Even through that vagary you should be able to tell that an NDA should be very specific and stipulate quite exactly what is and isn’t covered and who is and isn’t supposed to do what when. Unfortunately, not all NDAs reach this ideal in practice. They often fall down on some (or all) of the specific features or leave them far too ill-defined, making adherence and enforcement difficult.
Where do NDAs come from, anyway?
The concept of non-disclosure agreements arises from the truth that to collaborate for a particular goal, information has to be shared between the collaborators. In business, information is often the most valuable part of your arsenal, so protecting it is key to business survival. Certain forms of information can be legally protected by trademark or copyright law. For some businesses, the constrictions of those legal avenues are not protective enough. Either they’re too lax or have loopholes (e.g. fair use) or don’t last as long as the business wants. For example, a patent must be published when awarded and is only a protection against competitors for a set number of years. After the patent expires, anyone can read the patent and duplicate it in the marketplace. That’s why a lot of companies protect their secrets for longer using a legal protection called trade secrets. For a classic example, consider the formula to make Coca-Cola®. If the company had patented it when they created it, the 20 years span of protection would have run out a long time ago. They’ve chosen to keep the formula secret. The complexity comes in how to enforce that all important secrecy.
The way trade secret laws work, you have to actively keep the secrets that are key to your business. Hence, having a contractual obligation for all those who might need to have access to the secrets to make your goods is a way of showing the court that a potential divulging of those secrets would have an irreversible and detrimental effect on the company. The usual aversion of the court to prior restraint, or gagging free speech, is countered by the high value of the trade secret, the importance of not allowing it to be released, and the diligence employed to keep them secret. The development of non-disclosure agreements were a way of showing the court that the company takes seriously the secret keeping and provides a mechanism to force the party restricted by the NDA to keep silent.
Once established in one area of law, NDAs started showing up in other, secret-sensitive areas too. One of those often used today is in settlement negotiations. Settlement talks are a way of avoiding going to court for a dispute. In order to allow the best chance of reaching a settlement between parties, each side has to be comfortable laying all their cards on the table to try to find common enough ground to settle. If what’s admitted in a settlement discussion had the potential to be turned back against the admitter in a future trial or in public, then mouths would stay shut and any chance of settlement would be doomed from the start. Courts have recognized this and allow that negotiations within the context of a settlement discussion are inadmissible if no settlement is reached and the case goes to court. Note that it’s the negotiations that are bound, not what happened before the negotiations. Admissions aren’t admissible, prior existing or later discovered evidence (not admitted nor discovered in the negotiations) still is. If it existed before you sat down, you can still use it.
The restriction against admissibility applies only in the court. You need an extra agreement to keep the settled parties from discussing the issues in the media. Hence, the use of NDAs in these arenas for sensitive matters.
Now some may bring up the fact that settlements can be sealed or made non-disclosable by their own terms. But it should be kept clear that that form of silence has its limits. In a business context, loss of face or commercial status might be a reason to seal the settlement. To keep someone out of jail is not.
NDAs should not be used for “cover-ups” (though some try)
One of the reasons NDAs may be more on the mind than usual lately is the discussion about NDAs being used to hush up settlements for the #MeToo and #TimesUp experiences. We often hear the alleged bad actors had settled out of court when accused. But, it must be pointed out that contracting for something illegal is illegal, making the contract unenforceable. You cannot make a legitimate contract that requires a crime to be committed. (Which makes it quite ironic that the term the Mob uses to put a hit on someone is called a “contract.” It’s not enforceable in a court. But they’re used to handling things on their own, anyway.) A pledge to keep secrets of an illegality is likely not enforceable. In fact, knowingly keeping the commission of a crime secret might lead to the secret keeper being guilty of aiding and abetting that crime after the fact.
Some people have agreed in a settlement to “keep their mouth shut” and sign the equivalent of an NDA. That is their choice. But when the coverup includes criminal activity and the mum person has a change of heart, as long as they are telling the truth and have a valid, pursuable case, they shouldn’t feel that their promise is iron clad. They should definitely seek legal counsel because the specifics of every case varies, but it is likely that the worst that can happen to them is having to restore the parties to the status quo before the settlement i.e. give back the settlement payment. Just like much of the reason for these types of settlement attempts, it boils down to a play from a position of power to control those without as much. If the so called powerful have committed crimes, it greatly diminishes the power they can legitimately wield. They may try and bluster. But blusters are more often than not just a lot of wind.
Features of an NDA
When non-disclosure agreements are legitimately warranted, properly formulated NDAs have a lot of defined elements specific to the situations and secrets involved. Here’s a list of the major elements in a well-formed NDA:
- Bound parties – those parties who are specifically restricted by the NDA from disclosure. The amount and nature of each party’s restrictions and duties will vary according to the nature of the arrangement.
- Proprietary information – the specifically delineated private information being shared between the bound parties which isn’t to be disseminated outside of the stipulated parameters of the NDA.
- What constitutes being made public has to be defined. Usually, if some of the proprietary information becomes known to the public through other means or third parties or is publicly revealed by the originating secret holder, then the strictures no longer apply to that information (or shouldn’t). It is an undue burden to require the bound parties to be mum or suffer the consequences for discussing something that is already known by the public.
- Who are the public?The restrictions shouldn’t be so restrictive to interfere with the normal operation of the companies to the deal. For example, bound parties are usually allowed to share the information with assistants, company officials, lawyers or even specific third parties in order to carry out the agreement in full.
- Penalties for disclosure should be stated explicitly, since it might not be the intent for the entire contract to be terminated with a mere slip of the tongue. If no penalties or consequences are listed then the offense would default to a material breach of the contract with the same severity as a breach of any other clause.
- The term of the agreement should be set so that the bound parties needn’t be overburdened with keeping secrets whose relevancy has long since passed. Usually there is a recognizable time period within which it makes sense to require silence.
All of these elements should be determinable at the start of a venture and being vague or overstating any or all of these can cause difficulties or undue burdens upon the parties.
In general, NDAs should be very limited in scope and term, only covering what’s needed and only for as short as necessary. Often poorly formed NDAs are way too broad and interminable. That’s problematic. I’ve read NDAs that, if followed to the letter as written, didn’t allow ANYONE to talk at all about the project, making completing or selling the project, advertising it or even letting people know it exists, impossible.
When you use an NDA, you reveal something about yourself
If you are considering using an NDA you should consider what using an NDA says about you, business-wise. It’s all about trust. Attempting to protect ideas (which aren’t protectable anyway, except in the very limited cases that qualify for patent protection) isn’t pretty. If you won’t share your ideas with a business partner without an NDA, you aren’t showing that you trust that partner very far. Should you be entering into a business relationship with someone you can’t trust? Should they be entering into a relationship with someone that scared of someone “stealing” their ideas? And if they violate the NDA in some way, are you going to sue for a (from the outside perspective) petty slight? And if some bean spilling is acceptable to keep the relationship going, where is the line then to be drawn?
There are times when using an NDA makes sense in this industry. A common example in reality television is requiring that competitors not disclose the winner of a reality show competition that was taped ahead of time before the show actually airs. In those cases, a high enough penalty is imposed to dissuade the disclosure and partially compensate for lost revenue if the cat is let out of the bag.
In my opinion, it NEVER makes sense to seek an NDA from a potential producer before you show them your script. You risk so much more by showing them you don’t trust potential filmmaking partners from the start. They’ll likely not want to work with you anyway. If you don’t feel you can trust the person across the table from you to not “steal” your ideas and make them their own, then your best option is to walk away from that meeting. An NDA won’t stop a nefarious party and will put off a potential future collaborator.
What to do when someone asks you to sign an NDA? It depends. (You knew I had to use that phrase sooner or later, right?) You need to assess the values you give up against those you would potentially gain. If the NDA is properly written, you should be able to evaluate how constricted you would be and for how long. If the NDA seems vague or too onerous, you should feel free to walk away, knowing that the person is probably not worth dealing with in that way.
It is unfortunate that NDAs have had so much press lately and have been bandied and used in so many inappropriate situations. Hopefully this article has been able to shed some light on what they are and when they might be useful to you. Either way, don’t keep this information secret. Disclose away.