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The Skinny on NDAs

The Skinny on NDAs

May 20, 2013
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" It is a mistake —and often a serious one —to employ or engage persons as independent contractors without a written agreement establishing and defining the relationship; a confidentiality provision belongs in each. "

It is axiomatic that not all knowledge is obvious; in commerce, just as much as in science, information, know-how, and the means and methods by which results are achieved are often the result of extensive work, creative thought, insightful analysis, and laborious trial and error. There would be little incentive in commerce to drive the progress by which information is expensively acquired if it could not be protected: Knowledge itself is powerfully valuable. As important as copyrights and patents are, they do not and were never intended to protect any and all human discoveries. Where the protection of creative works by public copyright law ends, where the protection of inventions by public patent law ends, what remains is the private right to condition disclosure of confidential information by way of enforceable contracts that limit the further disclosure of the information. You might imagine a hypothetical world without enforceable Nondisclosure agreements — but it would be a world that would so discourage the disclosure of confidential information that progress and growth would be practically impossible, with all the risk of loss on those whose work is creative and valuable, but which falls outside those copyright and patent protections.

Nondisclosure agreements go by several names; they are sometimes called confidentiality agreements, secrecy agreements, and proprietary information agreements (PIA). In this article, I’ll refer to them as NDAs.

When you need an NDA.

They can — and should be adapted to a wide variety of situations in which valuable, private information will be transferred — information whose further disclosure will hurt one side or the other or even others. Some common examples:

1. When you hire a key employee or engage an important independent contractor who will be working with your confidential information or whose job it is to develop new confidential information at your expense.

2. When you transfer Section 2257 information as part of a licensing agreement, or perhaps in a sale or assignment.

3. When you train any employee or engage any important independent contractor who will have access to any trade secrets, lists of vendors/suppliers, designers, content producers, programmers, or customers, or other information that you legitimately consider and treat as secret, for your own protection or the protection of others with whom you deal.

4. When the quality and unique feel of your content depends on technical means and methods not commonly known, when your talent acquisition depends on methods not widely known, when you use nonobvious methods to create effects, and you engage others to assist you in content production in a technical manner or sometimes, in appropriate cases, performers who will be exposed to the contents of your trick bag.

5. When you wish to propose and negotiate a commercial transaction that will require financial information and statistics, such as a sale of a business or its assets or a credit or time payment transaction or when you propose to take on partners or secure outside investment and it would be unreasonable to expect them to act without detailed information about your finances.

6. When you buy a website of a unique character from its owner and it’s mutually understood that you are acquiring the exclusive right to use confidential means, methods, and techniques which he or she developed.

7. Where the operation of your site depends on particular designers, content producers, programmers, vendors whose identity is not generally known and it becomes necessary to share this information with anyone else.

8. When you engage workers and associates with whom you need to exchange frank and honest opinions and appraisals, or critical plans and assessments in writing, by email, by phone, Skype, or even oral conversation — or when your workers have these kinds of conversations with clients, customers, vendors and suppliers, attorneys, or banks. If the confidentiality could not be protected, it would deter the kind of frankness that is necessary for honest and meaningful exchanges among all of them. Your candor, sincerity, and honesty can come to bite you in the butt, and can even subject you to blackmail later. Your NDAs with your workers should include any and all communications with you, among your workers, and with the people with whom your business talks.

9. The communications among the owners of your business — and the conversations each of you may have with your attorneys. The attorney-client privilege usually works only one way — to seal the lips of your lawyer. It does not seal the lips of any client, and if you make statements to your business lawyer in the presence of your partners or workers, they may each be free to later use your statements against you in the absence of a carefully tailored agreement.

NDAs and the adult Internet.

It is a common — if not overwhelming — feature of the geography of the adult Internet to employ independent contractors working remotely at home or in their own quarters in order to support sites, programs, and content. In such cases, a duty of confidentiality will generally not be assumed or inferred by the law; an express agreement, as an enforceable contract, must be entered into for a duty to maintain secrets to arise.

It is a mistake — and often a serious one — to employ or engage persons as independent contractors without a written agreement establishing and defining the relationship; a confidentiality provision belongs in each. (There are other highly critical reasons to use a written agreement with all of them, IC or employee, not the least of which is to assure your ownership of every video, image, program, or design that they create at your expense through a Work for Hire Agreement; without his or her signature on a simple, but competently written Work for Hire Agreement, any non-employee owns what he created, not you, and despite the fact that you paid for it. Without it, you may get outrageous demands for “royalties” and you will have little with which to defend yourself. Even in the case of employees, who are subject to the “workshop doctine” which should provide you with ownership, it may become disputed whether they were truly employees or independent contractors, and it always makes sense to include Work for Hire language in every employment contract, too.)

Fine points about the drafting of NDAs.

In order for an agreement between persons to rise to the level of an enforceable contract, there must be consideration that supports each promise; that’s why such agreements should be entered into before an employee or contractor commences work. Unless new consideration is provided to the employee or contractor to support the NDA, it can be doubtful that continuing his or her engagement or employment will amount to consideration that will support the promises of the NDA. If you find yourself in need of a valid NDA after work has started, it is smart to support it with an additional benefit to the worker.

It is also a mistake to do this at home. Even if you have template language written by an attorney competent in this area, it should not be recycled for re-use unless you know that on all four legs the circumstances and facts are identical and that the law has not changed. It is best to use an attorney because some facts may change what language needs to be drafted to make it effective. For example, a difference in where the other side resides or does business can make the difference between a solid agreement or one that is unenforceable.

Unlike copyright and patent law, the law of trade secrets is largely a matter of state law. Many states have adopted a variant of the Uniform Trade Secrets Act (the UTSA, written by National Conference of Commissioners on Uniform State Laws) while at least four states rely exclusively on judicial “common law” principles to interpret the validity of NDAs. (California has adopted the UTSA almost without change.)

The potential of screwing up your privacy rights even with an NDA.

The enforceability of NDAs does not depend exclusively on the terms of the agreement; it may also be fatally affected by your conduct in regard to the secrets. For example, California defines protectable trade secrets as follows: “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (ii) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” California Civil Code §3426.1(d). It’s plain from California’s enactment of the UTSA (at section ii) — no different than the UTSA as enacted in most states — that a basic and important principle of trade secret law is that the party who claims to have been aggrieved must have actually treated the information as secret and confidential: you can blow any legal right you may have to the confidentiality of information by failing to safeguard its secrecy: if you leave the information unsecured, transmit it without reasonable measures calculated to keep it secret, or disclose it to persons who are not bound by a confidentiality agreement, you stand to lose any legal protection at all for its disclosure, written agreement or not. The cases suggest that you do not lose the protectability of trade secrets when you disclose them to others who are bound by such agreements because such binding agreements are “reasonable measures” calculated to protect the confidentiality of the information.

Failure to include provisions that require the person who receives the information to implement “reasonable measures”, equivalent to your own, for the protection of the information, may lead to a result that considers your disclosure to him or her to have amounted to a waiver of your claim of confidentiality — and which ends your legal rights to secrecy under the agreement. It makes sense for such agreements to spell out exactly how the information is to be safeguarded by the recipient, including a limitation that only his employees with a “need to know” receive the information; the agreement may also, and should, provide that such employees be bound by their own NDAs in connection with your trade secrets. There are dangers at every turn in this area of law and it makes little sense to use home remedies in an area that can be difficult even for attorneys.

When amateurs create their own NDAs, one of the most frequent serious mistakes they make is to draft the agreement to include everything but the kitchen sink in the definition of what is a protected secret. By including too much coverage, by including things that are by no rational measure true secrets at all, there exists some serious chance that a court may invalidate the entire provision, leaving the NDA without an effective definition and gutting it. By trying too hard here, as in other matters in life, you stand fall on your face; in this context, you may lose all of the protection you need and desire, and not necessarily just the overreaching provisions.

Generally speaking, the public disclosure of confidential information will terminate the contractual obligation of the person who receives such information to keep it secret, even if the disclosure was not willful or intentional, when, for example, it was disclosed by negligence or accident. Nevertheless, all such agreements should contain tight definitions of what it takes for the obligation of secrecy to be forfeit, and the parties should agree that the obligation of confidentiality should endure until it is made public by an authorized act of the party owning the secret; there are notable cases in which the general law of contract has enforced provisions which go beyond the special law of trade secrets. However, in balance, some courts have refused to enforce confidentiality agreements, despite their terms, when, through passage of time, the secrets have lost practical value, and at least one court has imposed the duty of pleading and proving that the secret is still of value on the Plaintiff who seeks in court to recover for the breach of a confidentiality agreement.

The reality of what an NDA gets you.

The most important value of NDAs, especially in the employment context, is as a deterrent rather than a means of enforcement. It is often the case that an ex-employee will have no substantial assets that can be executed against to fairly compensate for the value of the compromised information nor for the punitive or exemplary damages that may be warranted. The existence of a large, unsatisfied judgment my provide a defendant with a clear right to proceed in bankruptcy court and to obtain a discharge of the obligation there. Accordingly, of chief value to an employer is more about the prospect of complications in his life that may ensue from a breach of a confidentiality agreement, and an encouragement that ex-employees or former independent contractors stop and reflect than it is about actual recovery. Few, if any, recovering Plaintiffs in suits based on breaches of confidentiality agreements by employees have wound up on Easy Street.

This article is written to generally inform the public and does not provide legal advice nor does it establish an attorney-client relationship. If you have a legal issue or question, contact a lawyer. If you are arrested, make no statement and contact a lawyer immediately. The foregoing is not legal advice but information for the education of the general public; it does not create any attorney-client relationship.

J. D. Obenberger is a trial lawyer who has represented adult interests since 1993 and has practiced law since 1979. He represents clients from Budapest to Hong Kong with stops in every region of the U.S. His email address is obiwan@xxxlaw.com, his firm website is XXXLaw.com, and he can be followed on Twitter at @2257JD.


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