My new clients regularly ask me a question that goes something like this: “I am talking with a potential business partner who I am really excited to work with. Should I ask them to sign an NDA before I tell them about my idea?”
The unspoken corollaries to this initial question are: Will a seasoned businessperson be offended by the implication that a non-disclosure agreement (“NDA”) is even necessary? What happens in the event that the terms of the NDA are breached? Do these agreements have any legal force and effect?
Accordingly, it is prudent to provide a high-level overview of some of the considerations that business owners, entrepreneurs and inventors should be taking when first discussing potentially valuable ideas, inventions and business plans with prospective partners and investors.
NDAs are real contacts that may be hard to enforce
NDAs are legal contracts that effectively crystallize the common law legal regime of “confidential information” in writing. As you may be aware, in Canada it is illegal to disclose any secret that has been confided to you, provided a set of conditions are in place regarding the disclosure of that secret from the Discloser (the person with the secret) to the Receiver (the person being told the secret).
An NDA clarifies the understanding between the parties, setting out:
- That the secret is in fact a secret and it should be treated as such
- That there are legal consequences if it is disclosed
- The term of the agreement
- The process of how the confidential information related to the secret will be returned to the Discloser if the potential business opportunity is not pursued.
However, it is somewhat of a tautology to state that one cannot make confidential information confidential again after it has been publicly disclosed. Therefore, although an NDA is a legal document with real force and effect, litigating a breach of an NDA can result in somewhat of a pyrrhic victory. Rather than focusing on growing the potential new business, the aggrieved party must instead focus on resolving the matter through the costly and potentially uncertain result of litigation – all before the business model is proven as being economically viable!
As such, it is therefore often tough to make a strategic case for litigating a breach of an NDA in all but the most clear-cut and economically viable situations.
Therefore, trust is key
Accordingly, I often advise my clients that if the receiving party fundamentally cannot be trusted for any number of reasons, it may be unadvisable to move forward on the strength of an NDA alone. This is particularly the case in situations where a receiving party is situated such that pursuing a resolution against them is unreasonable if they were to abscond with your confidential information.
This also applies where one party is located in a foreign legal jurisdiction providing limited enforcement options or where there is a vast financial resource gap between the parties.
Make sure the scope is reasonable and clearly articulated
Interestingly enough, confidential information can cover a salacious story about a co-worker’s office affair or (more substantially) a business model that underpins a profound new invention. It is therefore of the utmost importance to ensure that any NDA signed is accurately and specifically drafted to enumerate exactly what confidential information is in fact being disclosed.
Moreover, one can appreciate that if an NDA is drafted using overly broad language, it can become very difficult to ascertain “what was what” in the event of an alleged breach. Once again, sorting out such disagreements can be costly, time-consuming and can distract from focussing on the core concern – growing a new business idea.
Therefore, having the NDA drafted by a lawyer who understands the true nuances of the confidential information being disclosed can save a significant number of headaches in the long term. Furthermore, it is unlikely that a boilerplate agreement obtained from the internet will be sufficient in the event that a real and consequential breach occurs.
Only disclose what is necessary
Even when an NDA agreement is in place, it is my advice that it generally benefits the disclosing party to only disclose what is absolutely necessary to the receiving party.
Is your business model brought to market by some clever, custom-designed software? Perhaps it would be wise not to disclose the code unless absolutely necessary. Do you have a unique hair treatment that achieves marvelous results? There is maybe no need to disclose any exact compositions of your proprietary product in your initial meetings with potential business partners.
In short, treat what makes your business idea special as a “black box” that is only disclosed if absolutely necessary. Put another way, it is not required to disclose every technical detail of a proposal when having initial exploratory meetings.
Get your other IP in place as soon as possible
Finally, and in the spirit of all of what has been discussed above, if your idea is underpinned by a specific invention, branding strategy or artistic concept, make sure to apply for your registered intellectual property (“IP”) protection as appropriate.
It is understandably the case that individuals rely on NDAs in the early days of a potential venture to “cover the bases” until the underlying IP is formally protected. However, it cannot be stressed enough that the most sure-fire way to protect yourself is to crystallize your IP rights with the appropriate intellectual property office as soon as it is economically feasible to do so. This is the surest way to take away the inherent risks in relying on NDAs as your sole source of protection against a rogue partner or unscrupulous investor.