How to use Non Disclosure Agreements properly

Tech and games companies love non disclosure agreements. Particularly enthusiastic companies tend to scatter them around like confetti.  Frequently you have to sign them just to walk into a big tech company’s lobby these days.  But NDAs are often misunderstood or used in the wrong way – which can have serious legal consequences. Besides which, we regularly see NDA ‘embargoes’ being breached, to no apparent ill effect.  In this post, I talk about what NDAs are, what they do and give some tips for how to use them more effectively. 

What is a NDA?

A NDA is a contract intended to protect confidential or sensitive information.  Examples of information which can be protected by a NDA are: business proposals, financial data, new IP (like a game beta) and trade secrets.

How does a NDA work?

Under a NDA, the signer promises the recipient that he will not disclose certain information to any third parties, except under circumstances described in that contract.  The value of the NDA is meant to be that: (i) the signer is legally bound by his promise not to disclose the information to third parties; and (ii) if he breaks that promise, the recipient can go to court to stop him and/or can sue him for damages or for other legal remedies.

Typically, NDAs are drafted as widely as possible in order to cover pretty much any kind of information which can be imparted from one party to another.  So much so that in one case recently I saw the judge read a NDA and comment “the only thing it is missing is the kitchen sink!”  The reason for this one size fits all NDA is fairly obvious: the wider you draft it, the greater the chance you will capture everything you want to have protected.  Or so the argument runs.  In fact, this is a pretty risky attitude to adopt – more on that below.

Important: there are a number of standard exceptions built into NDAs (and if they aren’t expressly in the contract they’ll likely be imposed by the law of most jurisdictions).  The key exception is where the information is already in the public domain.  In other words, if the confidential information you are trying to protect becomes public information (e.g. you give someone exclusive press coverage over whatever you sought to protect – like a new game) then there is a good argument any NDAs covering it would become unenforceable.

Benefits of NDAs

The primary perceived advantage of NDAs is that they provide protection of important information at relatively little cost.  The chances are that a party which signs a NDA will be persuaded/cowed into compliance by the mere threat of legal consequences if he doesn’t.  And besides, they’re drafted so widely they can cover everything you could want, right?

Issues for NDAs

In fact the one size fits all, standard form NDAs have three serious issues and some lesser problems too:

  • You’re in the hands of the NDA signer: a NDA, like all contracts, is only as good as the person signing it. No matter how well drafted it may be, if the signer wants to breach the NDA, he will. And, more often than not, he’ll do it in a way that makes life difficult for you.  So, they are not a total protection for your confidential information. 
  • Do you want to enforce the NDA anyway?: Even if you have a good NDA and can show that the breach of it is an open and shut case, ultimately you have to take the guy to court to protect your legal rights – which is expensive and can be a reputation killer.  For example, that’s essentially why a whole bunch of journalists have been able to break big games or tech exclusives despite being quite clearly subject to NDAs.
  • Does it even really work?: the wide drafting of NDAs which I talked about above is in reality a double-edged sword.  On the one hand, yes it can cover as many situations as possible.  On the other hand, this kind of ‘fire and forget’ approach can make it unclear what you actually want to protect.  As a result, there is a risk that, if you ever needed actually to rely on the NDA in court, there may be legal issues with that wide drafting.  Take that example I gave above of the judge who commented the NDA was so wide it virtually covered the kitchen sink – he went on to give the NDA and the party which had drafted it a hammering in court.  To be avoided.

And a number of other problems with NDAs:

  • Uncertainty: quite apart from the legal considerations, standard NDAs are often impenetrable to everyone except lawyers.  This defeats the primary purpose of the NDA: to encourage the signer not to spill the beans.  If the signer doesn’t really understand what ‘the beans’ are, that’s not good news.  Again, to be avoided. 
  • Too complicated: looking at it yet another way, some NDAs are just too complicated for their own good.  If you can get what you need legally in 10 words rather than 30, then use 10 words. It’s good drafting and good business. 
  • Overzealously applied: NDAs are also known to some as the “Silicon Valley handshake” because of their liberal use there.  Again, its good business to only use a contract – especially one that tries to restrict someone’s liberty to speak – if you really need it.  Besides which, using NDAs liberally just encourages all of the above problems because each NDA is less likely to be tailored and enforceable.

Important proviso: these problems don’t mean that NDAs are useless in the games/tech industry.  Far from it.  Rather, they illustrate that NDAs need to be used carefully if you want actually to achieve protection for your confidential information, whether it be a new game or a really good business idea you have.

Tips for using NDAs and protecting your confidential information:

  • NDAs are meant to protect your most important business assets – so treat NDAs just as importantly as those assets.  Have a standard document by all means, but think about it before you get someone to sign it.
  • Spend the time (with your lawyer ofc!) to ensure the NDA is drafted carefully and actually covers the points you want to deal with.  If the NDA doesn’t scream out what you are trying to protect, something is going wrong.
  • Make sure the signer of the NDA knows exactly what he can and cannot do.  Don’t leave him to decipher the legal wording alone.
  • If there is a media sensitivity regarding the subject matter of the NDA, then make it even clearer to the signer what he can and cannot say to the media/press about it.  If need be, build in sensible exceptions so that you can control the information flow.
  • Consider alternatives/supplements to NDAs, for example agreed public statements.  If you do want to use a NDA, be prepared to sue to protect it.
  • Some people will refuse to sign NDAs.  If their bargaining power is sufficiently high, you might have to accept that.  Some might even be offended you asked in the first place, like a venture capitalist.

Note: this post was originally published on Gamer/Law back in 2010, but seems to have disappeared off it since then.  So this is a repost.

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