Funny, but I wouldn’t rely on it for anything. 🙂
Funny, but I wouldn’t rely on it for anything. 🙂
Anyone out there remember Susan Powter? She was a blond, cropped hair diet guru from the 90s. Her catchphrase was “Stop the Insanity!” and it was all about controlling your own behavior.
One of the most common contracts people end up tossing over the fence to the other party is a non-disclosure agreement (NDA). Also known in some circles as a confidentiality agreement, the basic purpose of the document is to promise that whatever one side shows, the other will keep secret. There are two basic forms of this document, the one-way NDA and the mutual NDA.
We negotiate these agreements because a business owner feels that there may be secret information shared between the parties. OK. It’s possible. But not likely.
Yet we keep going through the motions.
We need to stop the insanity, too. But we won’t (remember, in most cases, we’re advisors, not decision makers). So, here’s my two-part advice for making the NDA a painless formality that will require virtually NO time that could be spent on better things:
1. Draft/configure a Mutual NDA. And I mean 100% mutual. Each party promises to keep the other party’s stuff secret for a fixed period of time (about 5-7 years) after the deal is done or the contract is terminated. If you have to include something special in the language because of your regulated industry (insurance, utilities, banking, government), do so only to the extent necessary and state in each required section the cause of the language.
For example: “Section 9: In compliance with _____ Act, and as applicable, the parties agree to…” making the obligations mutual again. Remember, however, that although you might be bound to follow one of these regulations, the other side might not, which is the reason for the “as applicable”. Check with your counsel on the specific language you will need to add.
2. When needed, send it to the other side and tell them that you’ve drafted it with 100% mutuality in mind and the goal of not having to discuss it at all (this is the kind way of saying that it’s non-negotiable). If they fight you on the regulation-required language, point out the “as applicable” clause. Total non-starter.
When was the last time that someone referred to you as the Order Prevention Department? Business folks tend to think that a contracts staff is only there to stop them from getting their next purchase. We know better, of course, but it doesn’t change the fact that we are constantly having to show value and purpose to our existence in the fact of adversity.
Recently, I was engaged in the beginning of a deal that would end with the purchase of a large technology system. The evaluation was done via an almost picture-perfect RFx process, spearheaded by a business owner who knows the value of a corporate contracts group and for whom I hold great respect. As the selection process neared conclusion, the business got anxious. They “needed” to start work immediately to meet their internal deadlines and thus wanted to do a…
… wait for it …
… bu, bum, baaaah…
Letter of Intent!
I wanted to cry. Here we were, humming along beautifully, and they wanted to derail it with a Letter of Intent (LoI).
Now, if you’ve never heard of a LoI, it is to a contract what a golf cart is to a car. In other words, it might eventually get you to your destination, but without the protection afforded by an enclosed vehicle. LoI’s are one of the banes of a contract negotiator’s existence – a poor excuse for a contract and they are sometimes seen as the easy way out to get a deal done quickly.
In the particular example above, the business wanted to use it as a bridge to get work started while we negotiated the full agreement. Since LoIs take at least some time, there’s a choice to devote some effort to the LoI rather than review the full agreement. Granted, the full contract will require MORE time, but I don’t think it outweighs the risks of the average LoI.
When confronted with a request to review a LoI (and when you can’t negotiate with the business to just forge ahead with the full agreement), then remember to at least lock down the following things:
1. Term. Place a limit on how long this interim agreement is going to last. The shorter the term, the less the risk.
2. Fee/Rate. Clearly state the rate/fees and how they will be calculated. A fixed fee is always best (and even better if that fee is $0.00). If you really want to protect yourself, include a cap on the total amount of money that can be expensed under the LoI. Remember always that a one-week engagement isn’t equal to only 40 hours – 2 resources = 80 hours, 3 resources = 120 hours. Multiply against your listed hourly rate and you can see “small” agreement add up quickly. Oh, and don’t forget about capping expenses, too.
3. License. If you’re getting access to software without a full license – WATCH OUT. All of the standard license issues still apply (IP indemnification and virii for example). Also remember that if for any reason the full agreement doesn’t get signed, it’s most likely that your license will terminate.
4. Services. Clarify ownership for anything created as a result of services performed. What happens if the full agreement isn’t completed? Do you lose ownership? How about work that includes your confidential information?
5. Warranty. Depending on how long the LoI lasts, or how any deliverables are created and delivered, you may need/desire a warranty for those deliverables.
6. Indemnification. As mentioned above, and for deliverables/services, too, you will want to be indemnified in the event that the vendor uses something they don’t have the right to use in performing the work. You will also want a general indemnification if the vendor is going to be onsite at your facilities in the interim term.
7. Confidentiality. Hopefully you’ve already completed a Non-Disclosure or Confidentiality Agreement with any vendor that you’re willing to use a LoI with – but if not, include your standard confidentiality language.
8. Termination. As with any other license or services agreement, include standard termination for breach language. Make sure you also retain the ability to terminate the LoI at any time, for any reason. It’s probably reasonable that you will have to pay for services performed up to the moment of termination, but don’t forget to tie it to ownership over work completed and paid for.
9. Governing Law. Fairly self-explanatory, but don’t forget to cover governing law. And remove jurisdictional statements, just like always.
Oh, and to make matters even worse, each of the terms you negotiate in the LoI may change in the full agreement, as the risk you (or the vendor) are willing to tolerate in a short-term agreement may be drastically different than the risk you (or they) are willing to take in the long run. The usual saving grace in all of this is that the vendor probably doesn’t want the LoI either – work together to make it palatable.
I don’t know why, but I’ve had a spate of NDAs cross my desk in the last week. Seemingly innocuous little documents, Non-Disclosure Agreements (sometimes also known as Confidentiality Agreements) are usually the starting point for all new contract negotiators.
Perhaps it’s because they’re generally short in length (usually no more than a page or two)… or perhaps it’s because they’re usually not very contentious (both parties desire to keep some set of secrets). But whatever the reason, all of the ones that I’ve done in the last week have had some sort of difficulty factor that just seemed out of the ordinary. So, let’s see if we can address common NDA concerns.
Starting with the basics, NDAs should clearly state the purpose for which the NDA is going to apply. You usually don’t want a generic NDA – it simply becomes difficult to manage the obligation over time… and since they’re usually easy to negotiate, doing another one for a future obligation isn’t seen as too problematic. Additionally, once you create a contract based on the purpose (ie: the NDA was the precursor agreement to a bigger, more involved relationship), you also usually have confidentiality language in the bigger “master” agreement anyways.
A NDA should also clearly define what is being kept confidential. This would seem to be a simple task – what you bring to the table is yours, what the other party brings to the table is theirs. This, of course, is too generic (too simple, I suppose). So get more specific… “documents, templates, source code, plans, drawings” etc. And if your business involves the capturing or use of information from your customers (such as via a financial institution, an insurance organization, a health-care company or any other business, too), you will want to detail that your customer information is confidential.
But then you have to carve away those bits of knowledge that are generally known in the world/industry. And you need to remove from obligations of confidentiality those bits that you learned from somewhere else (who provided it to you “lawfully” and not while they were under an obligation to keep it secret). Getting confused yet? What you end up with is a list of things that are confidential… and a list of exclusions for ways in which you obtained information and don’t have to keep it confidential.
Then you need to add a list of reasons why, even for information that is confidential, you can disclose it anyways. This would include a valid court order, for example. (But wait! You usually first have to tell the other party that you’re being compelled to disclose the information so that they have the time to try to fight the order.)
Of course, you also need to list who can see the Confidential Information and for what purpose they may use the information. You don’t want your new business partner to take your information and develop something based on it without your permission, for example.
Next, don’t forget remedies in the event that your Confidential Information is disclosed in a way not allowed under the agreement. The usual analogy here is to Pandora’s Box and the inability to put the secrets back in the box once released. It’s simply impossible. Legally, you’ll want to file an injunction to prevent further disclosure… but you also may have monetary damages as a result of the disclosure (for example, if another company steals your great idea for a new product, you can attempt to sue for lost profits). So I generally like to use a conversational phrase with my counterparts when discussing this section… just in case there’s any confusion.
“If you disclose my Confidential Information, I am going to own your company.”
In other words, the penalty for disclosing my information is going to cost you so much, that you’re going to go bankrupt in the process of trying to put the lid back on the box. This is especially true if you’re in one of the aforementioned Customer Information industries… and REALLY REALLY true if you’re dealing with Protected Health Information or Financial Information – which are both protected by various federal and state laws as well. Which, by the way, means that if you’re the recipient of this kind of information – of any Confidential Information for that matter – you need to take the obligations very seriously.
Lastly with respects to NDA basics, you need to know what to do with Confidential Information once the NDA terminates. Usually it’s “return or destroy”. Some organizations want one over the other. And some also want “certification from an officer” of the other party that destruction, if the chosen option, has been completed in a timely manner.
OK. So let’s review:
“Are we there yet?”
What’s left, of course, is the boilerplate contract language that you find in many other agreements. Sections on assignment, governing law, severability, term (again, how long should this thing go on?), party relationship and even a section on signature counterparts all get included, too.
Phew, maybe NDA’s aren’t that simple, eh?