How To: Use a Non-Disclosure Agreement

by Lydia M. Lim, Esq, Ladies Who Launch member, Los Angeles

 FA - NDA    Click for a sample NDA.

Editor’s Note: Non-disclosure and confidentiality agreements are a double-edged sword. At Ladies Who Launch, we believe that sharing ideas is the only way to move them forward, and that agreements of this nature do not generally serve a new business or idea. If you truly want to protect something, get a patent on it. Otherwise, NDAs are best saved for meetings where someone with experience in launching your product is being pitched. With so many competing ideas in the marketplace, it’s very difficult to prove that yours is first or the only one of its kind. It’s your unique voice and execution that will distinguish it, not the protection of an NDA …

You’ve incubated a fabulous idea for that next uber-product that will make the world an even better place, or have written a screenplay for the next blockbuster, and now it’s time to work with manufacturers, designers, studio executives, etc. You want to tell the whole world about it because you are so excited and believe 100 percent in your product/concept/invention. However, all newbie ideas need to be protected with love and care and shouldn’t be exposed to everybody and everything right away.There are several ways to protect your ideas, inventions, and products. First, you may want to secure the copyright, trademark/servicemark, and patent rights (“Intellectual Property Rights”) on your works and obtain these legal protections before you disclose your ideas to anyone. If you choose not to do so, you may be jeopardizing your ability to later claim the rights to such works. Another way to protect your work and to maintain the confidentiality of your creation before it hits the general marketplace is to require that your prospective business partner execute a Non-Disclosure Agreement (“NDA”), which is essentially a confidentiality agreement.

Having secured the Intellectual Property Rights does not automatically create an obligation by anyone that you share your idea with to keep your ideas confidential. So, for example, let’s say you invent a mirror that tells you how gorgeous you are every time you look at it. You patent your special mirror. You talk to people about your special mirror. Even though it is patented, no one is obligated to keep the idea of your special mirror under wraps while you are in pre-production or any other stage of development of the special mirror, unless you legally obligate them to maintain the confidentiality by requiring them to sign an NDA. So if you want to be first to hit the marketplace, mum’s the word, and an NDA may help keep things mum until the world is ready to be shocked at how gorgeous it is.

Of course, you may want to take an informal survey about your product and/or incubate your idea at some point. So do you ask for an NDA then or not? That is a personal decision based on how unique you feel your product truly is and how important it is for you to be first in the marketplace (if you are first in the marketplace). If you ask someone to sign an NDA and get a “no,” you will have to decide if the benefits of disclosing will outweigh the risk of someone beating you to the finish line.

Needless to say, however, the best way to protect your new idea is to select your business partners carefully and work with people you trust. Only once you have established a sense of comfort and trust with your prospective partner by generally discussing your ideas should you require that your prospective partner execute an NDA. This should happen before you provide them with more specific details about your unique ideas, logos, brands, artwork, written materials, concepts, and the product. Of course, you can request that any party sign an NDA at any time during a business relationship or prospective business relationship, but it may be difficult to get a business relationship going without a general disclosure of your ideas.

NDAs are good business practice for several reasons. If a business partner is not willing to sign, then you’ve got a red flag whipping loudly in the wind about that particular person/company. Secondly, your ideas are valuable and should only be shared with those who respect the privacy of the development process and potential goodwill and value you are creating. By agreeing to execute an NDA, a prospective partner is demonstrating their understanding of the value of your ideas. By asking them to sign an NDA, you are demonstrating that you believe in the value of your ideas.

When should you ask a prospective partner to sign? Once you’ve discussed your ideas generally with them and determined that there is the potential for a working relationship, then you should require that they sign an NDA, before you disclose the specifics of your ideas. The NDA should, among other things, state the scope of what must remain confidential and cannot be disclosed, and require the return of all materials to you if the relationship is terminated. It should specify the circumstances under which disclosure of your ideas may be made.

NDAs are essential for a unique and new idea that you may be working on. But it is not necessary for every business idea. If you’re planning on opening up a new yoga studio in your neighborhood, then an NDA is not necessary, because you’re providing a service which is not so unique. However, if you’re planning on pitching a new and unique yoga studio concept to investors, then it may be advisable for you to require an NDA, lest these investors learn about your unique ideas and look for another partner to implement the unique yoga studio concept you’ve created.

The one downside of an NDA is that it’s difficult to enforce if its terms are violated, generally because your damages for breach of contract are speculative—meaning there is no certain profit that you would have derived should your ideas come to fruition, particularly if this is a new business, product/creative idea and/or venture that you are developing. One way to handle this problem is to state specific liquidated damages. The liquidated damages provision would state that the partner acknowledges the economic value of your ideas and any goodwill you have created, but as these values are difficult to compute, the parties agree to a certain specific amount that will be paid if there is a breach of the agreement by the party in breach. Even so, be forewarned that in the event of a violation of the NDA, enforcement of its provisions is an expensive proposition and there is no guarantee of success. However, it is far more advisable to have an NDA in your pocket than no protection for your valuable ideas and products at all.

Click for a sample NDA.

Lydia M. Lim is a member of the Los Angeles Incubator and a business attorney in Los Angeles.