This article first appeared on DNA.
THE non-disclosure agreement (NDA) has come to be known as the ‘Silicon Valley Handshake,’ and is now de rigeur in our local industry, especially when dealing with technology companies.
It is often signed right after exchanging our salam (greetings), before any serious business is done.
Over the years, I have developed a certain disdain for the venerable NDA and I now refuse to sign any, as a matter of general principle. Needless to say, I have lost some valuable business due to this as it is often considered sine qua non in commercial relationships with certain types of companies.
And it seems that I’m not alone in this. IBM refuses to sign one unless it is required to receive specifically identified confidential information, while Intel and Microsoft include clauses that exclude from the NDA any information that their employees manage to keep in their heads.
But my personal bias aside, there are some real issues to think about when one is considering whether to sign an NDA or otherwise.
First is the issue of practicality.
When I released my first product in the late 1990s, I was advised to get everyone to sign an NDA before showing it to them. This is what a lot of startups do these days too. I was told that this would help to protect my intellectual property.
Not knowing any better, I blindly followed the practice.
Later, I learned how silly this was as it is impractical for me to enforce the NDA anyway, due to a lack of financial means.
I also learned that business relationships are built on trust. The NDA does not build trust but actually erects hurdles to idea exchange and increases the cost of information management.
Besides lawyers, I do not know of anyone who actually thinks that it is ever a good idea to enforce an NDA in a costly legal battle. It is well known that prevention is better than cure. Therefore, the best way to protect truly confidential data is to, simply, never reveal it.
Second is the issue of legality.
As someone reading law, I have learned that a mere NDA is not enforceable as it often lacks legal consideration – a required element for any enforceable contract. In legal parlance, consideration in this case means receiving something for a promise to keep the secret.
As an example, a legally enforceable NDA is one that a new employee signs at point of hire because he or she receives a job for a promise to keep the secret. But one that is signed after the person is gainfully employed is not usually enforceable unless there is additional consideration given to the employee.
Therefore, asking a potential investor to sign one before a product pitch and getting an external consultant to sign one before preliminary discussions are two situations where the NDA is not enforceable for want of consideration.
Third, an NDA may force the signee to violate fiduciary duties.
This is true for company directors under S.132 of our Companies Act 1965. Amongst other things, it requires a director to consider only the interests of the company alone and no one else, not even personal interests, when exercising his duties.
A company director who signs an NDA can be caught in a situation arising out of a conflict between the company interests and the NDA signed with another company. In such a situation, said director can be sued as a result of not acting in the best interest of the company.
This is also true for consultants. It goes without saying that professionals, such as engineers, owe a duty of care to our clients foremost amongst others, but a consultant will have other clients in the future, often the competitors of their current client as they are operating in the same sphere or industry.
A consultant who signs an NDA can be caught in a situation of conflict between the interests of their future clients and the NDA signed with the current client. They can then be sued by their future clients under negligence for not providing a professional standard of service.
I’d also like to highlight that a registered engineer can get deregistered under S.15 of our Registration of Engineers Act 1967 for a disgraceful act, which includes things like revealing client secrets.
Therefore, an NDA actually creates a no-win scenario for the signee, such as registered professionals and company directors, or anyone else who owes a fiduciary duty to another.
In conclusion, I personally think that NDAs are a silly thing to have and the distasteful practice should be discontinued. In most situations, it is neither legally nor practicably enforceable. It is much better to never reveal trade secrets or to get all intellectual property properly registered and protected.
A good recommendation is that one should only sign an NDA if, and only if, the other party signs an agreement indemnifying the signee against all future lawsuits arising from a conflict between the NDA and any future agreements or fiduciary responsibilities. Personally, I like this idea.
As per my usual disclaimer, I am not a lawyer.