Have you been asked to sign a Non-Disclosure Agreement (an "NDA")? Unless you take the appropriate steps beforehand, an NDA can serve as an open invitation to a lawsuit. Below are a few examples of some common NDAs, along with some dos and don’ts that may help you avoid costly litigation:
The Consultant’s NDA
Tom is a freelance consultant. Tom is hired to provide consulting services to Company Y. Tom is in high demand and doesn’t need to sign a non-compete agreement. Instead, Tom signs an NDA before starting a six-month consulting project with Company Y. Tom provides his services to Company Y for the length of the project and moves on to his next gig. Let’s skip ahead a year. Tom is working with Company Z – a competitor of Company Y – under a similar consulting arrangement. Company Y learns of Tom’s current role with Company Z and freaks out. Company Y hires lawyers and sues Tom, arguing that he not only breached his NDA but that he also stole Company Y's trade secrets.
The Failed Joint Venture NDA
Company Y and Company Z are considering a joint venture. The two companies sign an NDA prior to starting the due diligence process. In an effort to make the deal more enticing, Company Y provides Company Z with some confidential business information. However, after receiving this information, Company Z realizes that it already has similar projects in the works and takes the deal off the table as it doesn’t see much value in moving forward in a joint venture with Company Y. Company Y feels betrayed and decides to hire lawyers to sue Company Z, arguing that it not only breached the NDA but that it also stole trade secrets.
NDAs and Trade Secret Claims: Attached at the Hip
Plaintiffs will often dress up a run-of-the-mill breach of NDA claim as a claim for misappropriation of trade secrets. Strategically, adding a claim for misappropriation of trade secrets makes sense as it provides the plaintiff with several potential benefits:
What does this mean if you’re Tom or Company Z? In short, before signing an NDA you should recognize that it could one day turn into trade secret litigation. Therefore, you should consult with an attorney who focuses on restrictive covenants and competition law before signing an NDA. However, if you decide to skip that first step – at a minimum – consider the following:
Negotiating NDAs – Dos and Don’ts
Negotiate Jurisdiction: The importance of selecting the right forum/jurisdiction – not just for an NDA, but for any agreement – can’t be overstated. As it pertains to NDAs, you should include a provision stating that any trade secret claims must be brought in federal court under The Defend Trade Secrets Act of 2016. This sort of provision often flies under the radar during negotiations but can pay huge dividends down the road. Effectively, it prevents a plaintiff from suing in state court on a bogus trade secret claim. A few reasons why this is important is because if forced to defend a trade secret claim in state court you’re (1) less likely to be awarded summary judgment, and (2) more likely to be subjected to abusive discovery tactics that may, in turn, expose your own trade secrets.
Insist Upon a Broadly Written Prevailing Party Attorneys’ Fees Provision: A broadly written provision that covers the prevailing party’s attorneys’ fees for the entire action will force a plaintiff to think twice before asserting a meritless claim. This provision should be drafted to include any claims arising under, or related to, the contract or the parties’ course of dealings. The provision should also provide for recovery of (1) actual fees paid and (2) all litigation-related costs, including all monies spent on discovery, document production, third-party vendors, experts, etc.
Sign a Boilerplate NDA: Unless you have absolutely zero leverage and must engage on unilateral terms, never sign a boilerplate NDA. Always negotiate specific terms.
Accidentally Waive Federal Jurisdiction: Don’t give up your right to a federal venue. Scrutinize the venue/forum selection clause. At a minimum, the clause should say “state or federal courts of Florida” or “state or federal courts that have jurisdiction over Polk County.” But pay careful attention to the language. If your venue clause says “the state and federal courts in Polk County, FL” then you just waived federal jurisdiction because there are no federal courts in Polk County.
Rick Duarte is the owner of The Duarte Firm, P.A., where he focuses his practice on business law. He received his law degree from the Emory University School of Law and has been named a “Rising Star” in Business Litigation by Florida Super Lawyers for 2016 – 2018. Rick also serves as general counsel to emerging and medium-sized businesses, guiding clients through corporate governance, risk management issues, and strategic decisions where business and law intersect.