What you should know about NDAs
By Cliff Ennico
“I’m starting a consulting business and have been asked to sign a ‘confidentiality and nondisclosure agreement’ with my first client, a large multinational corporation.
The agreement seems straightforward enough, and it’s my understanding that these are pretty much ‘boilerplate’ agreements that you don’t want to spend a lot of time negotiating for fear of sending the wrong signals.
There is no noncompete clause in the agreement – which is good – but two sections of the agreement cause me concern:
- A clause saying I cannot solicit business or employment from any of the client’s customers for a period of two years after our relationship terminates; and
- A clause in which I assign to the client all ‘intellectual property rights’ to any work product I may create for them.
Should I sign this agreement ‘as is’ or attempt to negotiate it?”
First of all, there is no such thing as a “boilerplate” agreement. In 35 years of practicing law, I have never – not even once – filled in the blank spaces on a preprinted form and handed it to a client as a finished product. All agreements are unique and need to be tailored to the specific client or transaction to which they relate.
Having said that, most nondisclosure agreements (“NDAs” for short) are pretty benign. Your client does have the right to prevent you from blabbing about their trade secrets at cocktail parties.
Some NDAs go much further than that. You need to look closely at the definition of “confidential information” in the NDA and make sure it makes sense given the services you are providing. If you are designing the company’s website, you should be obligated to keep their “marketing plans” confidential, but not their “computer software source code” as you will not have access to that.
Some companies want every possible type of information listed in the NDA for fear they might miss something. The problem is that much of that information isn’t really confidential.
There are two ways to limit the scope of an NDA. First, at the end of the laundry list of information they want you to keep confidential, add: “which information is not generally known to the public and either derives economic value, actual or potential, from not being generally known, or is of such a character that [name of client] has a legitimate interest in maintaining its secrecy” – this language limits the NDA to the client’s “trade secrets”.
Second, add language saying that “Confidential Information as used herein does not include any information which:
- Is or becomes generally available to the public other than as a result of a disclosure by me; or
- Becomes available to me on a non-confidential basis from a source other than [name of client], provided that such source has represented to me (and which I have no reason to disbelieve after due inquiry) that it is lawfully entitled to disclose the information; or
- Is developed by me independently without the use of or reliance upon Confidential Information as herein defined.”
That way if your next client asks you to work on a similar project, you will not be “haunted” by your obligation to your first client (unless, of course, you divulge your first client’s trade secrets to the second client which clearly would breach the agreement).
Now, let’s turn to that “assignment of work product” clause. While seemingly harmless, this clause can cause a lot of problems when you are working for multiple clients on the same or similar types of projects. If you are not creating any intellectual property (such as artwork, graphics, customized reports, inventions or computer software) for a client, you should resist signing such a clause.
If you are creating something for a client that has value as “intellectual property,” be sure to include language in the contract saying the definition of “work product” does NOT include any “forms, templates, tools and materials” you have developed independently and use to serve your clients generally. If the client insists you can give them the “license” to use these, but not ownership. Otherwise you might be precluded from using these materials for other clients.
Finally, let’s talk about that “nonsolicitation” clause. While your client has the right to know you will not communicate with their customers behind their back, Murphy’s Law for consultants says that the minute you finish a project for Company A, one of Company A’s customers will call you out of the blue asking for similar work. You don’t want to be prevented by contract from returning that call.
Rather than sign an agreement saying you won’t “solicit” customers, say instead that you will not “cause a customer of [name of client] to terminate its relationship with [name of client], or induce any such customer to breach or terminate any agreement in existence between such customer and [name of client].”
That way you can work for anybody you please as long as it doesn’t hurt your client.
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2016 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Follow him at @cliffennico.