Will an NDA Really Protect Your Business Ideas…?

…and what if the other person won’t sign one?

Many people make others sign non-disclosure agreements (NDAs) before they reveal their business ideas to them. They assume that an NDA will prevent the other party from using or revealing their ideas.

But NDAs aren’t like the magical protective spells some people seem to think they are.

For one thing, people can – and do — violate NDAs. They aren’t scared off by the threat of litigation, because they know it’s often an empty threat.

The average startup, small business, or freelancer may not be willing or able to invest in a lawsuit to enforce an NDA. Unless it’s a “bet the company” case, they may just decide to suck it up when someone steals their ideas.

Definitions

Also, even if a business is ready to fight to protect its ideas, those ideas may not actually be protected by an NDA.

NDAs usually state that they protect “confidential information” or sometimes “proprietary information.”

Here’s a typical definitions clause, flagged by LawGeex:

NDA

The definition of “information” might specifically include “ideas” or “concepts” … but it might not. If you’re the party with the ideas to protect, obviously you want the definition of “information” to be as broad as possible.

(If, on the other hand, you’re the party getting the information, then you might not want the NDA to include broad terms like “ideas” and “concepts”…)

Suing to Enforce an NDA

A business that sues to enforce an NDA will often includes in the complaint a long list of alleged causes of action. These can include things like:

  • Breach of contract (the contract being the NDA)
  • Unfair competition
  • Misappropriation of trade secrets under state law

Ideas versus Data

However, an “idea” won’t necessarily be protected as a trade secret under state law.

As a California court noted in the Silvaco Data Systems case, while patent law protects ideas, concepts, and designs, trade secret law protects factual, empirical data.

“Empirical data” can include things like a “customer’s preferences, or the location of a mineral deposit.”

The recent California case of Top Agent Network, Inc. v. Zillow, Inc. involved two companies involved in the online real estate marketplace.

Top Agent’s CEO met with Zillow’s CRO to discuss a potential investment by Zillow in Top Agent. The Zillow CRO agreed to sign an NDA (though he didn’t actually ever sign one) and the Top Agent CEO then showed him some members-only content on the Top Agent site, including its “Upcoming Listings” feature.

Zillow later told Top Agent that it wouldn’t be making the proposed investment — and shortly thereafter Zillow launched its own “Upcoming Listings” feature. Top Agent sued.

The court found that it was far from clear the “features” and “strategy” associated with Top Agent’s “Upcoming Listings” were empirical data, protectable under California trade secrets law, “rather than ideas or functions, which are not.”

What if the other side won’t sign an NDA?

As the New York Times pointed out,

Ten years ago, it was not unusual for entrepreneurs to request and potential investors to sign nondisclosure agreements. But today the agreements are largely considered a thing of the past. In fact, some investors say they walk away from a founder who even suggests signing one.

(Emphasis added.)

This reluctance is for practical reasons. As a Stanford Business School professor and VC told the Times,

V.C. firms and angels are looking at so many more deals today, that they could freeze themselves out of a given area by signing an N.D.A. with one person.

The Times offered the following wisdom for firms worried about protecting their ideas:

  • “Everyone thinks their idea is extremely unique, but the idea is really 1 percent of the value. The value is in the execution.”
  • Don’t share proprietary information if you don’t have to, or before you have to – with or without an NDA.
  • Know who you’re sharing the info with and whether they’re reputable.
  • Consider filing for a provisional patent.

Getting Your NDA Reviewed

Are you asking other people to sign an NDA you haven’t actually read — or that maybe you don’t understand yourself?

You can get a better understanding of your own NDA form, or get feedback on one that you’re being asked to sign, using our fast legal document review tool at www.lawgeex.com.

Or just click the link to the right of this blog and upload your NDA now.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice. 

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