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PAABA Business Law Section NDA Misssteps and Surprises

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Satya Narayan, a leader in the field of intellectual property and commercial transactions at the Royse Law Firm, will share her wealth of knowledge on the subject, particularly: …

Satya Narayan, a leader in the field of intellectual property and commercial transactions at the Royse Law Firm, will share her wealth of knowledge on the subject, particularly:

-A brief introduction to nondisclosure agreements or "NDAs 101"
-NDA missteps and surprises
-Real life examples of the not so "boilerplate" NDAs

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  • 1. NDA MISSTEPS AND SURPRISES PAABA BUSINESS LAW SECTION JANUARY 14, 2014 Satya S. Narayan Royse Law Firm, PC SNarayan@rroyselaw.com Phone: 650.521.5745 This presentation and its contents are solely for informational purposes and does not constitute legal advice. All clauses presented are samples only. Copyright © 2014, Satya S. Narayan & Royse Law Firm, PC. All rights reserved.
  • 2. OVERVIEW I. I. II. III. IV. IV. Introduction to the Non‐Disclosure Agreement (NDA) introduction to the Non-Disclosure Agreement (NDA) NDA Missteps and Surprises NDA Missteps and Surprises Example of the not so “boilerplate” NDA Example of the not so "boilerplate" NDA Practitioner Tips Practitioner Tips ROYSE
  • 3. I. INTRODUCTION TO THE NDA C- ROYSE
  • 4. NDAs 101 • • • • Why enter into a confidentiality/ nondisclosure agreement (NDA)? – Protect confidential information and trade secrets When is an NDA needed? – BEFORE the client discloses and/or receives information What types of NDA are used? – Unilateral/ mutual/ multi‐party NDAs – NDAs may vary in form based on the contemplated transaction Some key terms of NDAs: – Definition of “Confidential Information” – Standard Exceptions – Permitted Use – Recipient’s Obligations – Permitted Disclosure – Term – Other Key Terms
  • 5. Definition of “Confidential Information” Broad vs narrow definition • Broad: Covers all information provided and lists protected categories ⁻ “any and all nonpublic information disclosed, including, without limitation, …” ⁻ Includes oral and visual disclosures • Narrow:  ⁻ Covers only listed information ⁻ Marking/ designation obligation (“marking”) • “If the Confidential Information is embodied in tangible material, it will be  labeled as ‘confidential,’ and if disclosed orally or visually, it will be identified  as such at the time of disclosure and be confirmed in a writing to the  Recipient within 30 days of such disclosure” • DISCLOSERS BEWARE: Failure to abide by NDA designation provisions may  preclude subsequent trade secret misappropriation claim (Convolve, Inc. v.  Compaq Computer Corp., 2013 WL 3285331 (Fed. Cir. July 1, 2013) (applying  California law to the trade secret misappropriation claim)
  • 6. Standard Exceptions Standard Exceptions: • In the public domain before disclosure, or subsequently enters the public  domain through no fault of Recipient • Already in Recipient’s possession as evidenced by written records • Lawfully communicated to Recipient by a third party without  confidentiality restrictions • Independently developed by Recipient as evidenced by written records • Not labeled as “confidential” or identified as “confidential” (if  orally/visually disclosed)
  • 7. Permitted Use Permitted Use Limit Recipient’s scope of use of Confidential Information to a specific purpose Limit Recipient's scope of use of Confidential Information to a specific purpose • “Recipient may use the Discloser’s Confidential Information solely for  • "Recipient may use the Discloser's Confidential Information solely for evaluating a possible business relationship between the parties (the  evaluating a possible business relationship between the parties (the “Permitted Use”).” "Permitted Use")." • “Recipient agrees that it will hold the Discloser’s Confidential  • "Recipient agrees that it will hold the Discloser's Confidential Information in strict confidence and will use the Discloser’s  Information in strict confidence and will use the Discloser's Confidential Information for no purpose other than the Permitted  Confidential Information for no purpose other than the Permitted Use.” Use." ROYSE
  • 8. Recipient’s Obligations • • • • Non‐Disclosure – “Recipient will hold Discloser’s Confidential Information in strict confidence  and not disclose to any third party any Confidential Information of the  Discloser.” Standard of Care – “Recipient will protect the Confidential Information of Discloser with at least  the same degree of care that Recipient uses to protect its own Confidential  Information, but in no case, less than reasonable care.” Notice – “Recipient will immediately notify the Discloser upon discovery of any loss or  unauthorized disclosure of the Discloser’s Confidential Information.” Return or Destroy – Upon termination or earlier, upon Discloser’s request – Include electronic copies – Certification of return/ destruction by Recipient’s executive officer – If Recipient, consider reserving rights to retain archival copy
  • 9. Permitted Disclosure Limit Recipient’s right to disclose Confidential Information: • To employees and representatives; contractors (?); affiliates (?) ⁻ must have a “need to know” and be subject to binding  confidentiality obligations that are at least as restrictive as the   terms of the NDA ⁻ “Recipient will limit access to the Discloser’s Confidential  Information to only those of Recipient’s employees or authorized  representatives having a need to know and who have signed  confidentiality agreements containing, or are otherwise bound by,  confidentiality obligations at least as restrictive as those  contained herein.” • Court order or legal requirement to disclose ⁻ NOT AN EXCEPTION to the definition of Confidential Information ⁻ Written notice and assistance clause to permit the Discloser to  obtain a protective order
  • 10. Term DIFFERENTIATE between the term of the NDA and the duration of the confidentiality  obligation • NDA usually has a fixed term of 1 to 2 years; BUT, generally want confidentiality  obligation to be indefinite  ‐ Limited confidentiality term may result in loss of trade secret protection  (see Silicon Image, Inc. v. Analogk, Semiconductor, Inc., 2008 WL 166950  (N.D. Cal. Jan. 17, 2008)(ultimately settled)) ‐ Even upon termination, Confidential Information may reside on Recipient’s  archives or back‐up tapes • Confidentiality term for non‐technical information not protected as trade  secrets can be limited; protect technical information and trade secrets  indefinitely • Sometimes confidentiality obligation is stated to continue until such time that  one of the standard exceptions becomes applicable ₋ Limit expiration of obligation to particular information affected by standard  exception
  • 11. Other Key Terms • • • • • No License Grant – “Nothing in this NDA is intended to grant or imply any rights, by license or  otherwise, to Recipient, including, without limitation, under any patent, copyright,  trade secret, or other intellectual property right[, except the limited right to review  Discloser’s Confidential Information solely for the purposes of consideration of a  possible transaction between the parties.]” Limit Recipient’s Reproduction Right – No reproduction except as required to accomplish the intent of the NDA  – All reproductions must include confidentiality/ proprietary notices No Reverse Engineering – “Recipient agrees not to modify, reverse engineer, decompile, create other works  from, or disassemble any software programs furnished by Discloser without the  Discloser’s prior written consent.” DISCLOSERS BEWARE of granting warranties.  Include a warranty disclaimer. DISCLOSERS BEWARE of liability caps and disclaimer of consequential damages.
  • 12. Other Key Terms • • Injunctive Relief – “Recipient acknowledges that money damages [would]/[may] not be a sufficient  remedy for any breach of this NDA and that the Discloser [would]/[may] suffer  irreparable harm as a result of such breach.  Accordingly, without limiting any  other remedies available to Discloser, Recipient agrees that Discloser will be  entitled to seek injunctive relief under this NDA, as well as such further relief as  may be granted by a court of competent jurisdiction.” Enforcement – Specify governing law – Prevailing party in litigation will be entitled to its costs and reasonable attorneys’  fees
  • 13. II. NDA MISSTEPS AND SURPRISES ROYSE
  • 14. Using the Wrong Type of NDA • • • Mutual NDA v. One‐Way NDA – Do you really need a Mutual NDA? – Do you need the Discloser’s Confidential Information? What Confidential Information  will be received? Will it taint Recipient’s Confidential Information? NDAs for M&A transactions  – Different from NDAs for commercial transactions – Strategic objectives in an M&A deal are different – Additional provisions: fact of transaction is confidential, non‐solicitation obligation,  standstill provisions (if target is, or about to become, public co.), etc. – Sometimes separate NDAs with purchaser’s diligence advisors are executed where  access to the target’s sensitive Confidential Information is limited to such advisors.   Form of such NDAs different. Using the NDA beyond its intended purpose – Using the NDA for purposes other preliminary discussions – If actual use (including testing) of a product is contemplated or services will be  provided, an NDA may be inadequate
  • 15. Misleading NDA Title • • Recipient favorable NDAs masquerading as “mutual” NDAs ₋ Limited confidentiality term ₋ Light obligations on the Recipient ₋ Broader use and disclosure rights (e.g. disclosure to Recipient’s  affiliates; residuals clause; etc.) ₋ Liability capped or consequential damages disclaimed Can also have Discloser favorable NDAs masquerading as “mutual” NDAs
  • 16. Warranties in NDA Warranties  – E.g., warranties of accuracy, non‐infringement, compliance with laws, etc.  – Recipient’s Perspective:  • Accuracy Warranty: Recipient must be able to trust information that is shared to  commit to a business relationship. • Non‐infringement Warranty: Exposure to third party infringement claims based on  Discloser’s Confidential Information – Discloser’s Perspective:  All warranties disclaimed. • No value promised or exchanged at NDA stage • NDA’s limited scope of use of Confidential Information may not justify granting  warranties • Unlimited liability nature of the NDA • Warranty exclusions and exclusive remedies are not negotiated at NDA stage • Definitive agreement will contain warranties • Accuracy warranty is a potential backdoor to claim reliance damages and diligence  costs 
  • 17. Indemnities in NDA Recipient Indemnification: To protect against third party infringement claims based on  Discloser’s Confidential Information – Same concerns from Discloser’s perspective as giving a non‐infringement  warranty – Alternative: Discloser will not knowingly communicate any information to  Recipient in violation of the proprietary rights of any third party. • Discloser Indemnification: Indemnity to cover losses and damages arising from  disclosure or misuse by Recipient’s third party personnel (e.g., Recipient’s contractors)  who are permitted access to Discloser’s Confidential Information – Alternative: Any disclosure or use of any Confidential Information of Discloser by  any Recipient Representative other than as authorized in this NDA, shall be  deemed a breach of this NDA by Recipient.  • BEWARE of indemnification that does not involve third party claims – Action for breach of contract should be sufficient •
  • 18. Residuals DISCLOSERS BEWARE: A ‘residuals’ clause permits Recipients to use  Confidential Information that they remember • Broad: Any information remembered – “Recipient shall be free to use Residuals for any purpose. ‘Residuals’  means information in non‐tangible form which may be retained by  those personnel of Recipient receiving Discloser’s Confidential  Information under this Agreement.” • Narrow: Limited to unintentionally remembered information in unaided memory – “‘Residuals’ means generalized ideas, concepts, know‐how, or  techniques in non‐tangible form that are incidentally retained in the  unaided memories of the Recipient’s employees. An employee’s  memory is considered unaided if the employee has not intentionally  memorized the Confidential Information.”
  • 19. Refrigeration & Anti-Refrigeration • • RECIPIENTS BEWARE of the “refrigeration” clause – Prevents employees of Recipient who have had access to Discloser’s  Confidential Information from working on similar projects, products  or services. DISCLOSERS BEWARE of the “anti‐refrigeration” clause – “Access to the Confidential Information of Discloser shall not  preclude any employee of Recipient who has seen such Confidential  Information from working on projects, products, or services for  Recipient or its customers that are the same as or similar to  Discloser’s projects, products, or services” – Sample Protective Proviso: […; provided that such employee does  not use or make reference to the Confidential Information of  Discloser or refer to notes made as a result of access to such  Confidential Information]
  • 20. III. EXAMPLE OF THE NOT SO “BOILERPLATE” NDA The contents of the next slide are for educational purposes only and should not be construed to constitute legal advice (which is dependent in every case on its own unique facts and circumstances). Clauses have been drafted by the presenter to reflect some issues encountered in NDAs; no plagiarism or copyright infringement is intended. The next slide is intentionally omitted from the take-home materials.
  • 21. This slide intentionally omitted in distribution copy. This slide intentionally omitted in distribution copy. ROYSE
  • 22. IV. PRACTITIONER TIPS • • • • • • Ask the client questions to inform your review of the NDA – What is the nature of the contemplated transaction? What Confidential  Information will be disclosed and received? How will each party use the other  party’s Confidential Information? Where is the Recipient located? Etc. Assess what form of NDA should be used based on the contemplated transaction If the client will be the primary discloser or will disclose sensitive Confidential  Information, advise the client to propose its form of NDA Allow time for negotiating the NDA Advise the client regarding the risk of making certain types of concessions Educate clients regarding NDA best practices – Mark tangible materials as “Confidential Information.” Comply with marking  and notice requirements for oral and visual disclosures. Keep notes of  information disclosed and received.  Keep other party’s information  confidential and treat it as you would your own. Etc.
  • 23. Royse Law Practice Areas Satya S. Narayan SNarayan@rroyselaw.com Phone: 650.521.5745 PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 Corporate Securities Tax Mergers & Acquisitions Fund Services Intellectual Property Technology Transactions  Labor & Employment Immigration Litigation Estate, Trust & Wealth Strategy Real Estate International LOS ANGELES 11150 Santa Monica Blvd.,  Suite 1200 Los Angeles, CA 90025 SAN FRANCISCO 135 Main Street,  12th Floor San Francisco, CA 94105

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