Dealing with legal agreements is never fun, yet in business it is a daily activity. Most employees rarely have to deal with contracts and other legal documents, leaving that for others and the lawyers they hire. Yet in the high-tech world there is one legal document that is very common: the Non-Disclosure Agreement (NDA). It often goes by other names but let's stick with NDA.
The reason the NDA is so common is that a total product solution for a technology-based company often requires complementary products and services from other companies. This is as true for start-ups as it is for the top names in the sector. These partnerships are initiated by one of the companies or both are directed to do so by a mutual customer. This activity is often delegated to a business development specialist or, for smaller firms, sales. In very early stage companies this may devolve to a technology executive for the simple reason that they may not have a business development or sales group yet. The first step of substantive discussions usually requires an NDA. Later, if all goes well, a contract will be signed to establish the terms of the business relationship.
NDAs are binding legal contracts, as should be obvious if you read through one in detail. They vary quite a bit in length -- I've seen some that fit comfortably within one page, while others run to a dozen pages or more -- but all are intended to achieve one important task: establish procedures, responsibilities and, yes, penalties, to control the necessary sharing of sensitive or proprietary information or technology. The shared intellectual property can range from disclosure of APIs, sharing of source code or pre-release object code, algorithms, customer lists, pricing, and so on.
For those previously unfamiliar with NDAs, it is sometimes assumed that they are a defensive weapon in much the same manner as a suit of armour was for a medieval warrior. With signed NDA in hand, many companies feel free to open up and share their most cherished secrets and the fruits of their labour, believing that the penalties for breaking the terms of the NDA will keep the other party honest. Regrettably, this is often not the case. Here is a recent example that provided the motivation for this blog post.
If you've ever discussed NDAs with lawyers -- which I've done a lot more than I'd like over my career -- you will find that they can be very relaxed about it all (unless they're particularly desperate for a few more billable hours). In contrast, if you are new to the game and are desperate for good advice on whether to sign an NDA or how to draft one, you may be quite anxious since the success or failure of your company may depend on doing everything right. Don't be annoyed with the lawyer's attitude: it's justified. Go ahead and ask why they don't share your concern and you may hear something like this (paraphrased from a discussion I once had with a lawyer along these same lines).
The lawyer will ask you whether you trust the person or company with whom you are negotiating the NDA. This may seem like an odd question since are probably thinking that the NDA is an alternative to trust, countering the risk of dealing with a shady character or a company with a hidden agenda by creating legal consequences for misuse of your valuable intellectual property. It isn't, as is beautifully exemplified by the above-referenced case: if they take the goods and run, regardless of your presumed legal protections, you've already lost.
Sure you can sue, but by then it's too late, it's expensive, the courts can be treacherous and you can be in the right and still lose, and even if you win there may no one you can collect from. It isn't only the small, asset-poor companies you need to watch out for. I have witnessed the very cream of the tech world sign NDAs with the sole objective of getting the goods from start-ups who go on to disclose everything in the hope of winning a top-tier partnership or (though this is only whispered in dark corners) being acquired. For the large corporation it can be far cheaper and faster to exploit what they've learned from you, while knowing that you do not have the resources to successfully pursue a case against a multi-billion dollar corporation in the courts.
The lesson here is that an NDA is absolutely not a substitute for trust. It is a supplement to a trust relationship so that no one makes any mistakes by making clear just what can and cannot be done with disclosed intellectual property. Even so, no matter how strong the level of trust, you should never disclose more than the minimum necessary. Also, disclose gradually in careful steps so that should you realize at some point that you've made a mistake, you can minimize the potential damage. A lawsuit should always be your last option, never the first, and one you almost certainly can't afford.
As when selecting a romantic partner or a building contractor, ask around discretely before walking down the aisle or tearing down the walls. Also, when you do sign an NDA, treat your new partner's intellectual property with the same care and diligence with which you wish they would treat yours. That way when the next deal comes around and the other party checks out your reputation, your existing partners will give the thumbs up sign.
Wednesday, October 28, 2009
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9 comments:
I notice no mention of patents. A formidable second layer of defence is to file a patent before speaking with the company and getting an NDA in place. Indeed, in your example, ArchOS may have made their decision based on the fact that the smaller company did not mention any patents.
-SA
You want to avoid litigation of any sort. Doing it over patents rather than violated terms of disclosure is not an improvement. If you can't trust someone, don't share! The party that dares you to litigate knows just how expensive and lengthy it can be. And in the interim, even if granted an injunction, the damage to your business is already done.
"If you can't trust someone, don't share! "
1) Not sure then how any business ever gets done except possibly between brothers.
2) Infringing a patent is usually more dangerous than an NDA since the claims are laid out for all to see and argue over. Larger corporations take patents very seriously and examine them and their owners closely before making the risk decision whether to move forward.
3) There are contingency law firms, happy to take your 50% to go after the big guys for you. So while the smaller entity does not stand to gain 100%, it's still pretty high.
Just sayin, I'd rather have a patent AND an signed DA/NDA than just an NDA.
-SA
"If you can't trust someone, don't share! "
1) Not sure then how any business ever gets done except possibly between brothers.
2) Infringing a patent is usually more dangerous than an NDA since the claims are laid out for all to see and argue over. Larger corporations take patents very seriously and examine them and their owners closely before making the risk decision whether to move forward.
3) There are contingency law firms, happy to take your 50% to go after the big guys for you. So while the smaller entity does not stand to gain 100%, it's still pretty high.
Just sayin, I'd rather have a patent AND an signed DA/NDA than just an NDA.
Have you ever participated in these sorts of business negotiations? I have done so many times, and there is an art to the disclosure game. And not all intellectual property is patentable; trade secrets covered a lot of ground. Some very reputable companies have tried to walk off with IP I've controlled, and a few times I've tried to wheedle it out of others. It's pretty routine in the tech sector.
Some companies are extremely ethical, others are the opposite, but most are somewhere in between. When business compels you to disclose, you do it carefully and in stages, starting with that which is least valuable. Trust is built in stages; it isn't a binary decision and it isn't done without some due diligence.
Litigation is not as easy or as cost-effective as you claim. Apart from the lawyers' fees, the time and resource allocation to this non-productive activity will harm your business, and in most cases it is very difficult to win the suit. I've watched this happen many times.
I'll say it one last time: do everything you can to avoid the necessity of litigation. It's the wrong solution to almost every problem.
Likely your perspective is that from a large company because for a while now most large companies do NOT sign NDA's from individual inventors or small entities. Certainly their public policies on their websites show this.
Given this fact, smaller or individual entities either disclose the information with NO protection or file for a patent. In fact, many of the large companies also will not accept disclosure unless a patent has been issued - so pending applications do not even count.
Lately, the USPTO is not issuing a first office action (e.g. cracking open patent applications) for at least 4 or 5 years (for many software fields), so small entities face further dilemma.
So your discussion of NDA's seems to assume that getting an NDA signed is simple while from my experience it's quite the opposite. IMO, patents are the better route. At least from a small entity perspective, large corporations likely face other factors.
I agree that trickling out the information is useful, but they can put a nice smile on their face and suggest they are going with you and purchase pilot components/projects - but you'll never know until it's too late. When there's money involved you'd be surprised at the amount of stealing that goes on.
Regarding litigation being costly - when a small entity faces their wares having being stolen and that bringing an infringement suit to court will cost a minimum of several $million - let me tell you the ~50% take by the lawyers seems almost a bargain.
"When I walk into that large company, they've got marketing, they've got distribution. If I show them what I've got, the only thing I have on my side of the table is that patent." - Dean Kamen
-SA
If all you have is a patent, I can perfectly believe the other party will not sign an NDA since doing so could imperil their business if a deal isn't done. My subject in the post was business to business negotiations, and therefore where one party has innovative technology, it is merely an enabler in a market-proven product or service; I am not talking to the case for small inventors.
Also, please be careful about your assumptions about me. You are not only wrong about my business experience, I am perfectly familiar with the USPTO process. And the legal process for litigation, for that matter.
I don't know that more need be said on this subject since we seem to be talking apples and oranges.
Regardless, in a negotiation where the balance of power is totally on one side and the other side has innovative tech, the holder of the tech would be foolish to disclose anything, except as an act of desperation. Far better that the inventor build their business (based on the innovation) first before entering any partnership negotiation. That evens the risk.
Interesting because I felt we were largely talking about the same thing. The link provided in your original post described a small company that attempted a business relationship with a large company (Archos) - hence my pointing out that a smaller company getting an NDA signed seems to be rare nowadays.
As well, from your statement:
"Far better that the inventor build their business (based on the innovation) first before entering any partnership negotiation. That evens the risk."
my belief is that this may not be as easy as it sounds. In today's technological world there are typically many components and technologies involved in bringing a new product to market - and as such, costly to bring a product to market (e.g. size of the team, assembling, distribution channels, etc..). So the small or independent person either needs to find investors, become an NPE, or try to sell or license the technology. The licensing avenue is typically the most interesting to an innovative technologically inclined independent. For one, they don't need to rely on much outside of technological expertise, and secondly it allows them to move on to the next innovation/project. However, back to square one again in dealing with the bigger companies in getting a licensing deal struck.
So, the interesting aspect of this entire thread is how does a small independent best go about making a living from innovating? What should the small company in your link have done instead? What in your experience worked from the small or independent innovator perspective?
My original article reference was a jumping off point to talk about the (non-)value of an NDA, not about the relations between large and small entities. Besides, Archos isn't all that large.
Regarding your major point, I think I have bad news for you. Ideas, even patented ideas, have little native value. It's businesses that have value. If you show an idea to a company or VC, with the objective getting them to take on or fund a product and business built up from that idea, they will almost always tell you to get lost (but they do it politely). The message here is that you cannot expect that anyone else will prove the value of an idea if you have not already done so. Life is hard that way.
It isn't just patents. Many times I've tried to form partnerships where the business I was representing had only limited commercial success, sometimes none at all by the time of the discussion. Little gets accomplished, except to build personal relationships. Until you can show an interesting revenue stream or customer portfolio, few will invest their own time or resources to get involved. That is, prove the business worth of what you have *first*, and then we can talk turkey.
This is tough for a lone inventor (I've been there myself). But you asked what you can do, and all I can suggest is the following. Build a business, or at least a committed team of a few people. Come up with a business and product plan and talk to prospective customers and investors to gauge interest. Don't stop and wait! Keep making progress. Build a rudimentary prototype and try it out on people, even if it's just a mock-up. PROVE that you have something of value that is worth the other party's time and money.
There is really no escape from this unless you catch an unnaturally lucky break. You can't count on being lucky, so do something to build up the value that others see in what you have. Businesses have value, products have value, but ideas generally do not. Even if you go the NPE route and litigate, your lawyer "friends" will demand 90% or more of the take (not the 50% you quoted), because the value is primarily in *their* work, not *yours*.
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