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This post was prompted by a Hacker News discussion.

Is it even worth asking a potential investor for an NDA?

Potential investors in a company might be reluctant to sign an NDA. Venture capitalists in particular often flatly refuse to do so. If you're dealing with folks like that, you might either have to take your chances that they won't "steal" your idea or see them walk away.

As a practical matter, though, going without an NDA with a potential investor might not be a bad bet, because:

  • You can try to be very, very selective about what you disclose without an NDA, so that you're not giving away the "secret sauce" of your idea.
  • Investors and others generally do have one or two other things on their minds. They generally see lots of entrepreneurs who are convinced they've got a world-beating idea. You'll probably be lucky to get these investors to pay attention for two minutes. Ask yourself how likely it is that they'll want to take your particular idea and spend time and money building a business around it without you.
  • Contracts aren't the only thing that discourage bad behavior. If an investor stole someone's idea, and if word got around, then that investor might later find it hard to get other people to talk to him.
  • You have to decide what risks you want to take. Your business might fail because an investor steals your idea and beats you to market. Or it might fail because you can't raise the money you need to get started.

It's sort of like having to take a trip across the country. You have to decide whether to fly or drive. Sure, there's a risk you could die in a plane crash flying from one side of the country to the other. But if you were to drive the same route, your risk of dying in a car crash has been estimated as being something like 65 times greater than flying.

As the old saying goes, you pays your money and you takes your choice.

Potential BigCo "partners" might be a very different story

Suppose that one day you're contacted by a big company. The BigCo people say that they want to "partner" with you, and hint that they might want to acquire you. It might be that their real interest is in finding out your secret sauce. This Hacker News commenter tells of how that happened to his (or her) startup company: A big company reached out to the startup and invited them to do a demo. The BigCo people asked, "how exactly do you do X?" The startup people told them. The BigCo people then showed the startup folks the door, with one of the BigCo higher-ups saying, "the race is on, better hurry!"

That sort of situation can be averted by an NDA — although it might take a long time and a lot of legal fees to enforce the NDA, especially if BigCo is convinced it hasn't done anything wrong. On the other hand, sometimes it can pay off, because a jury might well punish a company that it found violated an NDA. See, e.g., the 1996 case of Celeritas Technologies v. Rockwell International, where a federal-court jury in Los Angeles awarded a startup more than $57 million, and the judge then added $900,000 in attorneys' fees, because the jury found that Rockwell had breached an NDA. (Disclosure: I was on Rockwell's trial team in that case.)

Be sure to comply with marking requirements

Many NDAs include requirements that confidential information must be disclosed or summarized in a writing that's marked "Confidential" or "Subject to Nondisclosure Agreement" or something like that, on pain of losing protection. Disclosing parties will want to be sure to comply with any such requirement, because not doing so could be fatal. For example, in the Convolve v. Compaq case, the computer manufacturer Compaq (now part of Hewlett-Packard) defeated a claim of misappropriation of trade secrets concerning hard-disk technology because the owner of the putative trade-secret information didn't follow up its oral disclosures with written summaries as required by the parties' non-disclosure agreement. See Convolve, Inc. v. Compaq Computer Corp., No. 2012-1074, slip op. at 14, 21 (Fed. Cir. July 1, 2013) (affirming summary judgment).

Include a "show-how fee" in the NDA?

4. Suggestion: Even for non-secret information, an NDA might be negotiated to include the equivalent of a break-up fee. That is, even if it turns out that the secret technology wasn't a secret after all, but the receiving party didn't know the technology, then the receiving party might be required to pay the disclosing party something as payment for "show-how" (as distinct from know-how), in return for having taught the receiving party about the information.

You've probably seen — and you might have drafted — Web-site terms of service like the ones that grocery-store company Safeway had, saying, in essence, we can change these terms at any time, and you're bound by them if you continue to use the service; it's up to you to re-read the terms each time you use the site:

Changes to Terms and Conditions

... [Safeway] will plan to notify you of any material amendments to these Terms and Conditions; however, it is your responsibility to review the Terms and Conditions before submitting each order. [Safeway] has no responsibility to notify you of any changes before any such changes are effective.

Rodman v. Safeway Inc., No. 11-cv-03003-JST part II-A (N.D. Cal. Dec. 10, 2014) (granting class plaintiff's motion for summary judgment that Safeway had overcharged on-line customers) (alteration marks by the court, emphasis added).

That clause didn't fly with a California federal district court, citing Ninth Circuit precedent, as explained by Venkat Balasubramani.

Contract drafters sometimes put entire paragraphs into all-capital letters in the hope of making them "conspicuous"; you've probably seen examples of this particular disorder in warranty disclaimers and limitations of liability. But keeping the all-caps going for line, after line, after line, can be self-defeating, as the Georgia supreme court observed (arguably in dicta):

No one should make the mistake of thinking, however, that capitalization always and necessarily renders the capitalized language conspicuous and prominent.

In this case, the entirety of the fine print appears in capital letters, all in a relatively small font, rendering it difficult for the author of this opinion, among others, to read it.

Moreover, the capitalized disclaimers are mixed with a hodgepodge of other seemingly unrelated, boilerplate contractual provisions — provisions about, for instance, a daily storage fee and a restocking charge for returned vehicles — all of which are capitalized and in the same small font.

Raysoni v. Payless Auto Deals, LLC, No. S13G1826, slip op. at 6 n.5 (Ga. Nov. 17, 2014) (reversing and remanding judgment on the pleadings) (emphasis and extra paragraphing added).

The drafting tips here, of course, are:

1. Be judicious about what you put in all-caps.

2. Don't use too-small a font for language that you want to be conspicuous.

I'll be adding this to the commentary of the Common Draft research note on conspicuousness.

Georgia's supreme court seems to think that the words in a contract's warranty disclaimers mean whatever the court wants them to mean. In that court's November 17 opinion in Raysoni v. Payless Auto Deals, the main facts (in my view) were the following:

• The plaintiff, Raysoni, had bought a used minivan. Before the sale, he allegedly asked the sales representative whether the vehicle had ever been in an accident; the sales rep allegedly said no, and gave Raysoni a clean CarFax report.

• The sales contract included numerous disclaimers — and also said that at the auction (where presumably the dealership acquired the vehicle), the vehicle had been announced as having had unibody damage; moreover, the contract said, the buyer was urged to have the vehicle checked out before buying it.

• Two months after the sale, Raysoni allegedly learned that the vehicle had in fact been in an accident and suffered frame damage. The dealership rejected Raysoni's request to undo the deal and get his money back. Raysoni sued for fraud.

• The trial court granted judgment on the pleadings in favor of the dealership, saying that in view of the disclaimers in the sales contract, it would have been unreasonable for Raysoni to rely on the alleged written- and oral statements by the sales representative, and therefore Raysoni's fraud claims couldn't succeed. The court of appeals affirmed.

But then the state's supreme court took, how shall I put this, an intriguing view of the meaning of the disclaimer language, holding that:

The more prominent and general disclaimer of warranties—a provision that the minivan was sold "AS IS NO WARRANTY"—is followed immediately by an explanation that arguably qualifies and limits [sic] that disclaimer: "The dealership assumes no responsibility for any repairs regardless of any oral statements about the vehicle."

Raysoni v. Payless Auto Deals, LLC, No. S13G1826, slip op. at 5 (Ga. Nov. 17, 2014) (emphasis added).

Seriously? The court's interpretation seems totally contrary to the plain, unambiguous language of the contract. The agreement's no-responsibility-for-repairs sentence doesn't qualify or limit the as-is-no-warranty disclaimer, it emphasizes one of its implications.

And that's not all—the supreme court continued:

Likewise, the additional disclaimers of specific warranties that appear in the fine print of the contract are followed by the provision that "NO SALESMAN VERBAL REPRESENTATION IS BINDING ON THE COMPANY," and to the extent that the latter provision can be understood as an explanation of the foregoing disclaimers, it limits [sic] those disclaimers.

Id. (emphasis added).

Look, I get it; the supreme court didn't like it that the dealership allegedly gave the buyer a clean CarFax report but then tried to rely on a warranty disclaimer and a written warning that the car had been reported to have been damaged. But despite the supreme court's unanimous opinion, I still don't see how anyone could reasonably conclude that the dealership's warranty disclaimer was "qualifie[d] and limit[ed]" by the additional contract language. Moreover, on the facts as stated by the supreme court, I'm not sure what else the dealership could reasonably have done.

The danger now is that every contract drafter whose work might end up in a Georgia court must wonder whether even the most hard-hitting of warranty disclaimers will be enough to avoid a jury trial on fraud charges.

So what's the drafting tip here? All I can think of is to say, after a warranty disclaimer, that "The following additional provisions are not intended to limit the warranty disclaimer of the previous sentence." I've put comparable language into the Common Draft implied-warranty disclaimer. It seems a pity, though, that this might be necessary.

Audit rights can come in handy

Why ask for audit rights? Because mistakes happen—and so do creative accounting, stonewalling, and even outright fraud. Audit provisions can help to detect, and thus to deter, all of the above. (The nuclear Navy has a saying: You don't get what you expect, you get what you inspect.)

Consider, for example, the recent case of Zaki Kulaibee Establishment v. McFliker, No. 11-15207 (11th Cir. Nov. 18, 2014), where the appeals court reversed, as an abuse of discretion, a district court's refusal to order an accounting. In that case:

• Zaki, a Saudi company signed a consignment agreement with ANI, a Florida company, under which the Florida company would sell what was expected to be around $500 million worth of aircraft parts and remit the proceeds, less a commission, to the Saudi company.

• The parties apparently didn't have any parts-inventory procedure in place for confirming just what parts the Saudi company had shipped to the Florida company.

• A dispute over payment arose, during which the Saudi company tried repeatedly but unsuccessfully to get discovery to find out just how many parts the Florida company had really received and how many it had really sold. According to the appellate court:

ANI also manipulated the discovery procedures to prevent Zaki from discovering how many of its parts remained.

ANI retained possession and control of the remainder of Zaki’s parts—and along with them, the only conclusive means of determining the existence and extent of any damages.

Yet ANI repeatedly stymied Zaki’s attempts to conduct an inventory of those parts while simultaneously spinning out the discovery process for as long as possible.

Id., slip op. at 30 (extra paragraphing added).

• The parties' contract included an audit provision, see id., slip op. at 5, but the district court refused to order an accounting.

• The appeals court reversed on that point—but it took the Saudi company years of litigation and who knows how much in legal fees to get even that far. The appellate court seems not to have relied on the contract's audit provision, but instead on the Florida company's fiduciary duty as a consignee. And if the contract hadn't included an audit provision, who knows whether the appellate court would have taken the view it did.

Lesson for drafters: When the other side will have all the information needed to determine whether your client is getting everything to which it's entitled, it's a very good idea to include an audit provision.

I'll be adding a summary of this case in the research notes for the Common Draft audit provisions.

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