Why you might NOT want to ask someone to sign a nondisclosure agreement

Recently Sally the Software Developer called me with a question. She said she had been talking to Bob, an executive of BigCo, who indicated that his company might be interested in acquiring her embryonic software business. She wanted to know if she should ask Bob to sign a non-disclosure agreement, commonly referred to as an NDA, and offer to show him the details of how her software worked.

[This story is based on an actual event, but I’m changing up some of the facts to protect client confidentiality, including possibly the genders of the individuals.]

I told Sally she might not want to ask Bob for an NDA — at least not yet. I’ll explain why after the jump.

[For non-disclosure agreement clause text and commentary, see the Common Draft chapter, Confidential information clauses — understand your NDA.]

Triggering the fear of a Fatal Attraction predicament

If Sally the Software Developer were to ask Bob from BigCo to sign a nondisclosure agreement, in effect she would be telling him, I want you to hand me a really big stick, with spikes in it, that I can swing at you if I ever think that BigCo stole my confidential information. That might make Bob nervous.

And a certain amount of nervousness on Bob’s part wouldn’t be irrational: Suppose Sally did file a lawsuit against BigCo for allegedly breaching the NDA. BigCo might have a hard time extricating itself from the case.

It might not be possible for BigCo to convince a judge to throw out Sally’s lawsuit on summary judgment, which generally is available only when there is no genuine dispute about any fact that would affect the outcome of the case. Any kind of he-said/she-said swearing match about such a fact will usually be enough to make a judge sit back and say, nope, I’m not allowed to decide this on my own; this is a case that we have to let the jury decide.

BigCo would then have to go through the wringer of document production, depositions, and other pre-trial prep­ar­a­tion, not to mention the trial itself. These are always expensive, and they’re often nasty to boot. That wouldn’t do Bob’s career prospects at BigCo any good.

Plus, Bob can’t know in advance whether a  jury might take Sally the Software Developer’s side and hit BigCo with a big damages verdict. As one example, some years back I served as co-counsel for the defendant at the trial in Celeritas Technologies, Ltd. v. Rockwell Int’l Corp., 150 F.3d 1354 (Fed. Cir. 1998): The appeals court affirmed judgment on a jury verdict that defendant Rock­well was liable for $57 million for breaching a nondisclosure agreement that it had entered into with plaintiff Celeritas. The appellate court held that Celeritas’s technology was already pub­lic­ly known and therefore was unpatentable — in effect, that Celeritas’s founder had re-invented the wheel — but the court didn’t feel it could overturn the jury’s verdict about the NDA.

Even though Bob might like Sally and want to do business with her, he might also recall the 1987 hit movie Fatal Attraction. In that film, Dan Gallagher, a mar­ried attorney played by Michael Douglas, meets Alexandra Forrest, a publishing-company edit­or played by Glenn Close. They have a passionate fling — and then she turns out not to be quite as mature and discreet a woman as she had seemed ….

Timing is everything

I told Sally the Software Developer that in terms of deal psychology, her best bet might be to hold off on asking BigCo to sign an NDA. I suggested that she tell Bob something like this: I’m not going to ask you to sign a nondisclosure agreement just yet. Instead, for the time being I’m only going to give you information that I wouldn’t mind you knowing even if we didn’t do a deal. That way, if you decide you want to know more, then we can talk about an NDA.

My guess is that this approach will give Bob the impression that Sally knows what she’s doing, which certainly is no bad thing.

And if BigCo really did get interested in Sally’s company, then Bob would probably be the one to ask her for an NDA. That would be useful intelligence for Sally.