Charles Mudd Discusses the Use and Timing of NDAs

Show: Latest Startup Topics in the News and Law

Aired: 4/30/2012 8:00 PM UTC

Host: Startup Radio


Description:  Co-host Charles Mudd discussed non-disclosure agreements (NDAs). In particular, he discussed NDAs in the context of a recent Slashdot headline that suggested some programmers will not sign NDAs. Attorneys will always recommend needing an NDA before revealing trade secret or confidential information. However, some individuals will never begin a conversation with you if you hand them an NDA in the initial handshake. How do you balance protecting your idea and developing relationships with individuals or entities who will not sign an NDA? How are Mutual NDAs different? Charles Mudd discusses these questions and more on Startup Radio.


[Start of Transcript]  [Charles Mudd]


0:27: Welcome to the Startup Radio this is Charles Mudd.  It is Monday…


0:58: Once again, welcome to Startup Radio.  It is Monday, April 30th and I apologize for the slight technical error, just a moment ago.  Today, we are going to talk about some recent developments in startup news and the law.  But, before I get to those issues and some of the upcoming guests, I’d like to thank Josh Tolan of Spark Hire, who was with us last week discussing his startup in Spark Hire based in the Chicago area, but available to businesses, individuals, employers, employees and consultants worldwide.  Thanks again Josh.  The audio of that program is available on our website at on demand and the transcript will be available shortly.  Upcoming shows include next week May 7th at 3:00 p.m. Jennifer Beall of Clean Bee Baby LLC of California.  On the 14th of May, Dave Foster of the KudoCase, again at 3:00 p.m.  On the 21st May, Theresa Steinbach of Digital Divas L3C, once again 3:00 p.m.  The 28th is Memorial Day and certainly we wish everybody a very good upcoming Memorial Day.  We will have a special show broadcast, but it will not be live.  And then June 4th, we will have Marcy Capron of both Polymathic and Junto here over Chicago talking about her endeavors to help startup businesses.  So those were the upcoming programs well until June and I hope that you all join us at each of those times to discuss a variety of issues.


2:59: Among the legal issues that will be discussed within those interviews and talking to our guest.  Coming up with respect to Theresa Steinbach, Digital Divas L3C, we will talk about the L3C structure a little bit, basically it is a hybrid between a limited liability company in LLC, again a not-for-profit company.  As some have termed it, it is a for-profit entity with a non-profit sole.  We will also talk about other aspects of intellectual property, ranging from trademarks, copyrights, some patent ideas to more of the JOBS Act and analysis of that.  Of course, as we all know, the JOBS Act has not been signed into law and the JOBS Act amended a number of existing statutes among those is the Securities Act of 1933, The Sarbanes-Oxley Act, The Investor Protection and Securities Reform Act, as well as the Securities Exchange Act Of 1934.  We will have all of the exact amendments available on our blog at and with written discussion of those provisions and the various changes.  Today, what I’d like to talk about — we will start of with something that I read a few years ago thru Slashdot and that was came with the title Will Write Code, Won’t Sign NDA.  Now, of course as you may know, listeners, I am an attorney with the Mudd Law Offices here in Chicago.  We have an office in Park City, Utah as well, licensed in a number of other juries dictations but typically.


4:50: When somebody is starts off with the business idea or some idea that they are wanting to talk about, there are maybe some proprietary information or information that is secret or not available to the public.  Generally speaking, an attorney will recommend to somebody to have a non-disclosure agreement signed by those to whom the individual who is going to speak.  A non-disclosure agreement typically used with the acronym NDA protects the idea from being disclosed or used by somebody that learns of it through the discussions.  Now, through Slashdot, though the article — the headline came through Will Write Code, Won’t Sign NDA and while I am not going to quote the provision directly, I did tweet about that briefly.  More or less, it is basically saying that some code writers, some software code writers or programmers will not sign non-disclosure agreements.  In fact, John Larson says he will almost never sign an NDA.  One of the most upfront reasons happens to be is that its starts the relationship off on the wrong basis.  I’d like to talk to that issue a little bit because there are some competing interests of course.  A lot of times would an attorney will recommend as being the best legal approach to a particular situation may not be the best business approach to a particular situation, and in those cases, the attorney has to recognize that, but more, it often comes down to the client or the individual or entity deciding what would be the best course of action.


6:56: A non-disclosure agreement between a client and third parties protects everybody to some extent by putting boundaries on the use of the information.  Now, there are always also what are called mutual non-disclosure agreements.  Mutual non-disclosure agreements also protect the parties involve, but your typical non-disclosure agreement situation and let us use the program in context to an iPhone App context.  To be more specific is somebody wakes up one day with the brilliant idea for an application.  That’s — let’s presume for the moment nobody else has done, and that person is not a programmer, but wants to approach a programmer to develop the application, but the problem is that the person with the idea does not necessarily want to disclose the idea to the programmer without some protection that the programmer won’t, for lack of a better terms, deal the idea and use it for him or herself.  So in that particularly situation — hence you may not even know that the programmer to whom you are going to be speaking will actually be the programmer that will ultimately write the code.  You might be interviewing programmers to determine which one best fits your personality or your ethos and which programmer or code writer or design company you may work best with.


8:52: So the non-disclosure agreement puts contours around the disclosure of information to the programmers, using again our example, such that the person with the idea can discuss with the potential programmers his or her idea to see if there is a match, to see if its possible without worrying about the programmers again stealing the idea and using for their own or conveying it to somebody else.  With this article on Slashdot suggested — and actually Slashdot was pulling from another article that was written on this subject happens to be that sometimes presenting in individual, the person with the idea, let us say presenting a formal written contract to a programmer starts the business relationship off on the wrong foot and then the programmer is not going to be interested, not going to want to work with the individual with the idea and hence, then there is no movement forward.  So how do we resolve a situation where there are competing interest of the individual with the idea wanting to protect that idea from being stolen or used, and again, this is assuming that no one else has come up with the idea.  Balancing that interest to protect the idea with the business interest and actually being able to talk to someone about moving forward.  Well, I think that there is a balance, but that balance often times has to be navigated by the individual with the idea.


10:50: They will obtain advice from an attorney and more often than not, the attorney will be saying “you need a non-disclosure agreement”, because the attorney does not want to be on the hook for the errant programmer who does steal an idea and take it and use it for themselves or gives it to somebody else and then the person with the idea, the client, would turn to the attorney and say “you told me you did not need a non-disclosure agreement” and blame the attorney for what happened.  So clearly, being an attorney, myself, I am not going to advise anybody to disclose an idea without a non-disclosure agreement.  So the attorneys are going to be hiding behind that.  But often times, the attorney’s will and I think that they should also suggest that there might be business concerns that approaching somebody with a non-disclosure agreement will turn them off and that get you anywhere.  So the approach often is as I said navigated by the individual with the idea and there are may be a basis to sit down and talk with the programmers and reveal only so much information to obtain an understanding of how the program has worked and whether there is going to be a relationship, a trust between the parties, and used that opportunity without disclosing all of the details, without disclosing what are often perhaps called trade secrets to make that determination.  And then in the course of those discussions, you can lead to where there will a contract, a non-disclosure agreement produced.  They’re ultimately will need to be on a contract in any case where one hires a programmer because they will have to be discussions on what the compensation will be.


12:55: Is it a work for hire? Or is it a joint venture?  What is the relationship between the person with the idea and the programmers or the design team that ultimately is hired?  So in some, on that particular issue, I would say that it is always very important for an individual that comes up with an idea to reach out and speak to an attorney before approaching others and openly discussing that idea where the individual with the idea believes that it is protectable that there is some trade secret aspect to it or some nonpublic aspect to the idea.  Simply saying I want to make the next Angry Birds is not an idea that’s needing to be protected, but on the other hand, if somebody has detailed aspect of a particular application, then there is a need for protection.  But in any case, it starts with reaching out, finding an attorney that will discuss the issues with you, generally discuss the ideas with you and you should be able to discuss generally what you are looking for from an attorney, again without having design and engagement letter right away.  You want to retain an attorney that you trust, that you feel comfortable with and that seems to have the same work ethos and manner about him, her or the firm that you will find comfortable working with.  So find an attorney, discuss the issues with the attorney, and come up with some solutions or some approaches that might work best in a particular situation where you intend on disclosing information that has some trade secret or intellectual property aspect to it.


15:00: What often times might be the case and while this is not necessarily specific legal advice because — again, you should have an engagement letter, you need an engagement with any attorney or firm that you are having represent your interest, but generally speaking, it will involve navigating a course of disclosing some information that does not rise to the level of trade secret or proprietary or secret confidential information to the programmers of the design team and moving from there to where a contract both on compensation and the intellectual property rights.  The relationship between the parties can be memorialized than put down on paper.  Many times when a client comes into our offices, at Mudd Law Offices, we will discuss what is the business personality of the client, and how they like to approach things.  More particularly, if there is a pre-existing relationship between the client and another party, I as an attorney, would want to know the dynamics of that relationship because many times, it would be more advantageous to what we are looking to accomplish to have the client talk with the individual other party than having the attorneys get in the middle.  But all of that it depends on the circumstances and all of that presumes that one is talking to an attorney and working out the issues.  So we have talked briefly about non-disclosure agreements, a mutual non-disclosure agreement is similar and I won’t elaborate too much except to say that often times, there is a situation where two parties each have confidential information that they will be bringing to the table and in that case, the mutual non-disclosure agreement governs the disclosure of the information between and among the parties.


17:13: It could two or more parties.  Yeah, one other final comment with respect to non-disclosure agreement is that often times when you approach a large company, for example, if somebody wants to approach Disney or Apple computer, I would only imagine that you would not have much negotiating room in terms of what would be included in the non-disclosure agreement.  More often than not those companies will have a pre-form non-disclosure agreements or relationship agreement that will govern the parties, and often times in those agreements, it basically says that the party to whom the information is disclosed may already have developed or in development have similar ideas and that for those ideas and that all are already in development, there will be no recourse to preventing the receiving party, the party receiving the information from using that information or using the products already in development.  So we backtrack a little bit.  If, for example, Idea Person A approaches Developer Company Z and Developer Company Z says we are so big that we may very well have similar ideas already under production and we can’t tell right now whether we do or not our RND department is working at any number of applications at any particular point in time.


18:58: So it may very well be that we already have something similar in development.  Nonetheless, we’d like to hear what you have to say Idea Person A, but if we do have something already under development, nothing in this agreement precludes us from moving forward with the idea under development.  Of course, the issue always arises, do they actually have something under development and that would be determined in litigation, if there was a dispute that arose and it went to the point of having a complaint filed in court.  But the hope is that the dispute never occurs and one final piece of advice in that regard is that while business relationships are grades without agreements in theory and NDAs may set things off the wrong foot if somebody throws it in somebody’s face before even talking to them.  The bottom line is the best of friends can ultimately end up in dispute.  The objective of any contract, of any agreement is to layout the terms governing the particular relationship while everybody happens to be friends, such that if something goes wry and there is a dispute, there is already an agreement as to how to handle that dispute.  Because, certainly, if a disagreement arises, you will no longer be able to negotiate with the other side on how to resolve that particular dispute.


20:52: So it is always imperative to get an agreement in writing at the beginning of a relationship.  That does not necessarily mean the moment that you shake hands with somebody to say hello, but it does mean that soon as you are moving forward or as soon as somebody is moving forward with the particular business relationship and before any proprietary information trades secret information happens to be disclosed, you absolutely should have an agreement in writing that governs the relationship.  They may not like that, but I highly doubt you will find any attorney telling you otherwise.  There is a balance, but that balance has to be navigated.  But, in any case, before you reveal the proprietary or trade secret, non-public information to anybody, make sure that you have it in writing, and when I say anybody, we certainly mean anybody.  That does not mean that when you go out for dinner or you talk to your friend about the idea because somebody into at a table nearby may hear the idea and take it with them.  You have no control over that.  So, you need to make sure that you have an agreement before disclosing it to anybody else.  That leads into another aspect of protecting your idea.  Many times, when we talk out trade secrets or confidential information, nonpublic information, to make sure that the trade secrets are protectable, one has to treat them as trade secrets, as confidential information.


22:51: What is that mean?  Well, using an example I just mentioned, talking about something over dinner in a restaurant in a tone or volume that could be overheard by somebody is not treating the information as secret, confidential, or nonpublic.  Likewise, if you have employees and you do not have nondisclosure agreements with your employees or employer-employee agreements that govern the use of information, confidential information, you are not treating the information necessarily as secret or confidential.  So you need to develop a plan or an approach to handling the information that happens to be trade secrets or that needs protection in a matter that does actually protect it and you are building evidence for that.  Such that, again, if you have employees or independent contractors, you needed nondisclosure agreements.  You need non-computer agreements.  If you have multiple people that are your employees or independent contractors, you should not be disclosing information to anybody other than those who actually need that information.  Again, all of these need to be navigated, but the bottom line is that if it is not in writing, it does not really protect you.


24:34: You need to have a system set up such that you can demonstrate you are treating your trade secret information, your confidential information, secret and in a manner that protects that information from inadvertent disclosure or use by third parties.  So let us go back to the beginning.  If you wake up one morning and you have an idea, and again, this is not a specific advice because every situation is different and as I mentioned before, everybody should approach and find an attorney with whom they have a comfortable relationship, feel positive about to seek and obtain the advice needed.  But speaking generally, if an individual wakes up with an idea one day that they believe to be nonpublic.  Meaning that nobody else has that idea publicly.  It is not available in the public.  It is what they believe to be proprietary or confidential or what might be termed a trade secret.  You need to develop a plan that protects that information from the get-go.  Before you start disclosing the information about the idea, you should be attempting to find and actually find an attorney with whom you can speak openly and engage in a strategy to protect that information.  Now, many people ask if I call an attorney and let say, I do not end up retaining them, does the confidentiality, does the conversation with the potential attorney have a confidential nature to it apart from what may be in writing and the answer is at least in Illinois in the most jurisdictions.


26:29: If you happen to call an attorney, the attorney-client privilege, the attorney-client-the duties of the attorney to protect the confidentiality of communications arises from the moment that an attorney starts talking to a potential client whether or not that individual becomes or entity becomes a client.  So, you should feel free to open.  You should feel free to discuss issues with an attorney to determine whether or not that attorney is the right one for you.  But feel free to always ask an attorney at the beginning of a conversation.  Is this is a confidential conversation?  The answer should be yes.  But, again, if you want to make sure that you feel comfortable, ask the question.  If somebody bogs or has a problem with you asking the question, then that obviously is a relationship that is not going to be comfortable for you.  But, again, coming back to the beginning, if you have an idea, you should — you wake up one day with an idea, you should reach out and find an attorney.  Find an attorney before you start disclosing the identity.  Maybe look to have an initial consultation where you are able to talk about generally what you’re wanting to do and see whether or not the information or the idea is something worth protecting.  Now, ideas cannot be copyrighted, ideas cannot be trademarked and in patent law, there are certainly some ideas that might not be patentable.  You need to talk to an attorney and I am not a patent attorney.  So with respect to the patent issues, I defer to my colleagues.  You need to speak to an attorney about these issues to determine what can be or cannot be protected.


28:27: Then also, before you start disclosing your idea to other non-attorneys about developing the idea or talking with business partners or employees, you need to develop a plan and strategy for nondisclosure agreements or mutual nondisclosure agreements so that you have some contours protecting the disclosure of that information.  That’s about it for us today on Startup Radio talking about some of the legal and news issues that have come up off late.  I do want to make note however that it seems that Chicago is rowing in terms of startup development and startup opportunities, which is fantastic news, and again, coming up, we will have guests from Chicago.  We have Spark Hire’s Josh Tolan last week.  We will have Terry Steinbach of Digital Divas L3C coming up on May 21st.  We will have Marcy Capron of Polymathic and Junto on June 4th.  So please stay tuned for those episodes.  But, again, Chicago seems to be a developing hotspot for Startup.  Stay tuned for information about that.  We will look forward to all of our guests though and I will mention again Jennifer Beall of Clean Bee Baby LLC next week at 3 p.m. on May 7th.  We will be talking to her about her startup, about some of the many aspects that she has faced and the success that she has been able to enjoy.  Following that on the 14th will be the Dave Foster.  The KudoCase, a brilliant idea of an iPad case using the solar light as well as indoor lights.


30:24: Stay tuned for more information about that.  As always, thank you for tuning in or listening later to Startup Radio.

[End of Transcript]


About Charles Mudd

Charles Lee Mudd Jr. is the principal of Mudd Law Offices, an internationally recognized diversified practice providing representation to a clientele comprised of local, national, and international individuals and business organizations. Charles represents startup companies in a variety of legal and commercial matters. He is also the founder and co-host of Startup Radio, an Internet blog radio program.