The most common legal document you will be asked to sign when working on a website or app is a non-disclosure agreement (NDA). If you’re not sure whether to sign an NDA as a developer, this article will guide you to make an educated decision.
Staying On The Safe Side
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What Is An NDA?
An NDA is a type of contract in which one party, typically called the receiving party, agrees to keep confidential certain information it learns from the other party, typically called the disclosing party. NDAs can also be mutual, whereby each party agrees to keep certain types of shared information confidential. Frequently, an NDA will specify that the project, such as the development of a new app, should not be discussed except with those who have also signed the NDA.
An NDA is very useful for clarifying the expectations of the parties at the outset of the relationship. It also enables the disclosing party to feel comfortable sharing confidential information that is crucial for the project to proceed.
NDAs can also protect trade secrets. A trade secret could be anything from a business method to a customer list. It could even be a special formula that has economic value because it is kept secret from the general public and cannot easily be figured out by third parties based on publicly available information.
Theft of trade secrets is a major concern in both the United States and Europe. In the US, most states have already adopted the Uniform Trade Secrets Act, which defines trade secrets as well as remedies under state law for the theft of such trade secrets. In 2016, the US went one step further with the Defend Trade Secrets Act, which also protects trade secrets under federal law. In Europe, a 2013 study found that more than 20% of companies in the European Union, including many technology companies, have suffered such theft. In 2016, the European Commission proposed new rules to improve fairness and consistency across the EU with regard to access for legal actions for trade secret theft. These rules were approved by the European Council in May 2016. Therefore, in both the US and Europe, there is currently a big push to protect trade secrets and to punish violators more forcefully.
Why Are You Being Asked To Sign An NDA?
If you are a developer, trade secrets such as algorithms, prototypes, designs, drawings and business intelligence might be of critical importance to your client’s business. Your client might even have an invention that it plans to patent.
Today, both the US and Europe use a first-to-file patent system, making it more important than ever to keep inventive information confidential until a patent application is safely on file with the US Patent and Trademark Office or the European Patent Office. Given the value of these types of intellectual property, your client will naturally want to protect them with an NDA.
Unfortunately, the histories of some of today’s most popular apps and websites are littered with examples of people who were damaged because they didn’t have a good NDA in place. Twitter cofounder Noah Glass came up with the name of the ubiquitous platform and did a lot of the early work on it, but he failed to secure NDAs at the outset of the company to protect his work and ideas. He was later forced out. Web app developer Theodore Schroeder claims that investor Ben Cohen stole his ideas about the concept of “boards” and infinite scrolling and shared them with Pinterest CEO Ben Silbermann. However, Schroeder could not prove his case, and it was dismissed. In both of these cases, a well-drafted NDA could have helped to protect these developers.
How Do You Make Sure The NDA Is Fair?
When you are given an NDA, your responsibility is to read it over and make sure it is also fair to you.
When reviewing the clauses, here are five important issues to keep in mind.
When are you being asked to sign the document, and who is asking you to sign it? Usually, it isn’t reasonable for a potential client to ask you to sign an NDA before your first conversation about the project. You don’t want to agree to something when you have no idea what the project is about or whether you might already have a conflict. However, if you have had a high-level conversation and have a good idea of the project by the time you’ve agreed to work together, then it would be appropriate for them to ask you to sign an NDA.
What Does the NDA Say About the Source of the Confidential Information?
For example, most NDAs would prohibit the receiving party from using the confidential information to develop a separate project or from using it in another party’s work. As a developer, you want the NDA to specifically say that you are prohibited from using the confidential information in such a manner if it was learned from the disclosing party. If you learn the confidential information in another way, such as through an accidental public disclosure or from a different client, you would want the NDA to be flexible enough to permit you to use it in other projects.
Confidential Information Vs. Trade Secrets
Does the NDA distinguish between treatment of confidential information and treatment of trade secrets? A well-drafted NDA will clearly identify how each type of information should be treated. For example, there may be some people in the project with whom you shouldn’t discuss trade secrets. In addition, the NDA should have a limit on the term protecting information that is merely confidential, whereas a savvy client will know that trade secrets need to be protected indefinitely.
Effective Length of Confidentiality
The NDA should clearly specify the term during which the confidential information must be maintained secret. In the fast-paced world of technology, you don’t want to be tied to an inordinately long term, because today’s new app could be tomorrow’s old news. However, as discussed above, trade secrets should always be kept confidential, because disclosure of a trade secret would destroy its value.
Consequences of Breach
In the event that one or both parties breach the agreement, the NDA needs to be clear on the consequences. A breach could lead to legal liability, monetary damage, loss of professional reputation, even a stop-work injunction from a court — not to mention the headache of being caught up in a lawsuit. Both sides should fully understand what they are asking, what is being asked of them, and what the consequences are if one or both parties do not abide by the terms of the NDA.
Now that you understand what an NDA is and some important things to look out for, you will want to make sure that the NDA you are signing conforms to industry standards (and if it doesn’t, ask why not). To provide a little more context, here are six red flags that could indicate you shouldn’t sign.
An Overly Broad Definition of Confidential Information
If alarm bells go off when you read the definition of confidential information, bring it up right away. An overly broad clause could impact your other work. It might be helpful to list items that are explicitly not confidential, including but not limited to publicly available information, information known prior to receiving it from the disclosing party, and information provided from a third party on a non-confidential basis. You also want something to protect you in the event of compelled disclosure, such as a subpoena or government investigation.
Excessive Term of Confidentiality
As discussed, a well-drafted agreement will differentiate between the terms of confidentiality for trade secrets and for confidential information. If it does not, or if the terms otherwise seem excessive, this is a definite red flag, especially in the fast-moving tech industry.
Every Clause Is One-Sided, or No Willingness Is Shown to Negotiate Clauses
It’s not unusual for an NDA to be slanted toward the party that is asking you to sign, especially if they are using an NDA prepared by their lawyers. However, if every clause in the document obviously favors them and they show an unwillingness to negotiate any clauses in the document, this should give you pause. A difficult client who demonstrates trust issues right from the beginning of the business relationship and shows an inability to compromise might be more trouble than they are worth.
Noncompete Clauses That Go Beyond the Scope of the Project
Read non-compete clauses very carefully. Discuss any clause that appears to go beyond the scope of the project and that could impact your work with other clients. Keep in mind that enforcement of non-compete clauses varies based on state law in the US, with some states (such as California) almost refusing to enforce them. In Europe, a company generally must show a reasonable business interest in having a non-compete clause.
Unfair Damages Clause
A good damages clause should clearly address the consequences of a breach of confidentiality. A fairly drafted clause often lists different consequences, depending on whether the breach of the agreement was intentional, negligent or without fault of the breaching party.
NDA Should Not Obligate You to Work on the Project
An NDA is not the same thing as a contract or project agreement. Nothing in the NDA should require you to work on the project. Ideally, you wouldn’t be asked to sign the NDA unless you’ve already agreed to work on the project. If the client does ask you to sign an NDA before you have agreed to work together, make sure the NDA does not obligate you to do the project once it is signed.
What To Do If You Spot A Red Flag
Sometimes a simple discussion with the client about the NDA will help. NDAs are legal documents written by lawyers, and clients themselves very often do not understand the implications of what they are asking developers to sign. Mention to the client that you have carefully reviewed the NDA and have some concerns about it and that some of the clauses seem unnecessary or excessive. Ask if the relevant clauses can be edited or removed, and gauge their response. Remember that you can also consult your own lawyer if you don’t understand something or have additional questions.
Another helpful thing you can do is to compare the NDA with a standard, publicly available NDA in order to show why one clause or another makes you uncomfortable. (Legal Templates offers a legal document builder that bills you after a 14-day trial.) You can also check out other articles that discuss important clauses for more details on any of the clauses discussed above. Comparing your NDA to these can help you better understand it and catch any unusual clauses early on. Finally, if you are truly uncomfortable with the NDA but still want to work with the client, you could ask the client simply to add a confidentiality clause to the contract that describes your working relationship instead.
When Should You Ask The Other Party To Sign An NDA?
If you are in a work-for-hire relationship as a developer, then an NDA is usually not necessary. However, if you feel that your own confidential business information needs to be protected, then a mutual NDA might be a great idea.
What types of information might need to be protected? Some examples include passwords, account numbers and login names; salary information; business methods; future business plans; and customer data. If you think you might be acting as more of a business partner than just a developer and your business ideas might be used in the eventual app or product, this is another time to consider a mutual NDA (and you’ll also want to make sure the contract that clarifies your working relationship satisfies your needs as well).
It’s normal to feel a little intimidated when reviewing a legal document. However, NDAs are a part of life for developers. If you want to work for top clients, you will be asked to sign them. A client who has an idea for the next hot app would be smart to protect it. Keep these tips in mind, and don’t hesitate to ask questions. And remember, when done correctly, an NDA can protect you and the code you write, too.