The fictional geniuses in Robert Harris’s thriller are dealing with the commonplace reality of life: if you want people to invest in your brilliant ideas, you have to reveal what they are. I frequently find myself advising potential investors in ideas-based companies or advising those companies themselves and being asked: is the NDA a help or a hindrance?

I will look in a little more detail at this below, from both parties’ points of view, but my rule of thumb is that no-one is going to sue on an NDA and that therefore it is more about establishing a relationship of fair dealing between the players. In crude terms. it says:

• we are grown-ups who know what we are doing
• we are going to behave honourably when we are given each other’s secrets
• if we are going to go any further then we will enter into a more formal agreement which sets out the extent to which we will rely on this information

In other words, an NDA is at least as much about conditioning behaviour and engendering respect for each other’s professionalism, and hence each other’s information, as it is about establishing legal rights and obligations.

What’s in a name?

Americans tend to call these agreements Non-Disclosure Agreements; in the UK they are usually Confidentiality Agreements. The name is irrelevant (it reminds me of the concern some clients have about MoUs, Letters of Intent, Heads of Agreement etc – of which more in another blog): the important things are:

• there is an agreement in writing to record the basis on which information is going to be disclosed and for what purpose (eg to allow the potential investor to assess whether to invest)
• getting the parties right – I recently saw a draft NDA between the wrong member of a corporate group and a potential investor, which would have been rather embarrassing for all concerned.
• stating who is to have access to the information (eg the named company and its professional advisors, rather than too wide a class)
• what happens if matters don’t proceed (is the disclosed information returned/destroyed? What about notes containing that information?)

If the above seems like a statement of the obvious, that’s because it is. In my view, NDAs should be as short and common sense based as possible – who is disclosing what to whom and for what purpose, and what happens to the disclosed information? Are both parties disclosing information or is it all a one-way street (which is actually unusual in practice)?

In the context of a potential investment, most venture capital houses, at least in the UK, will use a variation on the standard form confidentiality letter published by the British Venture Capital Association (BVCA). If the VC is departing radically from that approach, the recipient of the draft agreement should ask why.

What’s confidential?

In practical terms, the most common concern when looking at an NDA is any requirement that to be regarded as “confidential” – and therefore to be treated with care by the recipient – the relevant information or data has to be marked as such. This is all very well in the theoretical world of the lawyers drafting these provisions and thinking about written data, no doubt printed on parchment, being handed over with “CONFIDENTIAL” stamped on every page in red ink. However, it is less than helpful when information is passed orally or by e-mail or in the hundred other real-world ways that apply in the digital age.

The thinking behind this apparently impractical requirement is based on fear, and it is no coincidence that these provisions are most common when attempting to do business with large US technology companies. The fear is that if they cannot control and audit the information one part of the organisation has come across, they may end up being sued by a disgruntled inventor if another part of the same vast company independently launches a similar product. In short, they do not want to be fixed with knowledge by some two-bit inventor that may hamstring some far more important project. At least, that is their viewpoint.

Of course, a smaller company with great technology which is looking for a joint venture with, or investment from, another tech company, has the opposite fear: that something it discloses will end up being exploited unfairly, just because it forgot to mark it “confidential” or disclosed it informally.

Luckily, there are practical ways of dealing with this – bearing in mind too that the longer the parties spend negotiating the NDA, the less well disposed they will be to each other when they actually meet to do business.

If the provision is on a “take it or leave it” basis, the disclosing party can:

• make sure that only key people interface with the other party, and that each of those people is educated in what to do to protect important information (having a sticker by the phone/laptop with these points is a good idea!)
• make sure there is a confidentiality statement as a footer in every document (don’t forget PowerPoint decks and Excel spreadsheets) and as an automatic addition to all e-mails
• make sure all discussions are started with an acknowledgment by everyone in the room/on the call that the contents are confidential – and then FOLLOW UP with an e-mail briefly summarising the contents and confirming this (I know it’s a pain…)
• THINK before disclosing state secrets…particularly over the phone or by e-mail

What about IP?

The information which may be disclosed as part of the discussions between the parties to an NDA may be commercial, financial, technical, personal, market-related, sensitive – in fact cover a whole range of subjects. In the context of an ideas-based company, some at least of this information may be protected by intellectual property rights. As with most lawyers, I tend to draw a distinction between IP and confidentiality: mainly on the pragmatic grounds that once something confidential has been disclosed to the world, it isn’t confidential any more…

Generally, disclosing material protected by an IP right (and usually we are dealing with brand rights, such as trade marks; and with copyright and patents) does not affect the validity of the IP, but there are two points to note:

• where the disclosing party has something new it may want to patent, but it has not yet applied for the patent, then publication of the potential invention may prove fatal to its ability to obtain the registration. This means that is vital that any disclosure to a potential funder (which may be vital to obtain the funds to develop the invention to the point where it can be patented) is under the terms of an NDA;
• if the recipient is going to make use of the IP – for example by evaluating code – then there ought to be a formal licence of that IP to cover what can be done with it. This use goes beyond the scope of a normal NDA.

What’s the point?

In the end, Confidentiality Agreements, NDAs and the like are about discipline and respect: they are often between parties of unequal bargaining power but establish a modicum of balance between them. They remind everyone concerned – on a personal as well as a corporate basis – that information which probably represents the hard work of real people is about to be disclosed and that that matters.

Taken in that spirit, they are not an end in themselves, but are a useful start to what could become a more effective commercial relationship between the parties than might otherwise have been the case.

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On the one hand, the 27 July article poses the question of whether “expansive claims” for the value of patent portfolios in tech companies is creating a new “tech bubble”. Those of us who had our fingers and fortunes burned in the fin de siecle tech bubble will shudder at the thought. I also recall the recent experience of carrying out due diligence on a target tech company on behalf of any investor where the owner/inventor grandly claimed that his patents had been valued at over £100m only to see his company go into administration and those prize assets disappear for a fraction of that sum.

The commentaries in the FT and elsewhere on the Google – Motorola Mobile deal though seem to suggest that Motorola’s fat patent portfolio may have played a large part in the $12.5bn transaction. They also point out that Nortel – remember Nortel? – ended up being little more than a defunct hardware manufacturer with a valuable pack of patents to sell (to Google’s arch-rivals Apple and Microsoft, as it happens).

So where does that leave the humbler tech company with clever technology and an IP protection strategy to think through? Are patents incredibly valuable assets which could ultimately be more lucrative than the business of the company itself – or are they simply a virility symbol?

My feeling remains that patents can never be seen as simply being legal protection of intellectual property. The cost and management time involved in filing a claim (and doing it properly) across the relevant jurisdictions can be considerable and, of course, there are the two key points to remember:

• filing a patent (with all its priority advantages) does not mean it will be granted, or granted in the form it has been filed
• detecting and stopping infringement, or resisting a challenge to the validity of the patent, may be prohibitively expensive and/or distracting

That said, many investors do expect targets to have filed applications for patents, and failure to do so may affect the value of the company on IPO or trade sale. There may also be some market cachet in being able to use the famous “patent pending” line -and it may discourage creditors.

I therefore see the question of whether a tech company seeks patent protection for its inventions as being as much for the marketing and commercial directors (and their budgets) as for the legal department. Which, after all, is quite right: legal advice should never exist in a vacuum.

Rory Graham
18 August 2011

See FT.com:
“Patent hunting is latest game on tech bubble circuit” By Richard Waters 27 July 2011
“Google snaps up Motorola Mobility” By Paul Taylor and Richard Waters 16 August 2011
and
“Is Google turning into a mobile phone company?” By Andrew Ross Sorkin, 15 August 2011, NYTimes.com

Perhaps a rather laboured play on words, but the title is meant to indicate that understanding what you are getting into when you outsource is pretty important – as is making sure you have an ongoing flow of relevant information for the life of the relationship and especially as you approach re-tendering and exit.

I was challenged to produce a checklist of all the points a user contemplating the renegotiation of business critical technology services contracts should take into account.  I rattled off a good (I think!) dozen or so key points immediately, but of course the real answer is the lawyer’s stand-by: “it depends”…  It isn’t just that not every issue (for example, the assignability of third party software licences) is relevant to every situation, but that their relative weight differs.  This is where the art of the experienced advisor who has seen it all before comes in (as opposed to the checklist of the fresh graduate…).   Put simply, clients expect their advisors to advise them about what matters and what doesn’t, rather than simply to report on the factors to take into account.

This raises the issue of what can be turned into a product – such as a “due diligence” checklist, perhaps? – and what is part of the valuable expertise of the technology lawyer.  And at what point is the lawyer simply being precious…

Anyway, I think in this case that it would never be possible – or helpful – to produce an exhaustive checklist of what to take into account when thinking about renegotiating an existing services deal, but I have tried to indicate the broad areas to consider in my podcast on the subject – please have a listen and let me know what you think!

Cheers

Rory

What has struck me, as the veteran of many technology-related deals over the years, is that there is a danger of being, as they say, “green-washed” with the excitement of it all.  That is, believing that, as this is a new industry and one which is poised to address some of the world’s most pressing problems, one can afford to suspend one’s normal commercial critical faculties.

In fact, the issues at the heart of the deal were much the same as ever:

1. Was the intellectual property underpinning the new technology properly protected?  In this case, there was an interesting tension between whether it was strategically better to keep the “secret sauce” a closely guarded secret or to disclose it in return for the protection of  a patent.
2. Linked to this, how could the new technology best be rolled out worldwide, while still protecting the invention behind it – and the interests of the inventors?  Where should manufacturing of equipment take place and on what basis?
3. What sort of infrastructure should be created?  A global corporate structure, with all the expense and tax issues that would raise, or a network of agency and distribution agreements?
4. What about the regulatory and compliance issues of rolling out new technology in multiple countries?
5. Where’s the money to come from to fund this, and on what basis?  Would private equity fund the initial trials or would public bodies or global financial institutions subsidise them?  Would the basis of funding the global roll-out (and therefore the return on investment) differ from country to country?

So, as we all worked hard to make the deal happen –and we all believe very much in its merits – our job as lawyers was to remain focused also on due diligence and asking the simple questions about who owned what and the many “what ifs” that can irritate clients so much!

The lesson is to let yourself be excited by exciting projects – but also to remember to kick the tyres!

For more information on our technology practice – green or otherwise – contact me at rory.graham@coffeygraham.com

In the end, Mr Justice Ramsey has produced the judicial equivalent of War and Peace – 468 pages of decisions and explanations. Here is one judge who is not intending to be overturned – his judgment is clear, well argued and detailed. I received a copy (thanks to some of the barristers involved!) on the day it was issued, and have read it several times – once at speed, then with post-its, highlighter and pen at the ready. I read some excellent notes by other lawyers, basically with the conclusions that (i) this case doesn’t change the existing law and (ii) there isn’t much for the service providers to worry about.

Broadly I agree, but I wanted to write a slightly different note, which is where the idea of creating adiagram with notes came from. I always find that it helps me to understand a complex deal if I draw a picture showing the parties involved and the relationships (whether corporate or contractual) between them. I then tried to add in a time-line, as I went through the judgment (which has some very useful chronologies and summaries throughout), to get an idea of who said what to whom and when.

I am afraid the diagram is a bit of a monster, rather more crowded than I wanted – one is supposed to make sure that there is a lot of white space on slides, not cramped text! I also wanted to set out my notes on it on one page, so that the diagram and the notes could be read together. I hope that people will find the end product useful.

So much of what went wrong in this case is familiar: a salesman, desperate to land a sale, over-promises and is not tempered by the views of those who actually have to deliver. The parties try to sort out the mess between them, at management level, and enter into variations and memoranda of understanding to avoid disaster. However, this was a deal doomed from the first, because the salesman concerned was not just over-enthusiastic, but deliberately deceitful. It is clear that he failed to carry out the proper internal analyses of what resources and time would be required to deliver the contract, then brow-beat those who tried to question his views. The fact that he lied freely about his qualifications and invented a false e-mail trail to cover up having sent out the wrong pricing schedule just added to his lack of credibility.

My contacts at service providers tell me that this could never happen to them – they vet all their senior staff and have proper internal procedures for putting together bids and managing the bid process and costing. Certainly, on the occasions that I have been involved from the provider’s side myself, there may have been strong leadership in the bid-team but there was always healthy debate about the form of the bid - or whether it should be made at all.

On a wider level, I was pleased to see a clear direction that aggrieved customers should not spend too much time or money riffling through all the pre-contractual documents and PowerPoint presentations and e-mails to manufacture a cause of action. I have frequently acted for customers who want to renegotiate or even terminate a services deal, and who assure me that the service provider is in breach of contract and that they have a strong case. As you will hear if you listen to my podcast on “Renegotiating Technology Deals”, part of Rob and my role is to filter the complaints and to assess the real legal and commercial issues, so that the parties can have a more constructive discussion – or, at least, to isolate the issues which are really in dispute.

Rory Graham, April 2010

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