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DECEMBER 9, 1999

LAW

Silent Partners
A confidentiality pact is the next best thing to keeping your ideas under lock and key

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Got a secret? In today's knowledge-based economy, plenty of businesses do. Ideas, after all, are often a company's most valuable asset, whether it's a Web-site design, a marketing plan, or a new way to test prospective hires. Since putting ideas under lock and key is impossible, more companies do the next best thing. They ask potential investors, vendors, customers and job applicants to sign a legally binding confidentiality or "nondisclosure" agreement. Doing business without one when you're selling an idea or concept is "nothing short of suicide," declares Prof. Janice Mueller, an intellectual property expert at the John Marshall Law School in Chicago.

Southport (Conn.) entrepreneur Brad G. Fisher has used one for years when discussing multimedia projects with outsiders. A lawyer drafted the first version and Fisher modified it slightly for his latest venture, an Internet community for entrepreneurs called tailwind.com. Still, he says, "Sometimes I wonder if they're even worth the paper they're printed on."

It's a valid question. It's not hard to slide around the edges of an agreement, and besides, few small-businesses can afford a court battle against a deep-pocketed opponent.

So why bother? A nondisclosure agreement is like staking a claim on the lawless frontier. If you do sue, it helps establish ownership of ideas that can't be patented or trademarked. Just ask two-employee Celeritas Technologies Ltd. of Newport Beach, Calif. In January, the U.S. Supreme Court upheld the company's $57 million verdict against Rockwell International Corp. for violating a 1993 nondisclosure agreement. The company's patent claim didn't hold up, but Celeritas still convinced the court that Rockwell had used confidential information gleaned from contacts with Celeritas to develop a modem chip set that speeds data transmission.

More often, an agreement provides a psychological edge in negotiations, reducing the temptation to steal an idea. Financial backers also are assured that you're trying to protect their investment—at a time when the number of suits alleging theft of intellectual property is skyrocketing. A well-crafted agreement can even help prevent litigation by outlining what's expected of the outside party, says Michael J. Lockerby, an intellectual-property attorney at the Richmond (Va.) firm Hunton & Williams. Will all documents be returned? Who's entitled to see confidential material? For exactly what purpose can the information canthe information be used?

You don't necessarily need a high-priced lawyer to draft the agreement, either. "It's simple to do yourself," says James Pooley, an attorney at Palo Alto's Gray Cary Wear & Freidenrich. "A standard form will do, as long as you think out your specifics a bit." (Try rmarkhalligan.com or sample forms at techdeals.findlaw.com.)

The last challenge is to introduce the agreement without appearing to question anyone's integrity. Present it at the outset as standard policy, advises Marjorie Brody, author of The Complete Business Etiquette Handbook. But be prepared to negotiate changes swiftly. You don't want your secret to become worthless long before the deal gets done.

Hints for Drafting a Nondisclosure Agreement

COVERAGE Be clear on what the agreement covers. Who in the company does it apply to? What information is confidential?

USE State specifically that the agreement bars use of materials or ideas that you originated unless you give written permission.

MANAGEMENT Define the relationships terms. Will all documents be returned or destroyed? Where will they be stored? Can a product be taken apart?

RESIDUALS If the other side wants to exclude "residuals," think hard and consult a lawyer (a good idea for any unusual changes). Residuals exclude what's lodged in their memory—which might be what really matters.