Business schools teach business ethics, and one of the first lessons is “do not hijack the ideas of others.” But life is different outside of academia, and people do not realize, or want to realize, that they are appropriating the dreams of others. A nondisclosure agreement (NDA) can protect against misappropriation and misuse of information.

Examples of Idea Hijacking

Businesspeople should be careful in engaging in business discussions without contractual protection. The risks can blind side them easily, especially if nonpublic information is shared. Take for example that foreign investors approach an emerging company in the United States and ask to be its first licensee in the Middle East for a $1 million. Although a great opportunity, for operational reasons, the company rationally rejects the offer. The foreign investors then explain, “if you do not grant us a license to use your name and business system, we will trademark your name in our territory and operate on our own.” A similar ploy occurs domestically, where after discussions, the new business is given an ultimatum, “offer us a joint venture or we will operate a knock-off of your business.”

Even at a social event, when two businesspeople are introduced, there is a risk of idea hijacking. The dentist and a private investor, they talk at the event about what great entrepreneurs they are. The dentist explains a new concept and is invited over coffee the next day to discuss it. The private investor is mildly interested but the dentist is not ready to roll out this innovative mass market service, and they promise to keep in touch. Six months later, the dentist has not advanced the idea but the market is ripe for development, and the private investor finds other medical professionals who capitalize and go to market with the idea. The dentist feels wronged and exacts revenge against the investor and his new partners with a mail campaign. Whether these are mere misunderstandings or intentional misappropriation, the drama and exposure could have been avoided through the use of a tailored NDA.

Essential Elements of NDAs

The first line of defense against idea hijacking is not to reveal too much. For initial discussions, only essential information need be conveyed, and it is better if the information discussed is already public. Best practices suggest that material discussions about confidential information requires a properly drafted NDA. If this scares off the other party, you can agree through exchange of emails or a label on the shared materials that they are nonpublic or confidential, but this is less than ideal for valuable ideas.

The NDA serves as protection for original ideas when intellectual property has not been protected through other means. Trademark registration protects distinctive phrases, names and symbols to identify their creators. Copyrights protect an author’s intangible inventive, creative, musical and literary works. Patents protect inventors’ rights to their novel inventions and innovations. Even if a business has these protections for its ideas, its marketing plan and know-how may not be public, but are and still protectable trade secrets or confidential information.

The NDA should identify generically what the information is being exchanged and is intended to be protected. The NDA should state if possible who owns the information and once it is shared, how it will be protected by the recipient through security measures. The NDA should identify the recipient, with whom the recipient can share the information and under what circumstances. The recipient should be defined broadly to cover anyone who is in privity with the recipient and which received the confidential information from the recipient. As lawyers, additional items to be addressed for completeness is the choice of law to be applied, venue for dispute resolution, counsel fees and the availability of injunction and damages.

No-Shop Provisions and Activity Restrictions

Often in NDAs, especially involving a sale of a business, the NDA will contain restrictions on the activities of the parties. The company sharing the information may desire that the recipient of the confidential information not engage in a competitive business for a period of time, even if the confidential information shared is not used in the competitive business. The narrower the restrictions on activities in terms of time and geography, the more likely a court will enforce the provisions. Some recipients under the NDAs may request a “no-shop” provision, which restricts the disclosing company from engaging activities which are likely to result in generating additional offers to buy the company. For example, while the recipient is reviewing and negotiating with the company, the company would be prohibited from listing the business and soliciting offers to buy the company. If the NDA has activity restrictions on the recipient, it is likely the recipient will request a no-shop clause.

Preparation of a proper NDA sets the expectations of the parties and creates an environment where the parties can safely and candidly discuss their business interests. Simple NDAs are sometimes adequate, but an NDA prepared by multidisciplinary law practices are usually better tailored for more complex businesses. Some investors and suitors will refuse to sign an NDA, or they may rightfully argue that they cannot be subject to activity restrictions because of the volume of deals they review. Whether the client desires to continue discussions is left to their business judgment which should be augmented by a character investigation, and informed advice from experienced counsel.

Reprinted with permission from the February 20, 2024 issue of The Legal Intelligencer© 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.