I Have Been Doing NDAs Wrong

I have spent most of my career negotiating NDAs wrong.  I only recently figured this out since, at first (and second) blush, NDAs seem rather straight forward.  For many years, I thought the objective function in reviewing, negotiating, and concluding NDAs was speed -- how fast could I review the document for any potential dealbreakers and get to a go/no go decision.  To the contrary, while I might use the same basic agreement for both, I would want to configure an NDA differently for my sales team than for my finance team.

The Minimum Viable NDA

I wrote about this approach a few years ago in a blog post called The Minimum Viable NDA.  The thesis of the approach was simple.  Just tell me what’s in your NDA and if it pattern-matches our template requirements we will sign on sight.  I even went so far as to propose that icons be used to represent clauses, based on a sort of  “Creative Commons Licensing” approach for NDAs.  This was a great step forward in terms of efficiency, but lacked any flexibility.  Given that reasonable attorneys can disagree on whether a particular clause is a dealbreaker one template NDA, even one represented by icons, was only of limited value.  

The Universal NDA

I returned to this problem two years after the Minimum Viable NDA by co-creating the Universal NDA with researchers for the University of California, San Francisco College of law.  The uNDA is not so much a template agreement as it is an open-source library of clauses. The uNDA is based on 13 clauses and various permutations, called “Included Clauses” and “Other Clauses”. The configuration of these clauses enables 192 different versions of the base agreement.  I dubbed this the “Androidification of NDAs.”  NDA drafters could assemble a non-disclosure contract based on a constellation of standard clauses to suit their needs in a particular transaction or type of transactions.  The drafter would still be able to balance among consistency, predictability, and flexibility.  However, given a choice within a particular clause or among clauses implies a trade-off between the various clauses comprising the contract.  Any trade-off implies an optimization.

NDA Strategy

The uNDA was deliberately designed not be the “perfect NDA”, but to bring speed, consistency, and flexibility to the Minimum Viable NDA.  However, we are still missing the strategy to ensure that the NDA is not just dealbreaker-free, but more importantly to optimize it the NDA so it is fit for the purpose to which it is to be employed.

Since I proposed the uNDA four years ago, I have only recently come to realize that there are two primary strategies inherent in concluding an NDA.  These are: the Jurisdictional Strategy and the Infromation Sharing Strategy.  

The Jurisdictional Strategy

The Jurisdictional Strategy is rather straight forward, so we can dispose of that first.  There are two clauses in the uNDA related to Jurisdictional Strategies: Governing Law and Venue.  While related to each other, they are independent determinations. The Choice of Law clause specifies the jurisdiction whose laws will govern the interpretation, enforcement, and resolution of any disputes related to the NDA. This provision helps provide clarity and consistency in the event of conflicts or legal action related to the agreement.  The primary consideration in choice of law is the selection of a jurisdiction which has well-established legal systems and well-defined contract law and to which at least one party has some colorable nexus.

The Venue specifies where any dispute to the agreement will be litigated.  Your preference for Venue will no doubt be a forum that is convent to you, such as your state of incorporation or location of corporate headquarters.  Naturally, the counterparty will want its state of incorporation or location of corporate headquarters. Sorting this out can be problematic and can even lead to a stalemate in negotiations.   Fortunately, one permutation for the Venue Clause in the uNDA is “Where the Defendant Resides.”  Clause requires that either party initiating any legal proceedings related to the NDA must do so in courts of the jurisdiction where the defendant is.  Choosing the permutation Where the Defendant Resides for the Venue clause makes matters harder for the plaintiff and easier for the defendant, acting as a natural disincentive to litigation.  

The Informational Strategy

The second of the two primary strategies in negotiating the uNDA is the Information Sharing Strategy.  Choice of this strategy is dependent on whether the drafter expects to be a net discloser or recipient of Confidential Information and the type of Confidential Information.  This is driven by factual considerations such as whether Confidential Information is sensitive or not and whether the contracting party is sharing or receiving such Confidential Information.  This strategy can be considered by the following two-by-two matrix.

Strategy A indicates the most restrictive NDA for the drafting party.  Strategy B indicates drafting for the least possible restrictive NDA. Strategies C and D may fall in the middle. Strategy A is dominant over all others and Strategy B may be dominant to Strategies C and D. The choice of a dominant strategy is dependent on whether: 1) you intend to disclose sensitive information and need rigid protections against use and disclosure or 2) you don’t intend to disclose sensitive information and want to protect against the probability of being in breach due to your own disclosure mishap.  

The Information Strategies can be effectuated by changes to the following 5 clauses in the uNDA: Business Purpose, Confidential Information, Representatives, Term, and Duration of Confidential Information. Narrow definitions of Business Purpose, Representatives, an expansive definition of Confidential Information, a long Term, and the presence of the Duration of Confidential Information enable a more protective strategy. Expansively drafted definitions of Business Propose, Representatives, a narrow definition of Confidential Information, a shorter Term, and the absence of the Duration of Confidential Information clause enable a strategy protective against contractual breach. And, vice-versa for each.

Negotiating the uNDA

If both sides see the same Jurisdictional Strategy and Information Strategy as being necessary for the NDA, then there are no negotiations to be done.  The drafters need to merely configure the NDA properly and send it for signature.  However, if the parties have different objectives for the Jurisdictional and Information Strategies, then given that the uNDA has a 192 configurable permutations of the agreement, we have plenty of horses to roll and logs to trade (please forgive me, I love broken, mixed metaphors).  

Just to briefly raise a counterpoint, I once had a very smart colleague tell me that you should never negotiate an NDA.  If the other side is going to haggle over the NDA, imagine how difficult they are going to be when it comes drafting the definitive agreement, she stated.  This is a problem of social capital, and perhaps can be solved with little economic cost.  As I have discussed in a previous blog post, Why Not Negotiate Better, that a much more effective approach to contract negotiations is to trade outcomes in clauses which are unimportant to the client in consideration for outcomes in the clauses which are.  This approach provides a massive improvement over template documents. Using a traditional template NDA and a brute force approach to negotiations can quickly lead to an impasse in negotiations.  For example, if you were to believe that the correct term of an NDA is 2 years and the counterparty’s attorney thinks it should be 5 years, is the correct term 3.5 years?  Probably not.  A more elegant solution is available.  A much more efficient approach would be to offer a concession you think more valuable to get.  You might concede to a 5 year term in consideration of the other party’s agreement to venue in San Francisco.

Disclaimer: Ozeki is not a law firm, and this blog post does not constitute or contain legal advice. Use of, and access to, this blog material does not create an attorney-client relationship with Ozeki.  In other words, if this were legal advice, a bill would follow.

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