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you know whoever wrote this has got a lot of hotspot welcome to the contract teardown show from law insider where legal experts tear down contracts from some of the most well-known companies and high-profile executives around the world in this episode attorney and business professor patrick o'malley shows you the good bad and ugly of non-disclosure agreements these are common and hotly debated documents while being fairly standard so patrick's three tiers of nda quality reveal a lot and he's got strong opinions on whether ndas are even useful or maybe culturally toxic so let's tear it down hey everybody welcome back to the contract tear down show from law insider i'm mike whalen the purpose of the show is exactly what it sounds like we take contracts we beat them up we're mean to them insult them and their ancestors and then we lift them up the end to make them feel warm and fuzzy i hang out with smart people like patrick o'malley here uh sir patrick how are you today fine thank you uh i'm sort of excited i have to say about this conversation because every time i ask people what do they want to talk about they say ndas and i find this discussion fascinating because nobody likes them i'm not sure anybody you know any of them are even enforceable but everybody brings them up and everybody's spending so much time with them so the fact that we are now going to rant about ndas makes me so happy we're going to root our conversation let me share this document real quick patrick this document from pace university a non-disclosure confidentiality agreement that's going to sort of be the basis of our conversation but we're going to spin off of it a bit before we dig into it patrick what is this document when are we going to see this thing you can preface why ndas are the worst we'll talk about it later what is this document sure well let's let's start with the narrow so uh this particular document uh i pulled off the website but as you can see it's pace university which i believe is in new york state and uh so the subtitle of my lecture notes because i'm a professor is the good the bad and the ugly so this pace uh nda uh qualifies as good doesn't mean it's perfect there's even a couple little weird things in there but uh by and by and large it is head and shoulders above the normal ndas i see out there which uh have all sorts of ridiculousness built into them gosh and i again having never practiced in-house i find this fascinating when people tell me this but the amount of time that lawyers spend on ndas is just it you would think by now would be we'd be artists with these things well before we dig into that you mentioned your professor tell us about your background what's your relationship with these kinds of documents when are you running into them uh yeah well i've been a a business attorney of one sort or another for about 20 years now and um but you know i've also been a business executive a recent gig for about six years i ran the world's first incubator for cannabis businesses making products and so as you can imagine you know i was seeing a lot of ndas you know coming in going out and uh you know just i started to form very definite opinions about those ndas and uh and and now i'm not teaching uh mba students and so i kind of started to take a more academic uh uh lens to to my legal work and and uh you know seeing well why aren't we doing these things quite frankly because 99 95 of the time uh they either don't make any sense or maybe they're even you know socially harmful but we can get into that in a minute right so what we're going to do is i'm going to like i mentioned to you in prep i'm going to run through this uh pace document but i also want you to feel totally free to nerd out on your professorialness as much as you want into comparing with these other documents because i do think this framing of the good the bad and the ugly is really interesting for these kinds of documents before i do anytime you see you know a contract nowadays there's a preface at the beginning that says what the heck is this even for i i want to get to that if you look at this pace document you know it it talks about to protect the confidential information which might be disclosed they start with sort of a background let's do the same let me ask you you know in the decision-making process of should i use an nda what do you think our first paragraph would be for that kind of analysis for that kind of conversation should we do these things um well uh most of the time no um you know i think as far as recitals go although this wasn't you know specifically labeled a recital that's clearly what it is um and i'm actually a big fan of recitals uh you know not not the kid type but uh you know the contract type because at the end of the day uh you're writing a contract and uh if everything works out nobody's ever gonna read it again but you know something goes sideways then everybody's going to start reading it and people who have no idea what's going on judges whoever and so recitals really kind of help keep everybody you know on the same page so to speak so i think this is a good recital that they uh that they got out here basically like why are we even signing this well to protect this information and that's that's good clear you know very clear uh statement of what they're trying to accomplish with this document well speaking of the information i mean again the recital's really rooting that as what we're talking about is confidential information protecting it one uh goes further it says as used here in confidential information shall mean the information described in exhibit a it talks about by reference this other document that'll be attached uh talks about personally identifiable student employee information what do you think about section one how they're defining confidential information as related to the purpose of this kind of document well i think they did a very good job with this uh two reasons uh you know they they cite a specific exhibit so presumably that's going to have you know a lot more detail but then as kind of a saver saber sort of function they talk about uh you know some more general things like business activities and obviously uh you know personally identifiable student and employee information would be a very worthy thing to uh you know to protect as much as you possibly can yeah and it talks about all discussions between like it makes a default category all discussions between vendor and pace in relation to the business purpose which again is capitalized uh as a defined term shall be deemed confidential information do you like the catch-all version there yeah well you know i mean lawyers got a lawyer right um but uh it's it's kind of like why did we go through all this really excellent work with the exhibit a and you know specifying student employee information and then say oh and by the way everything else it kind of cheapens the whole experience at least i don't know how you feel about it but i feel very let down yeah i know i mean and then you look at two obviously and it makes you know some exceptions and says but it's not these other things so it has this default of everything's confidential unless we we say it's not and and again i know that throughout this conversation we're going to talk about the big picture but thinking of the big picture is this you know you identified this document as a good you know the best of the three um um ndas if if you're advising someone to use in india and you mentioned that the vast majority of the time you don't need it presumably you think this is a scenario where you do need it does this kind of relationship with confidential information where everything's confidential unless we say otherwise do you think that fits the purpose uh that you would identify as a good nda well you know my general feeling is certainly that most ndas shouldn't be signed at all um and really what i'm looking for to even justify doing an nda is some serious hard data like unique trade secrets you know real intellectual property uh like here there's hipaa information uh or like payment or financial info those are all very you know important worthwhile things to to protect or you know public health and safety information um and so you know i think that uh if if you if you're covering any of those bases in the nda then you definitely want an nda um and you can certainly throw in all this other stuff but uh you know it's not going to get you in trouble obviously but uh it does seem to sort of water down the whole specificity that they talked about in exhibit a or in the you know in the identifiable information so and then in number two obviously uh you know uh you've got all the normal exceptions you know court orders uh public domain information that kind of thing so you know there's nothing wrong with with paragraph two with the those exceptions to confidentiality those are pretty standard stuff well in moving to three i mean everything is only as good as your um you know responsibilities that you put on people it talks about vendor will maintain the confidentiality of the confidential information using procedures not less rigorous than those the vendor uses the vendor may disclose there's a lot of control in the hands of the vendor uh but to sort of set the terms of what's responsible use of information what do you think about section three there well i think actually section three is where the in-house counsel and pace and maybe they have a very good reason for this but just reading this as an outside you know non-pace lawyer non-new york lawyer i look at this and say well gee basically if your vendor is a real slob with protecting his information then he's not really obligating himself to protect the information now you know obviously uh you also can't say oh you have to protect it as much as pace would protect it because this this guidance vendor this small might be a small businessman he doesn't have any idea what kind of protections you have in place so you know i think honestly they probably should just scratch that first sentence or two as just raising more questions than it than it actually solves and i think they created problems for themselves uh so you know but that's just my opinion and you know how it is a lot of times these are written in there for certain reasons somebody had a specific peace of mind there's a story you can tell when there's a story in a contract right and it's kind of like you know bad facts make for bad law well you know maybe you had a bad fact story that makes for a bad contract provision but this is the only like failure and it's not a big deal but this is the only sort of failure in this particular and a good one yeah and jump into four you see this in india is a lot that's basically like we can't bind you outside of what a court tells you to do right and that's what force sort of digs into uh but but the part of that that creates additional requirements is that you have to immediately provide written notice of such a legal requirement to pace what do you think about this as a way to handle if you in fact can't control that situation because of a court well i think this is you know this is definitely a good provision um for all parties and uh you know in one of the in the ugly or no the bad nda we're going to talk about later uh there's a whole lot of ridiculousness around this particular issue but here you're not putting an enormous burden on the the person the small businessman let's just say uh basically oh you know if you're getting a subpoena you gotta let us know that's not terribly difficult so i think again this is an example of good drafting which actually at the end of the day might actually yield a good result as opposed to just you know paperwork cya and and maybe again this is me as a as a novice talking to a professor but i'm looking at six and it talks about superseding and coming above this agreement it says that basically this is going to last until five years uh has happened you know past the talking about the business purpose and that they have a new agreement that expressly says this supersedes the previous confidential at the previous nda uh what what do you think about six and that way of handling that uh sure well you know i think actually they should have used ore rather than and but you know the point's still fine um but basically i like this uh you know five years is a long time but in some of the bad ndas it's indefinite uh like you know take it to your deathbed sort of thing and that's just obviously ridiculous the way i say try to explain it to people is why would you sign a document to somebody you barely know and give them an indefinite open-ended cause of action against you if it so strikes the fancy and when i explain it to people that way they're like yeah well that kind of does make sense why would i give people the right to sue me seven years from now or some ridiculousness um so i like sunset provisions almost inevitably uh almost any kind of contract i like sunset provisions um and i also just the second thing i like here with the subsection b is the execution of uh some sort of future agreement that's gonna supersede this agreement i like that uh because you know we know that once we ink a real contract uh we can throw this thing away and not worry about it so a good bit of housekeeping again for all parties so you know all in level i'm definitely going to give and oh i love that the pace lawyers put this in a two column format so when it's printed up properly it's basically just a one pager i love that you know one page one side uh makes it easy for a non you know lawyer to read it understand it and so you know high marks for usability uh on this one and um you know i really have to to to give them you know probably uh let's give them an a on this one yeah that's too nice so let's be mean uh i want to jump over to the second document um which you've identified as the bad this looks like a a generic uh agreement between an investor and a company and it's got a lot of the same headings and you know it it seems like the same sort of document but i'm noticing a lot of highlights in here that makes me think maybe you don't feel like it's the same run me through this document what are you seeing on here compared to the the good that you're saying red flag pay attention to this well it starts pretty early basically uh you got some company and they think they're just the greatest thing since sliced bread and so much so that they're you know daining to discuss with this investor i.e the guy with the money that they're trying to get his money uh you know we're gonna deign to talk to you and here you're gonna sign this thing well you know here's my first pro tip the best way to get shown the door when you're at the vc's office is to demand an nda they're just going to laugh in your face and honestly my way around that just kind of a practice note so whenever people ask me to sign an nda i just say no i don't sign ndas certainly just to have a chat with you just don't tell me anything that you don't want me to know you know wow imagine that now we don't have to create you know whole piece of paperwork that one of us or both of us might sue each other over in the future just keep your big fat mouth shut tell me what tell me what i need to know in order to have this conversation and whether we'll continue it on these guys don't obviously you know uh subscribe to my you know outlook on the world uh so they do all sorts of silly stuff in here uh you know it's kind of like just have fun with it you wanna you wanna find some stupid stuff i think there's probably six stupid things in in this particular nda but i think just to conceit that they're asking somebody to sign anything before this person would be allowed to invest in them it's like what do you think you are you know god's gift to you know venture capitalists i doubt it well i was curious in that in that definite you know the first remember in the previous document the definition was everything's confidential unless we say otherwise and here's some other ways in in one it's got a pretty broad stroke there it includes that any information independently obtained or prepared by the investor so it sounds like they're even saying if you investor doing your own research into us you can't talk about that either what do you think of that section uh i had a good laugh it was it was humorous i mean you know taken against the background that they shouldn't even be asking this guy for an nda and then they're saying oh well anything's that basically anything that relates to us even if you dig it out at your own time and expense is still protected by this agreement i mean i don't even get the concept of how they you know how they conceive of that uh you know honestly i i just got one who wrote this silliness um but uh yeah that that that's rich uh you know that when i saw that i was like oh i'm using this one because this is literally the most ridiculous provision i've ever seen in any nda yeah well again sort of you can tell who wrote this document looking down at four under the governmental orders and requests similar to the previous they are saying look we can't stop courts from requiring things but they say on their investors shall cooperate with the company in an effort to reasonably limit the nature and scope of any required disclosure of confidential information very different language in the sense that it's now putting the onus on the other side to be the adult in the room what do you think about that requirement yeah again uh you know just uh they just continue to be presumptuous uh you know quite frankly it's like first of all what's uh you know what kind of cooperation do you need do you need me to go out and hire my attorney to try to quash that subpoena or that you know whatever it is that court order um you know it's just it's bonkers uh you know contrast that with the pace university where they said hey uh your you know your act of obligation ends by giving us written notice so that we know what's going on these guys basically want you to become you know a party to some action uh you know at least could be argued that so again you know this is a real clown you know whoever wrote this is just a clown uh you know and anybody who signs it is dumber than a clown yeah it's probably like my brother or something uh wrote this and i'm gonna have to apologize to him later uh looking at six uh it talks about the accuracy of the confidential information and part of me is like this feels like there's a story here um and they included this and part of me is like what is this trying to do it says by executing this agreement the company makes no representations or warranties to the accuracy or completeness of the confidential information provided to the investor like what is that even doing what is that section even doing well i'm going to say uh you know whoever wrote this has got a lot of hot spot because basically they said okay everything we tell you is going to be confidential everything you figure out by yourself is going to be confidential and oh by the way all that stuff that we told you you can't count on any of it being true because we're expressly disclaiming and you know any we're just washing our hands with this thing it's just the silliness and here's the investor saying i'm just having coffee right like i think i'm just having coffee with a person with an idea and now i've got to sign this thing that says you're totally full of nonsense um you know and i'm speaking of sort of the the scope creep of what ndas do i know you wanted to talk about the ugly this is a fascinating document because it is not what it says it is tell me about this third document and sort of how nda scope creep and nda solve all social ills is now being turned into something totally different what is the ugly well okay yes the ugly as i was doing the research for this uh a good solid maybe third of the ndas that i was able to kind of just uncover in the public domain were real estate brokers and uh i've on and off been a real estate broker for let's just say more than two decades without getting into specifics and uh so you know i'm looking at going well okay realistically at the end of the day a broker is just an information conduit he's passing information from you know seller to buyer in essence and so why is this really neat in nda again you know you kind of wonder what's the point of even doing an nda doesn't the broker want to sell this prop property of course i do so why would they try to to limit uh you know the the scope or the you know the audience that might want to buy it but as i started digging into the um real estate ndas is that i realized that they weren't ndas at all uh basically although they have non-disclosure written at the top uh that's you know just a tiny fraction of the heavy lifting and serious you know contractual relationships that are being created in this document so although there is a non-disclosure in here somewhere there's a whole lot of extra stuff that definitely shouldn't be here period because uh there are other specific forms issued by state real estate regulators that would cover a lot of these eventualities yeah there's information in here about an escrow deposit like this is this is very different and i guess getting to the big picture what i'm seeing in in and correct me where this is wrong but what i'm seeing is like the universal applicability of the holy and righteous scripture of nda you know people like are stretching these things past the point of credulity but i also feel like the nature of contract the purpose of contract is to get two people who are not part of the same tribe not part of the same family have no reason to cooperate to create enough trust that those people feel safe cooperating what is the public policy sort of view of an nda that it can do sometimes that work of creating trust where trust is not but sometimes it actually undermines the trust that it was meant to create but what do you think about the big picture of the nda yeah well you know pulling way way way back and viewing the forest now uh you know i think there's probably the the first distinction we need to make is although these three that we've been talking about are uh let's call commercial ndas or business ndas where you know there is a business purpose um you know we we do see ndas used in other other ways and i'm going to just call them for lack of a better word personal ndas and uh you know this got a lot of press uh and as i was doing my research i was reminded of it a lot of press with the harvey weinstein the donald trump ndas um where you know these ndas were used by you know wealthy sophisticated well-represented individuals in order to basically browbeat you know non-sophisticated individuals and uh in order to cover the tracks of the disreputable wealthy individuals and you know that's very broad but you know you get the point that uh why you know why should the courts or even the threat of courts be permitted to basically in essence uh you know eliminate an individual's first amendment rights although you know power to contract is obviously very very very important there are plenty of contracts that we're not going to enforce because you know they're against public policy uh you know we're not going to enforce a contract that envisions an illegal activity and so you know i think that uh you know with these personal ndas you know i think that absent you know showing of some clear compelling socially legitimate need uh you know i think a very strong argument can be made and i've read a few law review articles to this extent that you know good public policy should say we're not going to enforce a personal nda kind of like how california disfavors non-compete employment clauses uh you know and i think a lot of people look at that and go well yeah that makes sense we don't want to uh basically you know chill people's abilities to go out and you know get another job and you know i think as bad as a you know a non-compete in a an employment situation is so bad that the state of california said we don't we don't want to countenance that i think it's much much worse when you're talking about a personal mda where it's not just about how old we don't want people compete with us um you know it's it's far more nefarious uh than an employee non-compete and so yeah you really have to to really think about that first amendment uh issue um you know for example perhaps an nda that protected uh the privacy of a child actor well i think you could probably make you know a good public policy case for that like well you know he's still a minor and so you know we don't want you know them to be splashed all over the news um so uh but you know on the opposite side of that maybe well definitely not we definitely don't want bad actors to use ndas to cover up their bad acts especially we're talking about you know something potentially criminal or tortious uh sexual harassment lawsuit settlements i think that right there you know when you're asking that person to sign an nda you're basically saying yeah you know we kind of want to go out and do it again and so we don't want to get caught and so we want to chill your speech so that you won't talk to anybody and i you know i think when i frame it that way i think it's pretty easy to agree that it is a misuse of the courts to allow a bad actor to get away with a misdeed by hiding behind the power of the court and you know at the end of the day the aspen times newspaper has uh back back when hunter s thompson was the editor uh or you know a contributor whatever they had a great motto and the motto was if you don't want it printed don't do it and you know i think that's uh that pretty much covers the waterfront for personal and das and uh you know i think lawyers you know not to be old-fashioned but lawyers as officers of the court you know i think you need to ask yourself why is my client asking me to draft a personal nda you know that they're putting upon this you know person of no means or this naive person and you know am i enabling you know am i using my law degree my profession my status my you know status officer the court to uh you know basically uh enable someone to to commit back future bad acts well you know i think with harvey weinstein's lawyers yeah yeah that's a definite yes yeah and i don't know that they those lawyers were asking those questions but i i do you know to your point there's a power dynamics question here right like who's got the power in the situation because a lot of that might define some of this public policy righteousness that you're talking about but in the case of a small i have an idea i want to start a company and i go to the big investor i mean the nature of that relationship is the person with the idea does not have the power in that situation the person with the capital has the ideas are there are many and there's not much capital right so that's a different power dynamic it sounds like you're disfavoring even that small uh you know founder from trying to use an nda are there other ways for that person to protect their you know the the to just not be taken advantage of by that disparate power structure well you know in all honesty uh it's a practical matter now could there be you know you came up with some gambling system that never fails and it's you know just the simplest thing in the world and once you tell the other person how it works then you know they can run off and take your idea and cut you out but that's just not the real world uh you know the real world is you come up with an idea you know oh i come up with three ideas before lunch time right but you know until somebody's actually done the legwork and executed and uh you know taking all those twists and turns that they need sure you really don't have much and you know and uh you know the big sophisticated company uh again isn't actually they make you know quite a clear policy that you know they don't accept uh unsolicited uh ideas because well they don't want to open themselves up to this and so you know i think that uh you know for all those uh people with a great idea you know that's great um but until you've got some real sales behind your great idea you definitely don't have anything worth protecting yeah and the majority of those ideas are iterative anyway they're not actually disruptive we've got this weird cult of everything's got to be disruptive but the majority of human progress is iterative so stop thinking you got to break everything and everybody cares about the weight kids because that's actually very rare um well i think it's interesting um i'm glad we finally on the show have gotten to talk about ndas especially from the perspective of why the freak are you guys all doing these things you all hate them i just find it fascinating it's like a social experiment why you guys are all doing ndas all the time so i appreciate you sharing your perspective on that uh for people who want to reach out to you and learn more about your work uh teaching the mba students and your experience uh with documents like this what's the best way for them to reach out to you patrick um i'm an email kind of guy i'm that generation so uh i don't know if you've got a little ticker down at the bottom there you can put my email address but uh yeah just put my gmail and uh that's where it all lands eventually we can and we'll have it there we'll also have it at lawnsider.com resources where the blog posts will live that we'll talk about this issue of the ndas and if you want to come on on the show and beat up contracts like we do just email us we are at community at law insider.com we'd love to have you uh thank you again patrick you guys we will see you next time [Music] you