Non Disclosure Provisions Can Be Useful Only If They Fit The Realities

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

This is a follow on article to my recent posting regarding the abuse of NDAs. It is usually unappreciated that having people agree to protect information that is neither proprietary nor yours provides all sorts of juicy opportunities for an adversary to portray your entire contractual system to be inherently untrustworthy. This includes not only the covenants not to compete so frequently used in conjunction with NDAs but also the major premise underlying investments in any relationship with you. If you seek to attract opportunity investors in major part by suggesting that you have a protectable "special sauce" business construct, and your NDA scope includes matter that has long been in the public domain and used in some fashion by your competitors, the entire premise of consideration for the investment is easily called into question. This goes far beyond the mere enforceability of the NDA and the covenant not to compete that so often accompanies it.

Organizations that "assist" others to enfranchise their business model have a templated existence that they brought with them from some earlier life. What was used in their former employments is assumed to be useful/valid/enforceable forever. That is a damn silly notion.

The first few companies in any new business obviously have value in that they have themselves brought into being techniques, products, services, methods that are somewhat novel. Novelty is a fundamental fulcrum for the leverage to protect anything in our system of commerce. It underlies our patent system. The obvious is simply not patentable (at least in theory). That the patent office will issue a patent on an old, torn soiled item of underwear tends to blur the essential value and purpose of our patent system, but that is a vicissitude of expecting anything worthwhile from any government. As we say here in Texas, government can mess up a two car funeral.

Companies that follow the early entrants into any business segment typically copy what their predecessors have been doing, with nonfunctional nuances that are claimed to constitute effective differentiation. That is simply a convenient fiction used to sell investments. In most instances the personnel of follow on companies came from employment with the earlier firms. One may reliably surmise here that these folks signed covenants not to compete and NDAs with their earlier relationships. These have probably expired (in the instance of the covenant not to compete) and are deemed not worth the cost of enforcement in the instance of the NDA. The fundamental secret sauce of that business segment has by then at least entered into the public domain. As such, there is no longer any basis for an enforceable NDA and a greatly diluted prospect of enforceability for post term covenants not to compete.

It is no longer an intelligent question to ask an adverse franchisee party whether he knew how to do whatever it is before he became a franchisee. That he learned it from the franchisor proves nothing, because it is being used in some form by all the competitors in that business. That he learned it from the franchisor is no more probative of a duty than his having learned it by searching Google.

Illustrations of franchised business segments to which this especially applies, due to over population and stage of life cycle, include sandwiches, hamburgers, pizza, auto repair, auto parts, exercise classes and facilities, home repair, building maintenance, fast casual food concepts of all kinds, home care, product retailing such as vitamin shops, and the list goes on and on.

The major premise here is that, if you have nothing that you can truthfully claim is your exclusive/confidential/trade secret/proprietary property, you do yourself great prospective harm by suggesting in your fundamental agreements and disclosure/selling documents that you do have such an advantage. Your adversary then gets the opportunity to portray you as the Donald Trump of your business segment because you pretend to be/have what you are not/do not have.

Ironically, the law firms that prepare franchise documents have either failed to realize this or, cynically, do in fact realize it and pretend otherwise in order to accomplish being retained. Today one does not look a potential client in the face and tell him that he is not wearing any clothing. But there is another way to skin that cat.

Continuing legal education seminars represent the perfect venue for the open discussion and proselytizing of this obvious but difficult truth. I say that because no CLE seminar materials actually tell the attendants to do the work to ascertain whether there is any basis for such proscriptive provisions. Without a solid basis for them they are potentially very harmful to the interests of your clients should your client come into conflict about these issues and the adversary be represented by competent counsel.

CLE proliferation of the issue is followed by similar treatment in all the relevant trade press. Very early on, potential and actual clients become aware that over claiming is simply the wrong way placement of a Claymore mine into your fundamental documentation. I think it used to be called being hung by one's own petard.

As this becomes more widely recognized, law firms that continue as per present practices expose themselves to E&O liability when they simply copy their old documents with the names changed and sell them as real legal work. These are mostly larger firms that any judge or jury will easily believe ought to have known better.

If you lacked the intestinal fortitude to tell the client about this in the first instance, you probably are not later giving the client a CYA explanation of the impact of insisting upon the use of these malignant provisions. So you didn't tell the client not to do it (after having done the work to determine its propriety), and you then omitted to inform the client that they are probably not enforceable and quite pernicious in their impact upon the integrity of the entire fundamental document package. Look into the mirror and ask yourself then, just what kind of lawyer am I? No, I am not politically correct and I do not seek to make you feel good despite your realities of practice, no matter how expensive your very professional suit may look. Get with it!