The death of the simple NDA

Non-disclosure agreements may never have really been simple, but they do seem to have become more complex in recent years.  No doubt part of the reason for this is the increasing sophistication of those writing and managing NDAs.  


Whatever the cause, the result is a substantial amount of risk for companies and individuals who dismiss NDAs as mere "boilerplate."  It is now as crucial as ever that those doing business with others use NDAs and, when using others' forms, read them carefully.


Here are a few challenging positions I have seen in NDAs that I suggest users approach with caution.  


1.  Assignment of intellectual property ownership.  An NDA is designed to simply allow two parties to start talking to one another about a deeper relationship.  Yet, in a couple cases, I have actually seen an NDA provide for one party's ownership of everything created over the course of the relationship.  No proprietary technology company will sign up for this.    


2.  Non-competition provisions.  Occasionally, NDAs will prevent one party from competing with the other.  This is another aggressive position with economic implications far beyond the NDA's typical "Let's talk" premise.  Non-competition provisions may also raise anti-trust issues.


3.  No-hire provisions.  Some NDAs will prohibit the solicitation of the other party's employees or customers.  Others will take the next step of seeking an actual no-hire clause.  Either provision will drive how the parties interact with one another.


4.  Lack of an independent development carve-out.  Most NDAs provide exceptions for what kind of information is deemed confidential.  A crucial exception that is sometimes missing regards independent development.  It's important to be able to retain the right to come up with good ideas independently of those that a vendor, customer, reseller or joint venture partner might have.


5.  Inappropriate period of protection.  NDAs will typically provide for a confidentiality period of about five years.  But, a business providing access to its most sensitive secret sauce that it expects to be valuable for decades would certainly want more protection than that.  It's important to think through how an NDA will be used in a given situation before signing up for a certain period of protection.


6.  Venue provisions.  Parties will often agree in advance where to litigate a dispute arising out of a contract.  But, this choice of location could create leverage for one party over the other.  Be thoughtful about agreeing to venue in your business partner's backyard if it's thousands of miles away from where you work. 


7.  Inconsistencies with other applicable documents.  If some other commercial agreement is signed as a result of the initial discussions, it will be important to consider how it relates to the NDA.  A new agreement with its own confidentiality provisions could create confusing conflicts with the NDA.  The NDA needs to be either completely superseded or carefully integrated into the new agreement.   

Insider PSA: "You're shady and self-dealing"

Venture investor Chamath Palihapitiya recently wrote a critical e-mail to the founder of Airbnb.  Palihapitiya passed on the opportunity to invest in Airbnb's latest financing round.  His criticism focused on a controversial and unusual element of the transaction.  In a nutshell, a dividend to common stockholders was being used to provide cash to founders to the disadvantage of other employees.  The e-mail raised many valid points and some good coaching, including the sentence, "Treat your employees the same as you'd treat yourself."


So what's the problem?


The problem is that the e-mail was somehow leaked to a reporter.  Given the amount of confidential information Palihapitiya was given, this amounted to a credible insider public service announcement that the founder could be considered, as the e-mail put it, "shady and self-dealing."  I don't believe that Palihapitiya intentionally leaked the e-mail, but the disclosure was embarrassing to all involved.


It's also symptomatic of a couple challenges in Silicon Valley's business culture.  


We have become too reliant on e-mail to communicate in detail about sensitive topics.  Coaching and constructive criticism are valuable, but e-mail is often an unhelpful channel for it.  


In addition, Silicon Valley is sometimes too open.  We have open office spaces.  Many investors refuse to sign non-disclosure agreements.  Some companies sign NDAs without reading or thinking about them - a very risky practice given that I have actually seen proposed "NDAs" in the last few years that assigned all intellectual property created in the business relationship to one party.  Every thought is posted on Twitter.  The "confidential" footnote is not inserted in the first place or ignored.


It's a good time to revisit the value of 1:1 verbal communication and confidentiality.  Not everything is meant for public dissemination.


If Palihapitiya's email "really was just an attempt to give (the founder of Airbnb) private feedback," he should have picked up the phone.

Customer Loyalty Chronicles, Vol. I – Roland

Hugely successful companies often boast about their "secret sauce."  They will cite particular ways they manage or recruit their people, their unique methods of quality control or their brilliant Super Bowl advertisements. Successful companies surely have a secret sauce and the greatest companies rise above with long term customer loyalty.  


When customers love the product so much that they are passionate about the company, that is an irreplaceable asset.  Apple sets the bar for its ability to generate long term customer loyalty.  But, there are other companies that have secured long term customer loyalty.


Roland Corporation is a company that I feel doesn't get near the attention it deserves for its success in this realm.   The Japanese manufacturer of electronic musical instruments has been a market leader for over 35 years, supplies major artists as well as amateurs worldwide and has developed the most devoted following in the industry.  In studying Roland, I have observed three elements that have driven its long term customer loyalty.


Innovation.  Roland is obsessively innovative, in ways that might even lead some to at first question it.  Apple is widely revered for being able to create demand with supply.  When the iPod came out, many said, "Why do we need this exactly?"  Today, everyone has one.  Same for Roland's electronic drums. An oddity at first, today they are common because of their flexibility and reliability.


Passion.  An extraordinarily driven and passionate founder seems to make a world of difference when it comes to customer focus.  Roland's was Ikutaro Kakehashi, who was orphaned at age two, spent four years of his early life in a hospital with a protracted illness and started his career as a watch repairman.  The love Mr. Kakehashi has for music and the desire he has to build the best musical instruments in the world is clear in his products and in his moving personal memoir.  If you're interested in an off the beaten path business book, I highly recommend it.  It's as if Mr. Kakehashi is still obsessed with making sure each and every customer who comes by his little store is delighted with his work. 


Freshness.  Roland is able to stay fresh with long time customers and gain new ones by keeping up with emerging trends in music recording and performance.  Among the ways it does this is through promotion of its relationships with young stars, such as Lady Gaga.  Decades after starting his company, Mr. Kakehashi remains a dreamer, writing in his book that Roland is looking at "turning imagination into sounds, images, and even shapes, then combining them to produce new solutions."


Long term customer loyalty is a key element of corporate success. Companies that are able to get there, like Roland Corporation, are great guides to achieving it.

America’s Trickiest Laws, Vol. II – Contractor-Employee Classification

The use of contingent workers has become a key component of many companies' human capital management.  Independent contractors minimize headcount, maximize flexibility and often allow a company to use more specialists than its size would ordinarily permit.


But, the era of contingent staffing has created a tricky challenge.  Federal and state governments have taken a strong interest in the classification of workers as contractors versus employees.  In a nutshell, a contractor classification costs the government revenue.  And the misclassification of employees as contractors has reportedly cost the government billions of dollars.


Unfortunately for business, getting the classification right is no easy task. The 11 factor test of the IRS is helpful but it is neither clear cut nor weighted.  On top of this, the states have different, fluid standards of their own.  The costs of getting it wrong are significant, from fines to the possibility of personal criminal liability for company officers.


The good news is that as attention to classification issues increases, so have the resources for helping to address the challenges.  Experienced commentators have taken a renewed interest in the topic, publishing useful guides to dealing with contractor management.  Third party vendors have emerged that will provide objective contractor testing and employer of record services to insulate companies from many of the risks of using contractors.  One that I have personally used with great satisfaction is MBO Enterprise Solutions, which recently published a case study on its success at Levi Strauss.


Contingent staff have become a critical tool in achieving big goals in corporate America.  Being aware of the challenges that come with contractor classification is important to running a successful workforce solution.   

Googlerola emphasizes importance of strong patent portfolios

Google's $12.5 billion bid for Motorola Mobility, at a 63% premium, is generally thought to be about using Motorola's large patent portfolio to help protect Android and Google's other mobile communications interests.  The deal has renewed debate on the weaknesses of our patent system and generated some interesting discussion about Google's plans.  It also emphasizes the reality that today, meaningful patent portfolios are still critical to business.


One would think that Google would have developed a much larger portfolio of its own.  The company has generally had a long term view, is indeed very innovative and has plenty of talented engineers, product managers and lawyers to write patent applications.  The reality, however, is that creating in-house patent development programs is challenging.  There are many reasons for this but a primary issue is simple - since time spent on patents doesn't necessarily turn into extra revenue until years later, patent work can be hard for young companies to prioritize.


So how does a company start a serious patent program that increases its valuation?  There are a few simple steps most any company can take.


All company stakeholders need to recognize the value of intellectual property and regularly review metrics.  Examples of such metrics include number of applications filed per quarter and competitor comparisons. Patents are probably the most objective measure of technological innovation, and yet often take a back seat at many board meetings to a deep dive on short term financials and sales data.  Management, board members and shareholders of technology companies, having seen the valuation premium paid for Motorola's portfolio, should all expect measurable productivity from their teams in this regard.


In addition, have one point person ultimately responsible for developing a patent strategy.  Whether this person is the company's Chief Technology Officer, VP Marketing, General Counsel or has some other role such as a VP of Intellectual Property, having one owner is much more likely to create accountability, clear goals and success.  Committees can be helpful, but identifying a leader will help tremendously.


Finally, create company-wide incentives for, and recognition of, inventors. Simple incentives such as cash bonuses are a sure way to increase productivity in patent programs.   Give, as an example, $1,500 per named inventor for granted patents and watch the number of patent applications increase rapidly.  I also like awarding plaques and certificates to inventors as recognition for their innovation.


These building blocks can help you establish your own successful patent program.  And developing a deep patent portfolio can help a technology company create significant enterprise value while protecting core assets.       

America’s Trickiest Laws, Vol. I – The Foreign Corrupt Practices Act.

Our nation may be one of laws, but our laws don’t necessarily make compliance easy.  In this series, I will try to highlight “tricky” laws, or those that corporations and professionals often find confusing, inconsistently enforced or impractical given various business conditions.  In my view, these laws deserve extra attention from corporate America because they often create great uncertainty.

The Foreign Corrupt Practices Act (FCPA) is an increasingly prominent example, as the Department of Justice has been both aggressive and successful in prosecuting FCPA cases of late, including another win earlier this month in the ongoing Haiti Teleco scheme.  

On the surface, the FCPA seems pretty basic.  It has an anti-bribery provision that prohibits corruptly paying or offering to pay anything of value to a foreign official to secure an improper advantage or influence him in his official capacity.

Where the FCPA gets tricky is in five different practical areas.

First, local custom is less important than compliance with law.  The rallying cry that, “We must pay bribes in country X because others do” is not a defense.  In reality, it’s an FCPA violation waiting to happen.

Second, and occasionally at odds with the first, the FCPA has exceptions that some commentators believe are not really exceptions at all.  Grease payments made to expedite or secure routine government action are permitted.  Wait, what?  Some bribes are OK if we call them “facilitating payments”?

Third, FCPA involves “successor liability,” meaning that a company is liable for the FCPA violations of the other companies that it has acquired.  Mergers and acquisitions activity is complicated enough.  With the FCPA, compliant, ethical companies have an additional risk to address – what is the FCPA profile of the target company?

Fourth, the FCPA includes a record keeping provision, requiring careful accounting of all transactions.  This includes records relating to facilitating payments.  So, if the company’s judgment about whether those payments were compliant proves incorrect, the documentation of the violation will be in black and white.

Fifth, most companies probably do not have adequate full time staff proactively managing FCPA compliance.   While significant SEC filing requirements (e.g., 10-Ks, proxies) lead corporate legal and finance departments to staff up to regularly prepare these documents, there is no tidy equivalent in the FCPA world.

When doing business internationally, keep an eye on the FCPA.  It’s one of our “tricky” laws.

Facebook didn’t steal your stuff. And don’t click “agree” next time.

Worries over Facebook’s privacy policies continue.  Upon closer examination, the concerns are more broad than Facebook’s specific policies.

The latest episode involves a fairly straightforward practice.  Using the Facebook mobile apps will sync your friends’ contact information between Facebook and your phone.  Only you can see it and you clicked “I agree” in setting up the connection between Facebook and your phone.  But, this alarmed some users when it was “reported.” 

General web usage habits are implicated by this concern.  How many times do we speed through a web-site, clicking “I Agree” multiple times without reading the fine print?  Too often.  Even if Facebook wanted to eat our first born, many would sign right up for it and click “I Agree.  You can have the second one too.”

Some of Mark Zuckerberg’s past cavalier statements about privacy certainly haven’t helped, such as when he reportedly expressed surprise early on that people would so willingly share personal information.  “People just submitted it.  I don’t know why.  They ‘trust me.’  Dumb [expletive].”

But, more than anything, I think folks are reacting to broad concerns over the increasingly public lives we live through our Internet identities.  We subconsciously recognize that we are not reading the license agreements and don’t fully understand the privacy policies.  We hear about people sharing too much in their news feeds.  I don’t believe any of those issues are ultimately Facebook’s fault.

Perhaps it’s time to consider this kind of privacy policy first and foremost…