Drafting Contracts

6 April

• No class on 4/27. So only 2 classes left. Final on 4/20. 4/13 is the last regular class.
• Options for remaining coverage: Franchise agreement, earn-out provisions, boilerplate provisions.
• Handout #1: Council/counsel/consul. Counsel is both a noun and a verb. It's the most common. Council is a group that deliberates; always a group.
• Shareholder agreements: creation of good workable time periods was key here. Definition of family members is also an interesting aspect. Might make sense to make sure that certificates are "legended" (i.e., they've got notice on them about the encumbrances, so that people who might be about to acquire them in violation of the agreement could find out about it).
• The Sligo provision: note that the agreement started in 1988, so you might not want to set book value on 12/31/89, because that might mean a long wait.
• Confidentiality agreements: what if you already knew the thing that you're agreeing to keep confidential? Would that be a problem? Also the term of the agreement. What if it becomes public? What if it's illegal in some way: can you testify?

  You see these a lot with business acquisitions: the seller pretty much has no choice but to disclose all sorts of things, but they want protection if the deal falls through.

  You'll also see these in connection with employment contracts. Or 3rd-party service agreements (e.g., the development of custom software). Joint ventures, too.

  Confidentiality agreements are sometimes included in other agreements (e.g., a letter of intent). They can be separate, though, and there are reasons to go either way.

  You'd think confidentiality agreements would be a big deal between startups and VCs. But apparently that's not how it usually proceeds: VCs won't sign these (all they do is go around looking for businesses to invest in-- they've probably got eyes on several similar startups at any one time, and they don't want to be accused by paranoid folks they didn't fund). So don't ask them to: it just makes you look clueless.

• Negotiating and drafting confidentiality agreements can be tough, and much will depend on perspective (are you the disclosing or the receiving party. Important provisions:
  • Generally the agreement imposes a burden on the recipient of the information. So the recipient wants the agreement to be as short, limited, and lightweight as possible. The discloser wants the most comprehensive agreement possible.
  • The relationship between the parties and the complexity of the deal and the degree of trust between them will influence how detailed the agreement is.
  • Defining "confidential information" is probably the biggest issue: is it all information disclosed, or is it just certain things, etc. The recipient wants maybe only to worry about information explicitly marked or identified (e.g., verbally, but confirmed in writing within 30 days) as confidential. We want to avoid ambiguity about what has to be treated as confidential, and we want to resolve it as early as possible.
  • No matter how broad or narrow the orginal definition, there are some standard exclusions:
    1. Information that is (or becomes) publicly available. Don't say "generally known to the public:" say "in the public domain" or something like that. And there's an exception to this exception: info that becomes publicly available through your employee's bad acts isn't covered.
    2. Information already in your possession at the time it is disclosed to you. Of course, you'll be required to provide some proof that you knew it: "as evidenced by written records of the recipient" is a standard qualification.
    3. Information that is disclosed to the recipient by a third party who is not prohibited from disclosing. (you'll want to impose some duty to conduct an inquiry about whether the third party was actually prohibited from disclosing: a duty of due inquiry).
    4. Information developed independently without the aid of the furnished confidential information. This is a somewhat rarer exception; lots of disclosers will not agree to this.
    5. Required disclosures (e.g., pursuant to some legal process). "Information that the recipient is advised by legal counsel that it is required to disclose." A written opinion of counsel might be required: this will make the lawyer take it more seriously. The discloser might require notice, though, and a copy of the letter, and the opportunity to intervene, etc. And of course, disclosure should be limited to what is absolutely necessary.
    So these are often taken as exceptions to the definition of confidential information. But it should really be an exception to the duty not to disclose: that's more elegant, and more precise.
  • The discloser wants the agreement to be perpetual; the recipient wants the obligation to have a fixed term. You'll haggle as to when it begins, too: discloser wants it to start on the date each piece of information is disclosed, the recipient wants a unified cut-off date. Note that agreements covering trade secrets *have* to be perpetual (else they enter the public domain and lose their value). Other info (e.g. financials) gets stale.
  • You can also specify remedies (injunctions, etc., so you can go straight to court if you think there has been a breach) to make things more heavy-duty. There are also regulatory obligations that define how certain things must be handled.
  • And you probably want to say a thing or two about who in the organization gets access to the information. Companies are run by people, after all. So the discloser might include a provision that restricts dissemination within the recipient organization to employees who have a need to know and who have expressly signed on to the same agreement as the recipient organization.
  • Remember that you want to cover disclosure of the information, but also usage of the information. So be sure to specify the purpose(s) for which the recipient can use the information, and prevent all others.
  • Cover choice of law for how problems will be settled. And negligent disclosure, etc.
• Our assignment will be based on a situation where a business receives unsolicited information from someone and is asked to treat it as confidential. So, for example, an inventor sends you a big package, and a note that says you might be interested in it, so please call if you want to buy the rights from me, but in the meantime it's my idea so keep it for yourself. Or an unsolicited screenplay, etc.

  How do you protect against claims like that? Some companies (who have been burned in the past) simply refuse to consider unsolicited ideas at all: they just return them to the sender. That might be an overreaction.

  But you can create a system whereby you can look at unsolicited ideas without incurring too much risk. First, have them screened (i.e., processed in the mailroom) by a non-technical person who wouldn't know if it has any commercial viability, but can identify it as an unsolicited submission. Then immediately send a letter denying any confidentiality obligation or arrangement, but include a release and waiver form, which (if it gets signed) will let us examine your work.

• Handout #2: a couple of example policies.
• Assignment 9: we'll want to define confidential information, and include the standard exceptions. Don't need boilerplate about choice of law, etc. But do have a signature block.