Why You Need an NDA with Your Customers
Some companies don’t think they need a non-disclosure agreement (NDA) with their customers. Well, here is a great reason why you need one.
Background: An expansion stage SaaS company (Techforward) disclosed its confidential consumer electronic buyback program information when trying to win the business from a ‘prospective customer’ (Best Buy).
Best Buy gave all the right buying signals and Techforward went even further and disclosed its trade secrets (internal workings of its proprietary analytical model) to Best Buy. However, at the last minute it appears that Best Buy decided not to buy the SaaS service from Techforward, and instead took Techforward’s information and created a nearly identical internal solution (in violation of the NDA).
Techforward sued, and a few years later a court awarded Techforward $27 million as compensation for their loss (including $5 million for Best Buy doing it intentionally).
Here are three takeaways for every expansion stage company. After all, something good has got to come from this case.
1) Always Use an NDA When Disclosing Confidential Information to Third Parties
- This helps to prevent a misuse of the information, as most customers will abide by the NDA.
- However, if your customer wrongfully uses your confidential information, then the NDA will really help when you try to get them to stop using it or to seek compensation for your loss.
Sorry to tell you, but sometimes customers don’t want to pay for your SaaS service, and they may take your information and create their own solution (that is pretty much what happened in this case).
2) Disclose Confidential/Trade Secret Information in ‘Layers’
- Disclose only what your customer needs (at that stage of the buying process).
- If your customer wants your super secretive stuff (aka trade secret information) then think hard about it before disclosing it.
Note to self….
- Does the customer really need this level of secretive information?
- Have I shared this type of information with other customers?
- If I plan to disclose it, mark it as ‘Confidential Information/Trade Secret of [Fill in Your Name Here].’
- Do we have a strong NDA in place?
3) Protect Your Trade Secrets (aka Crown Jewels)
- Identify your trade secrets.
- Take steps to protect them (secure them, mark them, limit access to them, only disclose them with an NDA in place, etc).
- Don’t share them with third parties (unless you have to).
In this case, Techforward actually disclosed their crown jewels, but at least that was a conscious decision made by the Board of Directors of Techforward (and they did have an NDA in place).
Remember that some potential customers are not good (or the right) customers. You should also take steps to identify and protect your confidential information, and make sure to get a good NDA signed. While none of this will guaranty that a customer will not misuse your information, it will help (a lot) in trying to avoid the Best Buy problem. Trust me.
- One of My Blog Posts on Trade Secret Protection.
- Blog Post from TechCrunch on this Topic.
- Blog post from the VC that funded this case (yep a VC had to fund it).
- All the Factual Details: Plaintiff’s Memorandum.
Disclaimer: This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.