Do loose lips sink chips?

Nondisclosure agreements are a way of life in Silicon Valley -- where everyone calls them "meaningless" but signs them anyway.

Published June 30, 1998 7:00PM (EDT)

Andrew is my quintessential Web friend: He knows everybody, reads everything, works 14-hour days and is determined to make his million off the Internet. (He probably will.) I recently ran into him at a South Park microbrew-and-brie affair. I had heard that he had left his job as an "evangelist" at NetObjects and was in the process of financing his own start-up.

I asked him what his new company was going to do. "E-commerce," he replied.

"Yes, but what kind of e-commerce?" I asked.

"I can't tell you," he said carefully, "unless you come down to my office and sign an NDA."

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The technology industry doesn't just build chips and Web sites; it manufactures secrets. And the magic piece of paper that transforms ordinary information into hot secrets is the nondisclosure agreement (or NDA).

Silicon Valley's favorite legal document tries to erect fortresses around ideas, information and data. Here, NDAs are ubiquitous: You sign an NDA for your employer when you take a new job. You sign an NDA when you meet with a potential partner or investor or client. The visitor badge you wear when visiting most high-tech companies has a catch-all NDA on the back. And, as I learned, you may even have to sign an NDA just to learn what your friend does for a living.

Yet people in Silicon Valley haven't stopped talking to each other. And though NDAs are proliferating at every turn, their real purpose is often a cipher. Everyone, it seems, has something they want to protect; but few people believe that NDAs are really taken seriously. Instead they are seen, as my friend Andrew puts it, as a "necessary evil."

"The thing that I'm most worried about is our idea for our company being put in the hands of competitors. All that takes is word of mouth," Andrew tells me. "Of course if I hand somebody a digital document it's much worse -- and I don't do that now, I number all my documents and try to print them on paper you can't photocopy; I give them to investors and make them read while I'm there watching them. But paranoia aside, ideas travel much faster than a piece of paper, and if I just give someone good ideas, they then could say, 'Hmmm, those are good ideas. My brother works at Microsoft and I should tell him ...' And then I'm history. Buh-bye."

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The NDA is not a modern invention. Intellectual property expert Pamela Samuelson, a law professor at the University of California at Berkeley, tracks them back at least as far as the Middle Ages -- when Venetian glass guilds would kill glassblowers who took their secrets off the city islands. Still, though NDAs are used today in many industries, only in the technology business have they become a part of everyday life for such a broad population.

Says Rob Merges, co-director of the Center for Law and Technology at UC-Berkeley, "I think that more people are carrying them around, and there's probably more pieces of paper with the title NDA on them in drawers all over the Valley ... and so in that very limited sense, yes, use is on the rise."

Yet while the piles of paper mount ever higher, he adds, there has been no increase in the number of lawsuits. Perhaps that means that everyone is honoring the agreements they sign; or perhaps it means that no one is actually enforcing them.

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Nondisclosure agreements fall into the legal category of trade secrets documents. Along with their siblings the "noncompete" clauses (which prevent former employees from taking jobs with competitors) and the "assignment of work product" clauses (in which employees sign away their rights to everything they create while employed), they make up a portion of the fortress that is intellectual property law. If you sign an NDA for a meeting, you are legally bound not to reveal what you have seen or heard in that meeting to anyone. If you violate the agreement, you can be sued.

But it doesn't mean that you will be sued. Certainly, there is a body of case law addressing broken NDAs in formal relationships: partnerships that ended in outright theft, employees who broke the noncompete sections of their trade secret agreements -- the clear-cut cases.

These days, though, NDAs are being used in more casual encounters -- in conversations over lunch, in press meetings, during product previews or preliminary partnership talks. Yet these more informal NDAs haven't sparked a wave of lawsuits. In fact, several Silicon Valley lawyers say they've never seen a case in which Mr. X claimed that Ms. Y stole his idea during a preliminary meeting, or filched a business plan that was revealed over a martini.

However, just because there have been no lawsuits doesn't mean that there haven't been any conflicts. Information sometimes does mysteriously make its way from one company to a competitor. That threat is enough to ratchet up the industry's level of paranoia -- and its addiction to the NDA.

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"All ______'s confidential ideas, designs, data, or other information disclosed to ______ shall be held in strictest confidence. Designation by ______ shall be conclusive but not required as to 'confidential.'"

This, in its entirety, is Matthew Butterick's NDA for social occasions: a legal document printed on the back of a business card that the president of design house Atomic Vision brings along when he goes out.

"I feel like I keep constantly running into people who can't tell me things because I'm not under NDA. So I figured I'd be prepared, right?" he explains. "It's like spontaneous sex. You want to be ready for this kind of thing."

He's only partly serious. Butterick's cards also trivialize the NDA: They are so simple that they make a mockery of the pages of clauses that constitute most NDAs. Mostly, the cards have been used as party favors, he says, but they do reflect a certain frustration within the Web community.

Many Web veterans feel that NDAs are out of control in their industry -- that the culture of protection has become a culture of unnecessary paranoia and documentation. And the more NDAs that you sign, the less weight each one seems to carry. You hear the same thing from CEOs, lawyers and people in the trenches: NDAs are a joke. They're meaningless.

"I think that they're totally pernicious -- these are about nothing more than trying to control what people say to each other," says Michael Wolff, author of "Burn Rate," citing the blanket NDAs on the back of visitor badges as the most evil. "These NDAs have spread from specific instances to a whole range of speculative notions -- what might you say, what might be thought. The issue is not nondisclosure anymore, it's not protection: it's ownership."

Some critics feel that NDAs are being used unnecessarily in hopes of creating an air of importance. Everyone likes a secret, and the close-lipped nature of companies like Transmeta or Interval Research has piqued the curiosity of countless techies. Other companies are hoping to adopt that mystique via NDAs, and those who sign NDAs are supposed to feel like privileged insiders. (Embodying this idea, the Red Herring has organized a conference about technology trends called "NDA": No NDAs will be signed, and it's doubtful that secrets will be revealed, but just the name NDA is intended to inflate the conference-goers' sense of privilege.)

"A lot of new-media companies are trying to be the next big thing. I think a lot of us are using NDAs to say, 'We're so great we can't let you talk about us' -- as if secrecy will build a bigger buzz," says Molly Ditmore, who has signed around 10 NDAs during her time at Circumstance Design. "A lot of start-ups are founded by people with no business knowledge. They begin throwing around NDAs without knowing what the NDA is doing for, or against, them."

But though many people downplay the importance of an NDA when it's handed to them, they frequently do an about-face when they are on the other side of the table: If they're trying to protect their own company, damn straight they are going to have those legal papers at the ready.

"Today, a lot people subscribe to the concept of 'information wants to be free,'" says Pamela Samuelson -- but they have a paradoxical response when it comes to their own data, she adds: They think, "Information is swirling around so freely, that I've gotta make sure I'm not the guy who goes out of business because all my secrets are getting spilled by all the people who come in and look at my stuff."

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LikeMinds was having an "early adopter" event in San Francisco -- an informational meeting intended to convince Web developers to use its collaborative filtering software. It was a marketing event that glossed over details of the software and instead focused on how successfully Web sites were already using LikeMinds' software. Yet the 50 people who came to that meeting had to sign NDAs.

According to LikeMinds vice president of marketing Linda Della, the NDA was used because the company was previewing a client's upcoming Web site. The NDA was a formality, she says: "I think that people understood that that's the code of operation -- every industry has its own quirks. And in this industry, people sign NDAs."

But few people at the event could tell what the secret was or why they had had to sign the NDA. Certainly no one was getting access to secret code, and many were irritated that they had to sign a legal document just to get walked through Web sites that they had already seen.

NDAs are usually vague: They rarely specify just what part of, say, a two-hour meeting or conversation makes the agreement so vital.

David Coursey, a veteran computer industry journalist, guesses he has signed nearly 1,000 NDAs during the course of his reporting. Most, he says, are inappropriate or improperly worded; usually, what's being protected by the NDA is hardly unknown stuff. In meetings covered by NDAs he often asks the person, "'What we're talking about today, you'll tell me when you get into the secret stuff, right?' Most conversations that are covered by NDAs are 90 percent public stuff and 10 percent secret stuff. And you're just supposed to guess. So I try to ask people."

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In her book "Regional Advantage," Berkeley professor AnnaLee Saxenian maps out the theory that Silicon Valley's success was built on the fluidity of information and relationships between companies -- that a lack of secrecy forged the invaluable partnerships and alliances of the West Coast technology industry. Community plus competition, in this case, equaled unparalleled growth.

Silicon Valley, in other words, was built on schmooze. So how did a conversation-stopper like the NDA become so popular there? Perhaps because NDAs don't so much prevent conversation as provide a layer of protective paper -- a safety net of signatures that allows potential partners to have power lunches and executives to go jogging together in the morning while still feeling comfortable that they're protecting their secrets. In a litigious industry, why take your chances with friendship when you can have a piece of paper that gives you the right to sue, if?

But if everyone is going to talk anyway -- and the majority of people interviewed for this article say that they don't really bother to honor the documents -- then what is the point of an NDA? It's a "just in case" -- a way, perhaps, for a paranoid, secretive industry to justify its chit-chat.

Some have described the social interactions of the industry as a "dance," a two-step of conversational guesswork as people try to read each others' intentions. If those intentions are serious, the dance will proceed under NDA.

As Merges, of Berkeley's Center for Law and Technology, puts it: "It's a kind of parity -- I'll show you my NDA if you show me yours. It's a scenario that is in many cases true -- people in a start-up will walk around with one in your pocket, because you never know who you are going to meet. Lawyers are telling them it's a magic piece of paper that protects them from an evil spell."

Of course, there are those who categorically resist that spell -- such as "Burn Rate" author Wolff, who says that his refusal to sign an NDA has often stalled, but never stopped, a deal. "I think that in the end it is hard to have a free exchange of ideas and points of view and feelings if we've overlaid all of our relationships with nondisclosure agreements," Wolff says.

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Writer and analyst Regina Joseph was trying to shop Blender, the CD-ROM magazine she co-founded, around the New York publishing scene. Versed in the ways of the tech industry, she had an NDA at the ready. It proved useless: The very first publisher she talked to immediately parroted her plan back to Joseph's current employer, despite signing a promise of secrecy. And it only got worse from there.

Joseph remembers: "I had one magazine executive tell me, as I was pitching him a magazine idea for a digitally delivered project, 'I'm not going to sign an NDA, there's no way I'm going to sign an NDA ... For you to even think that an NDA is valuable is ludicrous. Ideas are in the ether -- I can pluck ideas out of the air. All you're presenting to me is an idea, and there is nothing that protects ideas.'"

In the technology industry, NDAs were originally designed to safeguard engineering innovations: code, chip designs, hardware specifications and so on. The media industry, on the other hand, rarely uses NDAs. The Web is a hybrid industry that has put the distinct businesses of engineering, editorial and design into one blender called "new media." No longer is the marketplace based on just computer products: It's also based on information and ideas, words and pictures.

And so "new-media developers" in the middle are finding that the NDA does not have one universal meaning anymore. Online editors find themselves signing NDAs that were written to protect code from being stolen; software developers find that the media industry doesn't necessarily take the documents seriously.

"People on the East Coast are less compelled to observe the rigors of the NDA than on the West Coast. In Silicon Valley, the relationships and associations are very much colored by the incredibly secretive atmosphere and environment of developing software engines and code," Joseph says. "But the East Coast media world sees innovation as a much more abstract notion -- innovation is just a great idea and a great execution; whereas in Silicon Valley a company can be broken on the innovation of a chip set or
the structure of a processor."

But a Web site, unlike a chip set, can be easily and quickly duplicated. This, perhaps, is why the Web industry is riddled with NDAs: A Web site can go from concept to execution in mere months, and a good idea can potentially be worth a fortune if you're the first one to it. The sheer acceleration of time and competition means that a few weeks of secrecy can give you that much more of an edge. Ideas, in this nascent industry, are money.

Yet as that New York publisher pointed out, ideas can be in anyone's brain -- making the legal recourse of an NDA difficult. Despite that signed piece of paper, how can you prove that someone stole your idea?

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For most people in the technology industry, the NDA that actually counts -- and that leads to the most lawsuits -- is the one between employee and employer. Many trade secrets have been lost when former employees take a company's plans to a competitor. The Uniform Trade Secrets Act, which has been adopted by 40 states, outlaws such behavior. Past suits have set a variety of restrictive precedents: Not only are you not allowed to take documents, Rolodexes, code or marketing plans from company to company, but what's in your head does not, unfortunately, belong to you.

And the laws keep tightening. Judges in recent years have created the "inevitable disclosure" doctrine, which makes the case that even if employees don't want to give up trade secrets, and have no intent of doing so, they inevitably will fall back on knowledge gained under previous employment. These cases are increasing: DoubleClick, for example, last year sued two executives who were planning to leave and start their own competitive online ad network, and won. AMD sued employees who left for Hyundai Electronics -- despite the fact that the employees hadn't signed NDAs or noncompete clauses -- just because they knew AMD's secret processes. Again, AMD won. More and more departing employees are being told by courts that they have to take "time out" before starting a competing job, so that their knowledge loses its value.

The ramifications are ambiguous: If a company relies on its secrets for success, then any departing employee who knows those secrets is a threat. But for the essential employee, the legal threats are making it more and more difficult to leave a job and be able to stay in the same industry. The contents of your brain are too crucial for your employer to let go.

The "inevitable disclosure" doctrine alone
could have a negative growth effect on the industry, says Diane Savage, an intellectual property lawyer with Cooley Godward in Silicon Valley. "There's been a lot of concern among employees that, because this is a very fluid area and people do move from employer to employer, inevitable disclosure could be used to clamp down on the mobility that employees have always had."

In California, however, noncompete clauses -- which put an outright ban on an employee taking a job with a competing company -- are illegal, which make it more difficult to prosecute a departing employee (though employees can still be prosecuted for revealing trade secrets). And Silicon Valley observers like Merges think that the scarcity of qualified engineers, in particular, has made Silicon Valley companies reluctant to create strict NDA environments lest they scare off laid-back young employees. Few companies, he says, want to project an uptight, buttoned-up image.

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In another industry, perhaps, NDAs would be a crippling bureaucratic burden, and nothing would ever get done. In Silicon Valley, executives paint them instead as part of a streamlined way of doing business.

Philippe Kahn, founder of Borland and Starfish, says, "In the middle of a very litigious and unnecessarily complex legal environment ... deals and agreements get made extremely fast [in Silicon Valley] because everyone works with law firms who know the key players and their ethics, and are able to make things happen very fast. I believe that one of the secrets of Silicon Valley's success is its ability to make extremely complex legal matters happen fast because 'everyone has done it before and everyone knows everyone else around the table.'"

The paradox, of course, is that even though everyone knows each other already, they still want their NDAs -- even though that signed piece of paper, in the end, offers no guarantees. It's a circular argument: If you don't trust the person across the table, odds are that you won't tell them your secrets, even with legal documents to back you up. So the NDA ends up being used mostly between two people who already have faith in each other anyway.

"Basically, I only talk to people that I have to, and that I trust explicitly," says my friend Andrew, as he embarks on his start-up. "Even with the signing of NDAs, the information flow is liquid -- not molten lava, perhaps, but a jet stream. And that's a bummer."

By Janelle Brown

Janelle Brown is a contributing writer for Salon.

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