The ugly side of non-disclosure agreements (NDAs)

Non-disclosure agreements (NDAs) are a funny way to protect intangible assets.

They are meant to stop signees from speaking about what they see, hear or read at a company. But they don’t stop information from getting out eventually because no form of censorship (and NDAs are a type of censorship) will ever stop a good writer from cleverly expressing what they want to say, in a way that avoids all the legal obstacles.

An NDA can censor a person who signed it under their given name, but it effectively has zero power if that person decides to talk about the secrets under an anonymous name. There’s also little stopping them from talking with a journalist and relying on the media’s “source protection” ethics to protect the person under NDA.

The problem is that NDAs are not always issued for positive reasons, such as protecting copyright or innovation. Far too often, companies use NDAs to cover themselves after doing something illegal or damaging to their brand.

This use of NDAs can poison the nature of the agreements and leave a person who signs them grappling with their conscience. Should they bend to the lawyers’ scare tactics and stay quiet about a big scandal? Or should they anonymously leak it to protect the public from a bad company? Often, a good person will decide to leak.

For this reason, companies have begun to use NDAs like nervous computer gamers use save files.

On a difficult video game level, gamers will hit the “save game” button every few seconds to preserve their efforts. Run around the corner? Save. Shoot the monster? Save. Jump over a log? Save. Breathe? Save.

The concept of save files allows a gamer to reload the file and return to a location near where their fatal mistake occurred. Without a save file, the player is forced to go right back to the start of the game and try again, with all progress lost forever.

Companies often use NDAs in the same way.

An NDA means a factory that accidentally contaminates its food isn’t necessarily forced back to square one in liquidation or suffers serious brand damage if that information gets out.

The non-disclosure agreement allows the factory to lock everyone who witnessed the mistake into legal handcuffs, forbidding them from discussing it. This gives the company time to clean up its mess or, in the case of innovation, get a product to market before its rivals.

Yet, at some point, all confidential information gets out.

A recent thread on the website Reddit was a great example of the fickle nature of NDAs and secrets. It asked anonymous users to submit their juiciest NDA stories of businesses acting badly.

These anecdotes contain many lessons about intangible assets and the realities of NDAs. Both from the perspective of “what not to do” and to remind M&A professionals that it always pays to talk with past employees and do thorough due diligence on a target company.

You never know what legal Gordian knots are hiding inside NDAs…

• Made In The USA

“Worked for a packaging company and we got a job shipping American flags. The flags were manufactured in China, and it legally had to have a big ‘Made in China’ stamped on the plastic packaging.

“So, the company just double wrapped the flags, with the printed ‘Made in China’ on the outside bag. When it got to us, we were told to remove the outer plastic with those words on it and then package and ship the flags like normal. The company didn’t want its customers to know the flags were made overseas.”

~ KazGem

• Lies, Damn Lies and Statistics

“Manipulation of data to give false impressions of reliability was something I saw quite blatantly utilised with little repercussions.”

“My company was struggling to meet on-time delivery schedules. For numerous years, it was embarrassingly low at 40%. A new manager came in, and within months, we were boasting an on-time delivery rate of a brilliant 95%.

“Turns out all he did was change what constituted an on-time delivery: each time we knew a product would be late, we’d notify the customer of the delay and ask them to confirm they still wanted the order; if they still wanted the product, the on-time delivery would be recorded against the new expected date as opposed to the original promised date.

“Company literature was being sent out boasting of our 95% on-time delivery (amongst the highest in the industry) when, in fact, we were meeting less than 30% of initial delivery schedule targets.

“It was so simple that I’m sure numerous companies are getting away with such underhanded tricks.”

~ BarraDoner

• Playing Dumb

“Worked in technical customer support for an IT/hardware company. We were sold a bad batch of chips from a supplier.

“The chips caused random ‘watchdog’ resets, which would cause random crashes/reboots. The company got a settlement due to it to remediate it, but the MBA/legal types deemed it too expensive to fix what was already in the field, so they ‘fixed it in support.’

“We had very strict talking points when customers would report this issue. Everyone in the support team knew about the issue, but our ‘script’ made us act stupid, as if it were a unique case that had never happened before.

“It is kind of hard to do that when you have replaced multiple units for the exact same customer in several weeks. But, if you diverted from the talking points, you got counselled by management.

“This issue caused several very high-level outages/issues at many of our customers. We knew why, and we were told to ‘act dumb’ and bury it in process/procedures so we didn’t take the hit on needing to replace the known faulty hardware.”

~ labratnc

• Exploitation Of Innovation

“Intel Corporation used to go around to colleges and hold programming contests, and to the winner, they’d give a mid-grade laptop and a gaudy trophy.

“But back at corporate, some of these winning codes would get tens of millions of dollars poured into them in attempts to get them to Intel’s product release.”

“I heard that a lot of companies do this; they go around to high schools, colleges and universities and hold contests, but it’s written into the fine print that the company takes possession of the contestants’ intellectual property.

“By doing this, they can poach potentially profitable ideas from students for the price of a trophy and/or a one-off cash prize, take it to market themselves and make millions, or more often simply bury any innovations that could be a threat to their company in the future.

~ QueenieMcGee

• Competitions Rigged

“I worked for a website creation company back in 1999, managing the website for a big brand/large bank that was sponsoring a round-trip paid ticket to the Superbowl.

“I worked on the website that collected all the entries, and I posted the rules set by the company’s legal department. I wrote a software tool to randomly pick a winner when the contest was over.

“When the contest ended, I was told to forget my tool, forget the rules, just look in the database and find someone in South Florida (where the Superbowl was in 1999) so the company wouldn’t have to pay for airfare.”

~ midnitewarrior

• Have You Tried…

“In a tech support role, one manager used to boast his team’s average call times were the lowest in the company. While average call times were in the 12–17-minute range, his team was constantly under 10 minutes, or 20-30% lower than our competitors.

“His team was awarded multiple times, and his ‘strategy’ was adopted company-wide by all customer service and technical support teams, including our internal IT teams.

“That strategy was under a strict NDA, as we did not want to allow competitors to emulate it. When our call centre would go bid on contracts, it became an awesome metric.

“The dirty secret of the NDA that I was not allowed to disclose? Their ‘big method’?

“Just hang up on people. Find a way to say, ‘Okay, do this and call back if it doesn’t fix it’. Then hang up. Don’t wait for confirmation. ‘Okay, so, reboot your PC and your problem should be solved! Thanks for calling!’ then ‘click’.

“Eventually, the industry had more useful metrics that tracked things like First Call Resolution, which absolutely shredded this company, and they went out of business a year or two later.”

~ gaqua