LOIs and NDAs Have Teeth. “Pay Attention,” Two Courts Tell Us.

Summary:  Two recent decisions (in Delaware and Georgia) point out legal landmines when negotiating with potential business partners.  Even though the decisions point in opposite directions, they also point out the need for clear drafting.  One is about LOIs:  Make it clear what is binding and what is not and terms like “good faith” actually have a meaning.  The second, in Georgia:  Make certain your NDAs are well-drafted especially when revealing trade secrets, e.g., draft for limited disclosure for limited purposes and with constraints on competing products.

The Details.

Two companies entered into an LOI under Delaware law and one of the two claimed that the other party did not act in good faith in accordance with the terms of the LOI and breached the exclusivity and confidentiality provisions.  Please note that this was a decision only for a preliminary injunction.

In the second situation (this one an appeals court decision in Georgia), a company with a good idea (and some code) approached a couple of other companies about developing and selling a software product based on that idea and code.  The first sale would be to a large insurance company known by all of the parties.  So, the parties signed NDAs.  Well, oops:  Two parties decided to create their own product that was pretty similar to what was being developed and they went on to try to sell it as planned.  But guess what?  Both the trial court and the court of appeals held that there was no breach of the NDA (which was itself badly drafted, according to the court).

So What?

So, when it comes to an LOI, it is not an unenforceable “agreement to agree” but an actual agreement with specified rights and obligations.  As the Delaware opinion stated, parties “[. . .] enter into [LOIs] for a reason.  They don’t enter into them because they are gossamer and can be disregarded whenever situations change.  They enter into them because they create rights.”  What to do?  Well, this court opinion says that parties can specify what is binding and what is not binding.  Naturally, the opinion applies only to Delaware law but its principles extend to just about any LOI or term sheet.  In particular, once a document is found to be an agreement, then covenants of “good faith” are incorporated into the deal.  Pay attention.

As to NDAs, too little attention is paid to their precise terms—in other words, someone exhumes an earlier version and replaces the names of the parties.  This is not smart.  For example, specify—and we mean really specify—the purpose(s) to which the confidential information can be used.  Define “confidential information” so that the person providing that material can control the information.  This also means that one needs to make it clear whether or not copies of the confidential information can be provided and who has access to that information.

OK, OK, so we sound like a broken record:  Pay attention to the agreements and, almost as obvious, make sure that the behavior of both (or all) parties comports not just with the agreements but also to expectations.  Agreements are only a part of the relationship;  behavior is another large part.

James C. Roberts III (jcrext@globalcaplaw.com) is the Managing Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office for Global Capital.  Mr. Roberts speaks English and French.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

Global Capital (www.globalcaplaw.com) counsels domestic and international clients on legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.