To Sign Or Not To Sign. Software Outsourcing NDA/NCA

Profile picture for user Kristina Rozhniatovska

IT outsourcing is becoming more and more popular nowadays. Obviously that both IT companies and clients want to feel protected, confident and at the same time not restricted in their actions.

A good old contract for development is not enough now, a greater number of clients want developers to sign NDA (Non-Disclosure Agreement) and NCA (Non-Compete Agreement). But does it really protect clients’ interests and ideas? First of all, let’s remind ourselves what NDA and NCA are.

 

I Know What You Did Last Summer…

Non-Disclosure Agreement is a legal contract that outlines what confidential information parties (usually an employer and employee) are sharing and restricts revealing this information to third parties.

NDA can be Unilateral (signed by one party that agrees to keep the information confidential), Bilateral (signed by both parties that share confidential information with each other and agree to protect it from further disclosure, common in joint ventures, mergers, or partnerships) and Multilateral (if more than two parties are involved). The main purpose of any NDA is to protect. Either business idea, source code, intellectual property, personal information of the parties or the fact of the outsourcing.

One of the reasons for IT outsourcing is to reduce costs but here come pitfalls. Parties are operating in different legal spaces (registered in different countries) so it is extremely important to determine under which governing law the NDA violation issue will be resolved. Clients should remember that legal regulations concerning NDA may significantly differ from country to country. For example, in India NDA has to be stamped in order to be valid. In other countries, NDA can be just signed by a CEO in order to become a valid enforceable document. Working with Ukrainian companies you should keep in mind that just signing NDA listing information that is considered confidential may not be enough. According to Ukrainian law About Information, art. 21, confidential information is defined as information with limited access. Therefore the best solution is to indicate in the contract that any NDA violations will be resolved on the client’s side and according to client’s law (of course if the developer is fine with that).

You have the right to remain silent…

Non-Compete Agreement is a contract between employee and employer, in which an employee agrees not to enter into competition with the employer after or during employment. Employers may also want to avoid revealing secrets information, clients’ contacts, strategy, salary, ideas, marketing plans to competitors. There are several major employers’ fears.

Fear #1

You pay a developer lots of money to have an exclusive website/software developed (using your own innovative and creative business idea) and after the work is completed they build the same product for your competitor.

Solution: Own the intellectual property rights to the code.

 

Fear #2

You give your idea to the developer, they use it for themselves and leave. In this case, the developer becomes your direct competitor and most probably their website/software will be better than the one they develop for you.

Solution: Have the developer sign a non-disclosure agreement as well as non-compete and/or non-solicitation agreements.

 

Fear #3

The third-party developer outsources your project to a foreign country where you can’t control your intellectual property.

Solution: No, there is no contract that can protect you for 100% in this case. You can only research the developer/ company and see if they have done that in the past, if they are associated with any kind of scam, etc.

At the same time, developers (and other employees in any field) should pay extra attention to those agreements as well. Employers can go really crazy with their NCA/NDA. Imagine a web designer signs an NCA that prohibits working for a competing company for 12 months after leaving, sounds crazy, right? This is why NCA is considered unenforceable in many countries, including Ukraine, and some US states (for example CA). If you feel uncomfortable signing NCA, if it has restrictions that don't work for you, you can easily ask your employer to review the terms of the agreement and if they refuse, it's better to think twice if the work is worth legal risks.

What Is Common Sense Isn't Common Practice

When looking for IT outsourcing, first of all, do profound research, check the developer's website, find the company’s reviews, for example on clutch.co, if necessary contact their customers. All that will give you an understanding if this particular developer is trustworthy, responsible and worth working with. Don't try to find a template of a contract or NDA on the Internet, one-size-fits-all doesn’t work here, it's always better to consult with a lawyer and tailor your own contract that will meet all your and developers' needs.

If this post was helpful and you have your own story about NDA/NCA to share, I will be very glad to hear it.