Protecting Innovation: Hidden Risks of Confidentiality and Non-Disclosure Agreements

Many entrepreneurs use Confidentiality or Non-Disclosure Agreements (collectively “NDAs”) when talking with consultants, investors, and potential business partners about new innovations.

While NDAs are fundamental for protecting trade secrets, they can create a false sense of security if the agreements involve products or methods that fall outside of trade secret protection and that have not yet been patented.

For entrepreneurs in the early stage of commercializing inventions it is important to understand the benefits and limits of NDAs, as well as to make sure considerations around intellectual property protection are incorporated into their overall business plans.

Public Disclosures and Patentability.

Federal patent rules make it clear that a public disclosure before a patent application is filed is a bar to patentability.[1]

Over the years the courts have issued many decisions as to what constitutes a public disclosure.  Generally speaking, a disclosure is “public” if interested members of the public can obtain access to the disclosure of the invention if they so desire.[2]  Importantly, under this standard there is no requirement that the public actually accesses the information; all that is required is that they could access it.

With the rise in information technologies, it is easier now more than ever for a disclosure to occur. While in the past “public disclosure” typically meant some sort of “publication”(for example a trade journal article or a poster presented at a trade show/conference or an oral presentation), today a “public disclosure” can occur via Facebook, LinkedIn, Twitter, YouTube, etc.  With the increase and ease in which information can be disclosed, the potential risk of disclosure with or without an NDA increases with every person who has knowledge of the innovation.

So what good are NDAs?

NDAs are bona fide legal documents that represent an agreement between two parties to keep particular information secret.  They are fundamental for trade secret protection, which relies on maintaining the “secret sauce” elements of a product or a process.

Entrepreneurs generally rely on NDAs early on in the invention development process while gathering information, researching market demand, etc.

Because NDAs are legal documents that contract for confidentiality, they tend to transform what might otherwise be a casual conversation into something more substantial.  Most people being asked to sign an NDA appreciate that the information that will be disclosed is important and because they are signing a legal document, they tend to be more aware of maintaining confidentiality.

Effective NDAs identify the appropriate individual or entity that is intended to be bound by the agreement. Ideally, the agreement should indicate that the individual/entity should also be responsible for breaches of the agreement by their affiliates, accountants, attorneys or other agents to whom they provide the confidential information.

The Limits of NDAs

An NDA creates a legal claim for monetary damages when it is breached/broken, but it does not reverse the underlying disclosure from a patentability perspective.

And, because disclosure of the confidential information can eliminate the potential for patent protection, it becomes extremely difficult to put a dollar amount on a breached NDA. Even if it could, it would still be uncertain whether any patent that might be granted would be a “game changer” worth millions or something that would never be commercially viable.

Consequently, even if monetary damages are coupled with equitable remedies such as prohibiting the breaching party to use the publically disclosed information or to profit from it, there is no way to reverse the effects of the public disclosure to allow patentability.

Who should sign an NDA?

Entrepreneurs are well advised to have everyone sign an NDA if they are to receive any confidential or proprietary information, including friends and family.  Consultants, machine shops, draftsman and prototype developers are commonly asked to execute NDAs, as are investors, potential licensees and attorneys.

The NDA should carefully define what constitutes the confidential/propriety information that is being disclosed, how long confidentiality must be maintained and what happens at the end of the confidential period to any physical information such as graphs, charts, data, etc. that is provided to the recipient party.

In addition, the NDA should also clearly state any exceptions to the prohibition of disclosure. Typical exceptions are for information generally available to the public without breaching the NDA and information the recipient obtains from others who are not bound by a duty of confidentiality or an NDA and sometimes information already known by the recipient before being disclosed by the entrepreneur and/or information independently developed by the recipient.

Secure Yourself: File First, Then Use NDAs

Filing a provisional patent application provides the best protection against public disclosure of your idea by consultants, “friends,” or potential investors or, worse, theft of your idea. That is because once the application is filed, you have proof of your invention with the United States Patent and Trademark Office (USPTO).  So if you disclose your idea to an unscrupulous person who then makes a public disclosure or files their own patent application for your invention, you will have the earlier filing date.  In general, this means that you will be able to move forward towards patent grant.

Filing a provisional application also protects you if an attorney or investor declines to sign an NDA because of the potential that the confidential information could conflict or interfere with an already existing project.  Since the provisional application presents the details of the innovation and unequivocally identifies the date of filing, the inventor/entrepreneur has more confidence in engaging in conversations with these individuals despite the lack of an NDA.

In today’s fast moving world, there are more and more challenges as it relates to protecting the innovation at the heart of your business. To ensure you are protected, incorporate an analysis of your intellectual property into your overall business planning process. Gorman IP Law offers a streamlined and cost-effective approach to integrating IP considerations into your strategic planning process. Contact Susan Gorman today for more information.

[1]  35 U.S.C § 102(b)

[2]  Constant v. Advanced Micro-Devices Inc., 848 F.2d 1560 (Fed. Cir. 1988)