Step 3: Entering Into A Confidentiality Agreement
A Confidentiality Agreement is the inventor’s most basic tool for protecting intellectual property. Intellectual property means ideas, designs, prototypes, equations, formulas, software, pictures, music, story ideas, business plans, pending patents, market research, in short, anything a person can think of. Also known as a Disclosure Agreement, Non-Disclosure Agreement (“NDA”) and other names, the Confidentiality Agreement enables an inventor to disclose intellectual property without losing rights to that property.
The value of any Confidentiality Agreement is roughly proportionate to the difficulty of obtaining it. At one extreme are suppliers that have little or no issue in signing strong agreements. At the other extreme are potential licensees that are reluctant to sign anything but the weakest sort of agreement.
For unsolicited inventions the typical Fortune 500 Confidentiality Agreement essentially says:
We respect your validly issued patent, and therefore promise to respect the ownership of your intellectual property. Any information disclosed to us that is not already covered by a validly issued patent, is subject to free use without charge.
It should be clear that just getting any old Confidentiality Agreement is not enough if you have a valuable secret you need to disclose. In fact a bad Confidentiality Agreement, such as the one described above, could be worse than nothing at all. An inventor needs a good agreement with teeth. The trick is having the right amount of bite. Too much bite will cause important potential partners to walk away.
Finally, whenever an inventor discloses confidential information he or she risks losing certain patent rights unless the disclosure is properly covered by agreements and law.
Potential licensees need to know what you have before they will consider doing a deal with you. Some of the information they need to know is information you want to keep secret. Some of the best potential partners are also potential competitors. A strong Confidentiality Agreement should prevent potential partners (and potential competitors) from stealing your intellectual property.
A Confidentiality Agreement is a legally binding contract and is typically comprised of the following sections:
- Introduction. The inventor and the reviewer identify themselves and the reason they are entering into the agreement. The invention itself is identified by general description or by name.
- Terms of disclosure. Each party states what it will do. The inventor agrees to disclose the invention, probably comprised of drawings, prototype, market research, video etc. The reviewer agrees to keep the information secret (the information being kept secret is typically called “confidential information”). But… there are limitations to the secrecy. The limitations generally include:
- A time period for the agreement. The agreement terminates after __ years.
- Exclusions for things the reviewer already knows, including,
- “information in the public domain.” Public domain information is a wide open barn door that includes worldwide patent records, magazine articles, Internet articles, software, games, books, films, songs… everything that has been published (and can still be found) since the dawn of civilization. Do the walls of King Tut’s tomb have a hieroglyphic showing that cool wheelbarrow concept you thought was new? That might be considered “public domain”.
- Additional exclusions that enable the reviewer to continue its current business activities without limitation
- Reservation of rights. This provision clarifies the implications of the sections above:
- The inventor is not giving the reviewer rights to the invention just because he/she is disclosing it.
- The reviewer keeps the right to use information that isn’t confidential (the exclusions mentioned above).
- Many companies reserve the right to use information learned from the disclosure for developing other products. In particular, your disclosure may identify an attractive market opportunity or engineering concept that the reviewer will want to pursue without obligation to you.
- Software companies often reserve the right to reverse engineer product concepts
- Enforcement. Enforcement provisions define and limit the actions the inventor can take in the event of a dispute. Some Confidentiality Agreements provide no specific provisions for enforcement. Without enforcement provisions the only recourse in the event of a dispute may be an expensive lawsuit. Legal advisors often differ on their preferences in this area. Some like to keep open the possibility of a lawsuit (in the interests of their client and not just their own pocketbook). Others believe it can save both the inventor and the reviewer time and money if the agreement specifies binding arbitration for dispute resolution.
- Jurisdiction. Laws vary from state to state and country to country. Many contracts have a section that details the specific set of laws that will be applied in the event of a legal dispute. This can be important since certain provisions (or the entire contract) may be legal under one set of laws but not under another.
- Venue. If there is a dispute where will you argue about it? It costs less to argue in your own back yard using lawyers you already know.
If someone is interested in your invention they will be open to changing certain details of their standard Confidentiality Agreement to meet your concerns. Tell the reviewer your concerns about specific points of the agreement and explain why those points are problematic. Ask the reviewer for his or her ideas on how the agreement could be changed to address your specific concerns. General concerns will land flat and go nowhere. The key is to be specific and to back up your concerns with reasons the reviewer can understand. The reviewer may not provide ideas for resolving your concerns. In this case you can propose solutions. If the reviewer has a problem with your proposed solution ask the reviewer for an explanation. Remember that this is the first stage of building a relationship. If you are seen as reasonable and understanding then future (more important) negotiations will go more smoothly.
For the inventor the purpose of the Confidentiality Agreement is to tie the hands of the reviewer so that the reviewer cannot use the Inventor’s secret information. As noted in the introduction, the most important reviewers (potential licensees and professional investors) are likely to start out by insisting on using their own Confidentiality Agreement (see First Stage Agreement below), an agreement that is slanted strongly against the inventor.
The only way to get a reluctant reviewer to agree to have its hands tied, is to provide a hint of the wonders the inventor will reveal without revealing the wonders themselves. For inventors the equivalent of showing some leg is market research, a sparkling resume and a heavyweight introduction. When a reviewer believes there is something of value to see, the reviewer will agree to amend its generic and unfair Confidentiality Agreement to something custom-made that is a little less unfair (see Second Stage Agreement below). Also remember that a relationship may be built on multiple Confidentiality Agreements. You do not need to reveal everything after signing the first agreement, you only need reveal enough to get to the next agreement and one step closer to your goal.
When the opportunity arises to negotiate a custom agreement the inventor must be sensitive to the reviewer’s concerns. If you push too hard the reviewer will walk away and you will lose an opportunity. Here are some things you may reasonably seek to add (or change) in reviewer supplied Confidentiality Agreements:
1. Provide a detailed description of the invention in the introduction (without revealing the secret details). Details make the reviewer feel better about having its hands tied. For example, WorkTools, Inc. develops a wide range of hand tools. If the invention is described broadly as a hand tool WorkTools will need many exclusions because it develops many things in the category of hand tools and might be already developing a product that is directly competitive with the invention being disclosed. On the other hand, if the invention is described as a new form of personal hydraulic shovel, WorkTools will need far fewer exclusions because it is not active in the field of hydraulic shovels. Also try to broaden the definition of the invention to include concepts, research, designs etc. As much as possible you want to cover everything specifically related to your invention.
2. Extend the time period (term) for the agreement. A period of 1-2 years is standard. If the invention is in a non-competitive area the reviewer might accept a period of up to 5 years. More than five years is unrealistic since, a) 5 years is plenty of time to have a patent issue and b) businesses rarely look more than 5 years out and do not want to limit themselves in the unforeseen future.
3. Include information learned from reviewing the invention as confidential information. This is tricky since the main reason a reviewer agrees to look at unsolicited inventions is to learn what’s out there and act upon that information. Your minimal goal is to delay the reviewer from developing a competing product during the term of the agreement (see point 2 above). Remember that public domain is excluded from being considered confidential information. Once the reviewer learns how big the market is for your invention (by means of its own research using your designs and your prototype) it may be motivated to knock you off (if it cannot make a deal with you). The odds are good that some version of your invention already exists in the public domain (if you do a patent search and have not found at least some prior art then you didn’t look hard enough) – this means the loophole for a knockoff is probably in place. This closes part of the loophole… at least during the term of the agreement (the reviewer will probably accept a term that equals the length of time it takes to develop and introduce a knockoff). In other words, once you begin disclosing your invention you should have a plan in place to get to market quickly. The Confidentiality Agreements you sign will give you a 1-3 year head start. Patents may or may not give you more protection. The value of a patent depends on how unique (“non-obvious” in patent-speak) your invention really is.
4. Surgically limit the exclusions to confidential information. Define wide-open terms and concepts as much as possible. Clear definitions minimize possible misunderstandings. For example, the term public domain might be replaced with currently marketed products and information available in US, EPO and PCT patent records. Likewise, the exclusion for information already known by the reviewer might be limited to, written and graphic information and physical models possessed by the reviewer at the time of disclosure. The reviewer will need to be deeply interested in your invention to agree to changes in the exclusions. But, so long as your requests are reasonable, you have a chance in getting some positive modifications.
5. The inventor alone owns contributions and improvements made to the invention by the reviewer. In the process of reviewing the invention the reviewer may provide good ideas on how the invention can be improved. Being clear about who owns those ideas will help to prevent future problems. In the absence of this provision, if a reviewer’s idea is incorporated in your invention, the reviewer could become a co-inventor with corresponding rights to the improved invention.
6. The reviewer agrees to be subject to an injunction. Adding this provision could save a lot of legal wrangling and, given appropriate caveats, there is no good reason for a reviewer to refuse it (other than the hassle of getting approval from the legal department). In the event that the reviewer is knocking you off you may be able to get a court to act much more quickly.
7. If the reviewer earns profits from violating the agreement those profits are paid to the inventor. Like point 6 above (given appropriate caveats and cooperation from the company’s lawyers) there is no good reason to refuse this provision and it could help in achieving a speedy resolution to any dispute.
The preceding review is in no way comprehensive. It points out some of the potential dangers of Confidentiality Agreements and ways the inventor might try to address those dangers. It should be clear that despite being short and deceptively simple, Confidentiality Agreements are in fact filled with complexities and hidden meanings. Professional legal advice at the outset can save a great deal of heartache and expense down the road.
Click to see sample agreements
While there is no set standard for such agreements, the examples roughly correspond to the agreements you will encounter from most companies. Note that both of the sample Agreements are written from perspective of a prospective licensee.
Inventor Supplied Confidentiality Agreements
Companies that are seriously involved in making money from selling new products will rarely sign inventor-supplied Confidentiality Agreements. Beware of a prospective licensee that blithely agrees to sign one. Inventor-supplied agreements are most appropriate for companies and individuals that provide services: manufacturers, designers, engineers and consultants. If a company agrees to sign your agreement the odds are good that the company expects to make money by selling something to you.
A good licensee is not interested in selling anything to you; it wants to make money for you by selling your invention. Because it has a track record of success, the good licensee will be frequently approached by many other inventors. And because it is approached by many other inventors it will almost always insist on using (modifying) its own Agreement.
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