Confidentiality Agreement Review
by Mike Marks
Disclaimer: The purpose of this review is to give inventors a general understanding of Confidentiality Agreements. This is not legal advice. Inventors are advised to seek professional counsel before entering into any 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Following are two examples of Confidentiality Agreements corresponding to first stage (unsolicited inventions) and second stage (after interest has been expressed). While there is no set standard for such agreements, the following agreements should roughly correspond to agreements you will encounter from most companies.
First Stage Agreement
| Second Stage Agreement|
Invention City deeply appreciates the efforts of inventors who wish to submit projects for review to Invention City and its Partners. The nature of these submissions and the legal considerations associated with them require that the procedures and conditions set forth in this Agreement be accepted and agreed to in writing. Invention City asks that you review the terms of this Agreement before proceeding with your submission. A signed copy of this Agreement must accompany all submissions or the submission will be immediately returned without review.
Invention City and its Partners are continually engaged in research, development and marketing of many ideas, unpublished materials, inventions and products of their own and of others. There is always the possibility of a conflict between your submission and items being developed by Invention City and its Partners. For this reason, Invention City cannot consider any submission which creates a confidential or contractual obligation for itself or any of its Partners: this Agreement shall not curtail the ability of Invention City and its Partners to pursue business interests in any way.
Before making any submission, you should protect your proprietary rights to your own satisfaction. You should discuss any questions regarding this Agreement with a professional advisor of your own choice. Invention City and its Partners are not responsible for any expense related to advice on your submission or for the protection of your idea.
Submissions must be made using the Invention City Submission Form together with any other relevant documents. If an issued patent covers the submission, a copy of that patent should be included. You should keep the original or an exact copy of your submission for future reference. Materials submitted to Invention City and its Partners will not be returned.
In the act of processing and evaluating your submission numerous people both inside and outside of organizations related to Invention City and its Partners may learn the details of your submission. Therefore, Invention City and its Partners cannot treat your submission as confidential or secret.
Your submission will be reviewed under guidelines set independently by Invention City and its Partners. You will only be told if there is interest in your submission. If there is no interest in your submission, Invention City and its Partners are not obligated to tell you or to offer an explanation.
It is agreed and understood that, with regard to your submission, no confidential relationship or obligation of any kind exists between you and Invention City or you and any of Invention City's Partners unless and until a formal written agreement has been entered into, and then, only as expressed in that agreement.
The rights and liabilities arising out of your submission are defined solely by the protection available under applicable United States laws relating to patents, copyrights and/or trademarks. Except to the extent that any feature of your submission is protected by a claim of an in-force US Patent, or copyright or trademark protection, Invention City and its Partners shall be free to use your submission and information gained from researching your submission in any way. Nothing contained in this Agreement, or the receipt and evaluation of your submission, shall limit the right of Invention City or its Partners to contest the validity or infringement of any asserted protection.
Material similar to your submission may already be known to Invention City and its Partners either in the public domain or in prior art patents or in the known works of others, including the past and present works of employees and associates of Invention City and its Partners. Materials of similar nature may be submitted to Invention City and its Partners. Invention City and its Partners are under no obligation to reveal patents or projects the same or similar to your submission or to reveal any information learned through investigating your submission.
Any negotiations that may arise between you and Invention City or its Partners with regard to acquiring the rights to a submission shall not be prejudicial to Invention City or its Partners in any way and shall not be considered an admission of any novelty or usefulness or priority or originality of the submission.
This submission is being made solely at the request of the submitter. The submitter represents a good faith belief that it has the sole and complete right(s) to offer the submission to Invention City and its Partners and that no other person or company has any rights to the submission.
This Agreement applies to Invention City and its Partners, their employees, agents and affiliated companies. This Agreement also applies to any additional written or oral disclosures which might be made incidental to the submission, whether made before now, at the same time as this submission, or at a later date. These conditions may be superseded only by a subsequent written agreement between the submitter and Invention City and/or its Partners.
This Agreement will be governed by Massachusetts law and all disputes under this Agreement will be settled in accordance with the rules of the American Arbitration Association to be held in Boston, Massachusetts.
I/We have had the opportunity to review the preceding Agreement with a professional legal advisor. I/We have read the preceding Agreement and fully understand and agree to its terms and conditions.
AGREEMENT TO KEEP INFORMATION CONFIDENTIAL
This Agreement is made as of ___________, 2012 by and between _______________, a resident of _______________ ("Inventor") and Invention City, Inc., a Massachusetts corporation ("Company").
Inventor has developed a ____________________________________________ (the "Product"). The Inventor wishes to disclose the Product to Company for evaluation of a possible business relationship and wants Company to keep Product information confidential.
The Inventor and the Company agree as follows:
1. Inventor will disclose a sample and other information pertaining to the Product for review.
2. All knowledge and information regarding the Product shall be considered confidential, and shall not be disclosed or otherwise used by the Company for a period of two (2) years from this date without written permission from the Inventor.
3. The following information will not be considered confidential:
A. Information which at the time of disclosure is in the public domain; or
B. Information which after disclosure becomes part of the public domain by publication or otherwise (but confidentiality ceases only after it becomes part of the public domain); or
C. Information which Company had in its possession at the time of disclosure; or
D. Unsolicited information received by Company subsequent to disclosure; or
4. The Company does not acquire any rights to Product by this Agreement. The Company is free to use information that is not confidential.
5. The Company agrees that Inventor will suffer serious harm if the Company does not honor the terms of this Agreement. Therefore, the Company agrees that, in addition to any other remedies available to Inventor at law or in equity, it will be subject to the issuance of injunctive relief to enforce this Agreement.
6. Inventor fully understands the meanings and implications of the provisions herein. Inventor has had the opportunity to consult a lawyer before signing this Agreement. Other than as described in this Agreement, Inventor's rights are as allowed under current United States Patent law.
7. Inventor owns all rights to the Product and has full authority to enter into this Agreement.
8. This Agreement will be governed by Massachusetts law and all disputes under this Agreement that cannot be settled by the parties themselves or with the assistance of a mediator within one month of notice of the dispute (except for the issuance of an injunction) will be settled by arbitration on an accelerated basis in accordance with the rules of the American Arbitration Association to be held in Barnstable, Massachusetts.
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