If you've developed a potentially marketable invention, you are faced with a dilemma. To make money from the invention, you must generally license the rights to it to another business, often a manufacturer or distributor. But in pitching the invention to potential licensees, you run the risk of disclosing so much information that the invention might be stolen or no longer protected by law.
So how can you shop your invention around without jeopardizing your rights? To protect yourself you can file a provisional patent application (if your invention is patentable) or use a nondisclosure agreement (if it is not patentable). If a potential licensee refuses to sign a nondisclosure agreement, take extra precautions.
(To learn more about another option for making money from your invention, manufacturing and marketing the invention yourself, see Should You License or Manufacture Your Invention?)Prepare and file a provisional patent application online, with Nolo’s easy-to-use Online Provisional Patent Application.
Filing a Provisional Patent Application
If your invention potentially qualifies for a patent, it may be worth your while to file a provisional patent application ($65 for micro entities) and obtain "patent pending" status. Most often, this will deter rip-offs. For more information on filing a provisional patent application, see Basics of Provisional Patent Applications".
Using Nondisclosure Agreements
However, if you determine that the invention is probably not patentable, the best way to protect yourself is to have prospective licensees sign a nondisclosure agreement (sometimes called a disclosure agreement or confidentiality agreement) before you disclose any secrets. If someone signs a nondisclosure agreement and later uses your secret without authorization, you can sue for damages. (To see examples of various nondisclosure agreements as well as detailed explanations of their provisions, check out NDAs for Free.)
Nondisclosure agreements vary in format. Generally, they contain these important elements:
- a definition of what is and what isn't confidential information,
- obligations of the receiving party, and
- time periods.
What's Confidential. Every nondisclosure agreement provides a definition of confidential information or trade secrets. Every nondisclosure agreement also specifically excludes some information from protection, meaning that the receiving party has no obligation to protect that information. Information is not protected if it was created or discovered before or independent of any involvement with you.
Obligations of the Receiving Party. The person or company you're sharing confidential information with generally must hold the information in confidence and limit its use. Under most state laws, the receiving party cannot breach the confidential relationship, induce others to breach it or induce others to acquire the confidential information by improper means. Most companies accept these obligations without discussion. If you enter into a mutual nondisclosure agreement (where you also agree to keep information confidential), you should also feel comfortable with these requirements.
Time Periods. How long must the information be kept confidential? This issue is often a subject of negotiation. Disclosing parties want a long period; receiving parties want a short one. Five years is a common length in the United States, although many companies insist on no more than two or three years. In Europe, it is not unusual for the period to be as long as ten years. Ultimately, the result depends on the relative bargaining power of the parties.
One factor in negotiations may be the shelf life of your idea. Ask yourself:
- How long will it be before others stumble upon the same innovation?
- If the product were licensed in the next year or two, how long would it be before the secret would be figured out?
If the answer to these questions is only a few years, then you are unlikely to be damaged by a shorter (two- to three-year) period.
Disclosing Without an Agreement
It's always safest to get a prospective licensee to sign a nondisclosure agreement, but you may not always be able to convince them to do so. When that happens, you are left in a vulnerable position. If you disclose crucial information without the agreement, you risk losing your rights to the invention (as well as the ability to file a patent if it is considered a "public disclosure under new "first-to-file" rules). If you don't disclose it, you risk losing a business opportunity.
Probably the most important factor to consider is the reputation of the person or company you're dealing with. If the company has a poor reputation, the dangers of losing your secrets outweigh the business opportunity.
If you decide to go ahead and disclose, proceed cautiously. Here are some tips.
Disclose "Around" the Secret. A licensee is primarily concerned with two questions about your invention: "What does it do?" and "Is it profitable?" Try to determine if there is a way to present your invention and an estimate of its costs without disclosing trade secrets. If you can give a company this information, it may enter into a nondisclosure agreement.
Establish a Confidential Relationship. A confidential relationship can, in some cases, be established without a signed agreement. An "implied" confidential relationship occurs when the conduct of the parties indicates that they intended to create one. An implied confidential relationship gives you legal rights similar to those created by a written agreement, but it is always more difficult to prove that an implied relationship existed.
A confidential relationship can be implied if certain factors are present:
- the person you gave confidential information to solicited the idea from you -- you did not send it without prompting
- you indicated that the invention was a business proposition and you hoped for payment
- at the time of disclosure you requested that the information be kept secret, and
- the information is a trade secret -- it has commercial value and is not known by competitors.
To learn more about nondisclosure agreements and other aspects of intellectual property law, get Patent It Yourself, by David Pressman (Nolo).