By Richard Stim, Attorney
Imagine that you have developed a potentially marketable invention. What do you do next? You are faced with a dilemma. To make money from the invention, you must ordinarily license the invention to another business, often a manufacturer or distributor, who will invest in mass producing, advertising, and selling it. 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 be protected by law.
Put differently, the company to which you are pitching your idea could turn around and steal it, without paying you any royalties.
So how can you shop your invention around without jeopardizing your rights? To protect your interests, consider two common strategies employed by inventors, amateur and professional alike. First, you can file a provisional patent application (if your invention is patentable). Second, you can use a nondisclosure agreement (regardless of whether it is patentable).
(Remember that inventors do not always need to license their invention in order to make money. 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?).
If your invention potentially qualifies for a patent, it may be worth your while to file a provisional patent application (as of 2018, $65 for micro-entities) and obtain "patent pending" status. Most often, this will deter infringers, because they will see that you are serious in protecting your legal rights.
For more information on filing a provisional patent application, see Basics of Provisional Patent Applications. Or, prepare and file a provisional patent application online, with Nolo’s easy-to-use Online Provisional Patent Application.
If you determine that the invention is probably not patentable, the most effective way to protect yourself is to have prospective licensees sign a nondisclosure agreement before you reveal your invention. This document is sometimes called an "NDA" or a "confidentiality agreement," but the terms are similar.
The agreement must be signed before you meet with the potential buyer or licencee and thus before you disclose any secrets. If someone signs a nondisclosure agreement and later uses your secret without authorization, you can sue for damages. The NDA is a contract like any other, and if the company breaches, you can seek a finding of liability and contractual damages.
Nondisclosure agreements vary in format. Typically, they contain these important elements:
Defining confidential information. 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. Generally, not every single topic you discuss in a pitch meeting will be confidential; only the information specific to your invention or method would qualify under the NDA.
Obligations of the party receiving the confidential information. The person or company you are sharing confidential information with must, in most situations, 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. The majority of 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.
Applicable time periods. How long must the information be kept confidential? This issue is often a subject of negotiation. Disclosing parties want a long period, while receiving parties likely 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:
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.
One more warning: If scheduling a meeting with a potential licensee that refuses to sign a nondisclosure agreement, this should raise some red flags. It is fairly common for manufacturers and distributors to sign such agreements, as long as their terms are reasonable. If you are dealing with someone who refuses, that might raise questions about their motives.
It is always safest to get a prospective licensee to sign a nondisclosure agreement, but you may not always be able to convince the person or company to do so. When that happens, you are left in a somewhat 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: (i) What does it do? and (ii) Is it likely to be profitable? Try to determine whether there is a way to present your invention and an estimate of its costs without disclosing the actual trade secrets. If you can give a company this information, it may be enticed enough to 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:
To learn more about nondisclosure agreements and other aspects of intellectual property law, get Patent It Yourself by David Pressman (Nolo).