While recently on a trip to the United States, I was invited by an inventor with new technology relating to Cold Fusion to sign a Confidentiality Document, also known as a Nondisclosure Agreement, or NDA. I reviewed the document and I was reminded of the important points to consider before ever signing such a paper.
Inventors rely on non-disclosure agreements to preserve their rights to file for patent protection when disclosing their ideas to others during the development or funding stage of their inventions. Most countries in the world will not grant a patent, or uphold its validity in litigation, if it comes out that the inventor broke secrecy before filing a first patent application. This is the famous novelty requirement of patent law. Until further jurisprudence develops, it is likely that a single disclosure to a person who is not obligated to keep the information confidential will have the effect of invalidating the right to obtain a patent. Accordingly, it’s legitimate for inventors to want to discuss their ideas only on a confidential basis.
Lawyers are not normally expected to sign an NDA. If a lawyer is engaged to act for a client then they have a fiduciary duty, an obligation of utmost good faith, to act in the best interests of the client. But a lawyer is not always acting in a professional capacity when engaging in conversations with others, particularly inventors. Accordingly, it was not illegitimate for this type of paper to be presented even to a lawyer.
Although some protection can arise through the use of non-disclosure agreements, there is a risk that these commitments to maintain confidentiality will be broken and patent rights will be lost anyway. The abused person’s only recourse in such circumstances is to sue for the damages that they suffer. However, such documents can be difficult to interpret. Large corporations and some investors generally do not sign non-disclosure agreements, requiring inventors to file at least an initial patent application before soliciting licensing arrangements or capital investments. This protects them from unrealistic damage claims.
What is the normal content of a nondisclosure agreement?
The norm in the trade is that such a document will specify a field of technology and then ask the signing party to agree as follows:
- They will keep what is disclosed to them secret.
- This obligation will not arise with respect to things that are already public or which become public thereafter (through no fault of the person signing).
- This obligation does not apply to anything already known by the recipient.
These points are the bare bones of a simple confidentiality commitment. However, typical NDA documents go further. Additional features may be as follows:
- The recipient will not “use” any of the information that they receive. This is such a complicating clause that it will be reviewed further below.
- Things which are public may be specified as limited to information that has been “published.” This generally means that copies of descriptions have been distributed to members of the public. This is much more specific, and narrow, than information which is stated as having been “made available to the public” or is “publicly available.”
- Clause 3, above, may be limited to only apply to information already known by the recipient which is reflected in tangible documentation. In other words, the recipient is not permitted to later say: “I already knew that” without producing corroborative paper or electronic records.
These three last stipulations are examples of how the person wishing to preserve secrecy or confidentiality may endeavor to tighten-up their control over the individual receiving information. Other clauses and limitations in a similar vein may also be included in an NDA. On the other hand, the information recipient may ask for limitations as well.
An example of a limitation that the recipient may wish to advance would be a stipulation that the obligation of confidentiality will expire after a period of time, e.g. three years, five years, or whatever term the parties may negotiate. Another example is that the document could stipulate that it only protects confidential information that is supported by collaborative documentation possessed or provided by the information provider. And the information recipient may even insist that they receive a written stipulation as to the things that are being communicated which must be kept confidential.
Sometimes requesting terms such as these can be a deal-breaker. That is, the parties cannot agree on the form of an acceptable nondisclosure agreement.
The first of the three additional limitations identified above that could be imposed upon a party receiving information requires further commentary as it is fraught with problems. The provision is:
- The recipient will not “use” any of the information that they receive.
What does “use” really mean? It must go beyond merely disclosing the information to others or such further words wouldn’t be added. Certainly it is intended to prevent the recipient from embarrassing the supplier of confidential information as by, for example, encouraging someone else to find out something that is supposed to be kept confidential. For example, phoning a reporter and suggesting that they check a certain situation may not disclose confidential information but it would certainly constitute a damaging use of confidential information. So there might be some legitimate basis for the presence of a “non-use” stipulation.
But what if confidential information is used by the recipient to improve the recipient’s own situation? For example, the recipient may sell shares in anticipation of the possibility that the value of the shares will go down on the stock exchange. Under certain circumstances, this could constitute the criminal offense of insider trading if the confidential information related to the situation of the information supplier. But in other cases the confidential disclosure may be that a third-party is going to launch a new product (a tablet computer) which will increase the demand for certain types of batteries. If the information recipient responds by buying a large stock of the soon-to-increase-in-value batteries, then this may not involve the disclosure of confidential information nor constitute insider trading. More significantly, it would not injure the supplier of the confidential information. Is it legitimate for the information recipient to be constrained from pursuing non-damaging initiatives?
The most stressful situation is where the recipient of confidential information is inspired to conceive of an idea for a new product, or a new opportunity, that was never in the mind of the supplier of the confidential information. Can the recipient then exploit this new information? Would filing a patent application for this new idea constitute “use” of the confidential information? This can be one of the most complicating consequences that may flow out of signing an NDA that includes a “non-use” requirement.
Confidentiality agreements or NDAs are commonly passed around and signed quite casually by many people. There is a danger in not taking such documents seriously. They can bring major complications into a person’s life. No one wants to be involved in litigation, and even bad publicity arising from a public accusation of a breach of duty can be embarrassing. The temptation followed by many because of these concerns is to never sign an NDA.
On the other hand, you may be missing out on something really important by taking such a rigid position.
It’s a tough call, but at least you should take care to read such documents when presented. If nothing else, it will tell you something about the character of the person who is proposing to provide you with confidential information.
David French is the principal and CEO of Second Counsel Services, which provides guidance for companies that wish to improve their management of Intellectual Property. For more information visit www.SecondCounsel.com.