I am frequently asked by clients and potential clients alike how to protect an idea or invention or other valuable information when trying to work with third parties to develop a business centered around that idea or invention. Typically, part of the answer is a well-drafted non-disclosure agreement. While form agreements are easy to come by, there is no substitute for a professionally drafted non-disclosure agreement that is tailored to your specific needs.
One of the more obvious and basic considerations when drafting a non-disclosure agreement is, of course, the manner in which the information to be protected is defined. There are three basic schools of thought on how to define confidential information. One of the more widely used methods is to make the definition as broad as possible, so as to encompass as much information as possible. This is particularly useful in an ongoing relationship such as that between employer and employee. However, the vagueness of the definition can lead to more disputes over what is and what is not covered by that definition. At the other end of the spectrum is the practice of marking all information subject to protection under the agreement as “confidential.” The obvious drawbacks with this approach are (1) the difficulty in labeling non-written or intangible communications and (2) the obvious problem caused by failing to label altogether. The middle of the road approach is to identify specific types or pieces of information without the need for labeling. This approach works well when the agreement is to cover a short-term, targeted engagement and is a great option for those wishing to preserve trade secret status for part or all of the information.
A good non-disclosure agreement not only prevents someone from disclosing or disseminating the information to third parties, but also prevents the recipient from using the information to develop a competing business venture. Remember that confidentiality does not necessarily prohibit use of the information at issue. In other words, confidentiality dictates non-disclosure, not non-competition. This is another pitfall for those trying to protect information using state and federal trade secret laws. In addition, any non-disclosure agreement worth its salt will include provisions guaranteeing the disclosing party’s continued ownership of any intellectual property rights in the information at issue.
In addition to prohibiting the recipient from disclosing or using the information, a non-disclosure agreement is going to need to address to whom the recipient can disclose the protected information. It is good practice to consider the recipient’s plans for the information and whether they include the use of independent contractors or other parties over whom the recipient will have limited control. Requiring any disclosure to be accompanied by a formal written agreement is usually ideal for inventors. In addition, the non-disclosure agreement is an opportunity to limit how the information is stored making it easier to destroy or return upon demand. Moreover, an inventor will likely want to prohibit the recipient for their information from assigning their rights or obligations under the agreement to another party.
Any non-disclosure agreement will need to specify the term for which it is in force. Moreover, anyone disclosing information under such an agreement will need to make sure their rights are protected in any subsequent agreements that concern the use or dissemination of the protected information.
Some agreements call for the breaching party to pay a certain amount of money in damages when they breach the agreement. Such provisions are referred to as liquidated damages provisions. While such provisions may seem to be a good way to discourage the recipient from violating the agreement, they can be difficult to enforce. In addition, including liquidated damages provisions in your agreement may backfire when it is time to ask a Court to issue an injunction – a court order prohibiting certain behavior. Part of the showing for an injunction is a showing that there is no other adequate remedy. If the agreement at issue has a built in remedy such as liquidated damages, a judge may refuse to issue the injunction.
There are a variety of other issues that can and should be taken into account when drafting a non-disclosure agreement, but the conversation begins and ends with the inventor’s goals. While inventors and startups may be tempted to take short cuts early on to conserve resources, protecting the core information around which the business is built is not something that should be trusted to mass produced form agreements.
Download a free sample Non-Disclosure Agreement: NONDISCLOSURE AGREEMENT
This document is meant for informational purposes only and is not meant to substitute for the advice of an attorney or create an attorney-client relationship. Please contact the Firm for individualized legal advice.