Popular culture is full of stories about people and companies who lost their intellectual property (IP) to others and forfeited lucrative opportunities because of it. The common refrain in all of those stories: “I trusted him!” But you can’t take misplaced trust to the bank.
How trusting are you? Let’s find out – raise your hand if you’ve done one of the following:
- Talked to potential investors or partners in detail about a new technology you’re developing without a written agreement in place
- Signed off on a contract without reading it
- Shared product specs with potential manufacturers without a written agreement in place
- All of the above
When your business or startup has a new idea, you are faced with the delicate balance between getting out there and selling your product or technology on one hand and protecting your IP on the other. Of course, you’ve filed your copyright, your trademark, and/or your patent or put in place strong trade secret protections. But those are only tools you can use after someone steals your stuff. What proactive measures can you take to avoid theft in the first place?
This is where Non-Disclosure Agreements (NDAs) can come to the rescue. Some lawyers will tell you that NDAs are not worth your time because enforcement can be expensive. But they are valuable – they communicate that you are serious and that you’re aware of the fact that this information is your property. Often just that communication of awareness of your IP rights is enough to make sure the other party behaves.
It’s important to understand that there are generally two kinds of NDAs. The “one-way,” or unilateral, NDA just protects you, while the “two-way,” or mutual, NDA protects both you and the other party.
When to Use a “One-Way” NDA
Say you want to talk to investors; you want an NDA that focuses on your IP and your technology. Your NDA will say, something like, “I’m telling you about this solely for the purposes of seeking investment. You agree that what I’m disclosing is proprietary and you will not discuss this with anyone other than for the purpose of deciding to invest.”
You also want a provision that says, “If you end up disclosing or using this information, I can come after you for legal remedies.” It will also include provisions providing that you can immediately pursue an injunction if needed.
NDAs do not have to be long and complicated. All they need to do is lay out clearly the scope of protection and the remedy. Good investors see these all the time and are willing to sign them. If your potential investor is unwilling to sign a simple NDA, find a new investor.
When to Use a Mutual NDA
Let’s say I have Widget A and you have Widget B, and if we put them together, we can make something. Or, maybe I have an idea for a product, but I need you for manufacturing. In a mutual NDA, I will agree to disclose technical information to you, and you will agree to disclose technical information to me so we can figure out if we can work together.
These NDAs are the equivalent of a Cold War NDA: if it’s breached, you’re headed towards mutually-assured destruction. Therefore, you want equality of protection.
You’ll include provisions around why you’re talking to each other, who gets the information and why, and that it can only be used for the purpose of determining if you’re going to work together going forward. These NDAs should also contain clear descriptions of the consequences of breach.
A lot of bigger companies, particularly manufacturers, already have mutual NDAs pre-drafted. As a general matter, we find these pretty well-drafted, because the obligations and consequences for the parties are the same. Sometimes, however, pre-drafted NDAs can be one-sided even if they are called mutual, so it’s always important for you and your attorney to review an NDA (and any contract) before you sign it.
What Comes After the NDA
When you decide to move forward and work with an investor or manufacturer, make sure you continue to protect your IP in your contracts with them. With a manufacturer, you’ll want to make clear that they are just manufacturing Widget A for you and they have no rights to the technology.
You also need to think about potential future IP as well. For example, what happens if you come up with a related technology or process while working with your partner on existing technology or process? Who owns it? Your contracts should address this scenario before it actually happens. The language can be tricky, and so can the negotiations on this point, but it is better to be clear about these expectations up front than to have to fight lengthy legal battles over it later. Your IP attorney can help you craft the right language for the particular relationship.
Again, many larger companies have pre-drafted agreements that they want you to sign. Don’t get all excited and sign them without reading! Smaller businesses often assume that whatever the standard agreement says is what has been discussed in negotiations, but that is rarely true. Taking the time to review the contract yourself – and having your IP attorney review it – is critical. You don’t want to sign away your IP without knowing it, and good companies understand that changes might need to be made to reflect your particular situation.
Be Aware of Implied Licenses
When you are hired to create something for someone, the business transaction of supplying it and getting paid for it, absent any contractual provision about IP, may imply that you have given the company license to use it anytime, anywhere.
This happens in other contexts, too. Let’s say you talk to a manufacturer about making a product without an NDA in place, and they go out and make it. A court might determine that by having the conversation without staking a claim on the IP you gave them a license to use it. Of course, there are a lot of nuances in that kind of case, but do you really want to be in a position to have to explore them? A good NDA can help you avoid that problem
Bottom line: Protect your IP in all of your contracts. Your IP attorney can help you draft the appropriate NDA or other agreements for your business. And when you are presented with a contract by your larger potential investor or manufacturer – don’t just sign it! Have your IP attorney review it to make sure you are not signing away your rights. If a potential business partner tells you to just trust them: Say you want to put that trust in writing.