The Surprises and Secrets of Non-Disclosure Agreements (NDA)

Photo Credit: Oleg Volk

In the patent world, one of the most important, yet surprisingly overrated, issues is secrecy.

Yet while it’s a needless fear for many, it can make sense to protect yourself when you have to trust someone else with your secrets.  An NDA (Non-Disclosure Agreement) is also known as a “confidentiality agreement” (CA), “confidential disclosure agreement” (CDA), “proprietary information agreement” (PIA), or “secrecy agreement” (SA).  They’re all the same thing.

In this newsletter, I’m offering a free template that you can use (if you dare) and will tell you why in some cases you needn’t bother.  Now, when I’m so casual and cavalier about secrecy, I’m talking about an invention for which a patent application (possibly just a quick and inexpensive provisional) is already pending.  That’s critical.

Before your patent application is filed, ABSOLUTE SECRECY is critical.  Trust no one until you have received confirmation that you’re “patent pending.”  That’s because anyone who hears of your invention might file their own patent application on the same invention.  If they file before you in this First-to-File system, they get the patent, and you won’t even be able to use your own invention.

Got that?  It basically doesn’t matter who invented it first.  It’s who files first.  There is an exception if you can prove that they stole your idea, but that’s hard to do, and it would be part of a million-dollar lawsuit – something to avoid at all costs.

NDA = Not Desirable Always?

First-time inventors and startup company executives are often surprised when I tell them NDAs are overrated.  But here’s why I advise differently than a traditional CYA lawyer might: because having your invention stolen is far down the list of risks your venture faces.

The greatest risk to any new product is not that someone will steal the idea, but that it will be a market flop.  It could be a flop for a number of reasons:

  1. Dumb idea
  2. Doesn’t work
  3. Too expensive to manufacture
  4. Too small of a market (inventor solves a problem few others share)
  5. Denied regulatory approval (ATF)
  6. Marketing failed to reach the customers
  7. Networking failed to find the right industry partners

The first five risks don’t worry most of my clients, because they can test them, work on them, and learn for themselves whether to worry about them.  But, those last two are the killers.  Inventors aren’t always marketers or don’t have the connections they need for success.  I can offer some marketing suggestions or leads, but it’s often an uphill battle.

Question:  What makes the #6 and #7 reasons different from the others?

Answer: #1-#5 can often be resolved in secret, but #6 and #7 require disclosing your secrets.

You don’t need an NDA (or trust) to see if your prototype works or to calculate how much material and machine time it will require.  But, if you want to see if a retailer or major manufacturer is interested in your invention, you need to “lift your skirt.”

If the main failure mode for new-product start-ups is lack of interest from buyers and partners, then anything that worsens those problems is to be avoided, and anything that eases them is desired.  Unfortunately, asking a big company to sign an NDA before they’re even aware of your invention (and you were lucky even to get the contact and meeting!) is a good way to slit your own throat and have them lose interest.

I often advise: “Stop worrying about secrecy and tell the world about your (patent pending) invention!”

Then I get the question that reveals their deepest, darkest fear: “What if some big company knocks off our invention?”

I laugh and tell them: “If that happens, break out the champagne, pat yourself on the back, and congratulate yourself on your success!”  That’s because a credible knock-off is one of the best signals that the invention will be a hit.  All seven of the above risks just got resolved.

When a patent-pending invention is knocked off, it means that someone else is “making your market” for you.  They are investing their money trying to convince their customers that they can’t live without your invention.  They are working to grow your market, until the special day when we write them a letter either demanding they cease selling or come to the table to pay royalties on your terms.  That day can be as early as 18 months after we have filed your provisional application, and maybe even sooner.  I know some companies will be willing to pay royalties on an invention that isn’t yet patented if they presume that it eventually will earn a patent.  That’s because they want in on the ground floor, and they might cut a better royalty deal with you.  They might even cut an exclusive deal that makes them the only seller (but only if you think that’s best for you, and you might insist on minimum sales to keep the exclusivity).

So if you tell the world about your patent-pending invention, what’s the worst that can happen on the secrecy front?  No one can beat you to be First-to-File.  But there is some risk that they might see your invention and be inspired to apply for a patent on some improvement you didn’t come up with yet (or you already have thought of but didn’t file a new provisional to cover – shame on you!), hemming you in.  You might lose a year or two of sales as they skate and sell your invention until your patent rights are ready to enforce.  But, since those early sales are lower profit as the market is made, that might not be too big of a loss.  They might appear to the market to be the true inventor and become the apparent first choice product.  But, remember that with a patent you can shut them down or demand a royalty.  And your deal can include requiring them to give credit to you – that they are selling under license to your patent rights.

True, you might have to threaten a lawsuit that you think you can’t afford, but remember that they may have to pay treble (3x) damages if they lose.  The reality is that in clear cases of patent infringement, in our industry the infringers usually take their lawyers’ advice the vast majority of the time and do the right thing.  And if your invention is popular enough to be infringed, the infringer will probably realize that your profits will pay for your legal costs while their profits might end up turned over to you by a judge.

So, those are some reasons why you might not worry too much about an NDA: you’re already protected as First-to-File by your patent pending status.

And, if you were smart and started telling the world all about your product the day you went “patent pending”, then you don’t have any secret left to worry about.  Good move.  (*Most probably, but remember that even smart decisions have occasional bad outcomes, like the guy wearing a seatbelt who might have survived the crash only if he had ignored all the usually-wise safety advice, but perished because of some freak aspect of the crash.  No guarantees, but the path to safety is usually with a seatbelt, and the path to business success is usually by spreading the word).

Why Companies don’t want to sign NDAs

Imagine some street hustler came up to you on the sidewalk and offered to show you some watches you might want to buy.  Interested?  Now imagine that you are, and he says: “OK, but first sign this legal document that gives me the right to sue you in some circumstances.”  Still interested?

That’s how some big companies feel about signing your NDA to look at your invention.

An NDA is a contract that creates rights and obligations for both sides that sign it.  Anyone who violates the rights of the other or fails in his responsibilities can be sued for damages caused by the consequences of his violation.  So, both sides need a darn good reason to hand someone a golden ticket to take them to court.  You hope that the reason is that that Big Company is desperate to learn about your awesome invention.  In reality, they aren’t.  They might be, after they learn all about it. But not before.  So, unless you have a trusted relationship with them, or are a recognized designer, they probably won’t want to sign before they see.  And if you have a trusted relationship, you’ll probably have already shared the idea anyway, which is how the industry actually works much of the time, thankfully.

You may have to show them a little leg before they will sign an NDA.  Maybe your invention is one of those that makes people say “Wow!  How does it work?”  If your invention can impress without giving away the secret (or enabling motivated engineers to come up with their own solution), then you might be one of the rare cases in which you’ll get an NDA signature.

Who Would Ever Want to Sign an NDA?

The easy answer is: “Anyone who has to, before you give them money.”

That might be a supplier, a consulting engineer, a CAD draftsman, or a marketing adviser.  Someone who hopes you will hire them.  It could be an employee, with the employment contract including NDA-types of provisions.  (You do have employment agreements, don’t you?)  These agreements must make it clear that you own all the patent rights to anything pertinent that your employee or contractor thinks of while they are employed by you.

In other cases where an NDA is a good idea, you’ll want to work with a partner or affiliate as equals, and simply want it to be clear that everything is confidential.  It’s harder for them to forget about that when there’s signed a formal contract.

As an aside, you do have a written agreement with your business partner and best buddy, right?  If you don’t, note that you can avoid all forms of hell to get your understandings in writing when things are going well.  If you can’t imagine having a dispute with your buddy, imagine that he gets hit by a bus, and you’re now partners with his widow’s new boyfriend, with no written agreement that says who owns what.  Not pretty.  Get it in writing!

FREE Samples are worth Every Penny!

This issue concludes with an offer for a free sample of a typical NDA.  I’ll do some lawyer-style “CYA” and tell you that every situation is different, and our example is guaranteed to be wrong for any use you might put it to.  An NDA should be customized for each user, but it’s a good example for discussion.  I know many of you will use this, and maybe you’ll be better off than if you didn’t, but I reserve the right to say “told ya so” if you didn’t have me check out if it’s right for your circumstances.

Here’s what to look for in an NDA.  First, is it written to favor the discloser (inventor) or the recipient of the confidential information?  Or is it written in a balanced way?  The reality is that whoever is “selling” is more likely to have to accept an agreement that is biased against them, for example in setting jurisdictions for resolving disputes for the geographic convenience of the other side.

Often, I’ll see an NDA brought to me by a client that they got from another side. It will be clear that the other side didn’t involve their own lawyer and copied something they had from before, or from the internet (Google “NDA form” for examples).  Sometimes they’ll be using a form that is biased against themselves and which favors us!

When I’m writing or reviewing an NDA, I consider what the agreement is for.  The sample (which we will email on request) is for disclosing prior to a potential business deal, not to have your new machinist keep his yap shut.  So, it focuses on the steps:  An initial period for revealing the info for evaluation purposes (are they interested in the invention?)

Notice how all disclosures are made “in writing” – that way there is no dispute as to what is disclosed.  It’s also a good way to be sure that what you disclose doesn’t go beyond what you have covered in a patent application.  It’s a big blunder to be stingy with info in a patent application and generous when disclosing like this.  Ideally, you’ll show them your patent filing, and leave it at that (maybe leave out any claims so as not to reveal your legal strategy).  Beware of the temptation to share secrets orally, because the NDA doesn’t require them to be kept secret.  They only have to keep it secret if it’s in the written disclosure.  If you do share information orally, it’s on you to summarize it in writing immediately after to have it covered.

If they like what they see, then there is another period for them to let you know in writing that they’re interested in a deal with you.

The agreement covers the big “what if” that lets them reveal information if the cat’s already out of the bag (either when your patent is granted, or something else is published, or your product is released, or maybe someone else screwed up and over-shared).

The term of the sample agreement is 3 years.  This means that even if your patent application were not published (it will be unless you request specifically), no product is released, and no patent is granted, they aren’t bound to secrecy if three years goes by.  Usually, your marketing or the patent process will reveal the secrets to the world before 3 years, and a patent will usually have been granted by then, so the other side won’t be able to compete with you anyway.

My final thought on contracts like this is never to sign something you don’t understand every line of.  Even if you have hired me to draft or customize one for your specific needs, everything should be understandable, and make sense to you.  So, give me a call if you need some help on this, and don’t forget that the best NDA is a pending patent application!

How to Get a FREE NDA Sample

Just email patent@langlotz.com, and we’ll email you your own document.

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About the Author: Ben Langlotz

Ben Langlotz is the nation’s leading firearms patent and trademark attorney, and the author of Bulletproof Firearms Business: The Legal Guide to Success Under Fire. He is trusted by more firearms industry companies than any other lawyer or law firm in the nation, and is consistently ranked at the top of all attorneys in securing gun patents and gun trademarks.