Will an NDA Really Protect You?
I often get asked, "Should I use a non-disclosure agreement (NDA)? Does it really protect me? What is the benefit of it?" And for all of you developing new products and working with proprietary information, here's my answer:
The non-disclosure is possibly the most misunderstood and over-rated document in our industry. That is not to say that it cannot be a useful tool if it is understood and used properly.
A non disclosure agreement is an agreement between two parties (people or organizations) to keep in confidence and to not disclose information to any third party the private and confidential information that is shared between the original two parties.
For example, if "Kim" enters into a mutual ("mutual" means it applies to both parties) NDA with "John" and they exchange private information, then John can't share this new information with any other person not party to the agreement and neither can Kim.
This can be useful if an inventor is trying to get feedback on her product. It is also useful in preserving future patent rights because an invention has not been publicly disclosed if it is shown within the context of "confidentiality".
What a non-disclosure agreement is NOT: it is not a patent, trademark or copyright. Note that nothing in it says that John won't copy or steal Kim's idea. Only that he won't show anyone else. In some cases a non-compete clause will be added but in our experience, it is rare that a prospective licensee will sign such an agreement. The reason for mentioning this is that we often find that inventors believe that by having this agreement signed, they are somehow preventing the other party from stealing their idea.
Also recognize that many people, including manufacturers will refuse to sign these agreements. Unless someone is highly interested in seeing your invention, it is generally not in their interest to sign such an agreement. Since they don't know what they have to gain, by signing this agreement, they are binding their organization to a legal agreement with unknown benefit. So in some cases when an inventor is attempting to get a licensing agreement with a manufacturer, the NDA could act as an obstacle. Recognizing the pros and cons and understanding the true benefits of an NDA, you will need to make a decision whether to proceed without such an agreement in place.
So use these tools when appropriate with a clear understanding of their benefits and drawbacks. To us, its best use is in an organized setting when people understand why they are signing it, such as a business partnership with a new vendor (who stands to benefit by working with you), a focus group, or in another negotiation when both parties are fully aware of what is to gain. It is also useful to help preserve patentability in overseas markets and your 12 month patent window in the United States. In some cases a "verbal" confidentiality agreement may be a sufficient substitute (consult your attorney about this). An NDA is not useful as a replacement for other intellectual property protection, such as a patent or a trademark.
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Note: my comment should be read in the context that I am frequently asked to sign these agreements. I work in the apparel industry, there's not much new there beyond styling features.
There are many reasons I won't sign these.
1. NDAs are poor protection. If a client has one, they breathe a sigh of relief thinking their bases are covered. If they have inordinate confidence in the NDA, they usually fail to monitor the process in ways that matter more, or they don't use standard best practices that would prevent the greatest abuses.
2. Many clients don't understand where their controls lie. It is more common than not that they publicly disclose to the world, information I would consider proprietary. I can't be held responsible for this.
3. No one likes to admit this but many start ups copy existing products. I can't tell you how many times they'll show up with a competitor's product in one hand and an NDA in the other. An NDA in this context is silly. What's the NDA for? So I can't tell on them?
4. Many start ups develop products that are not unique because they haven't researched the market sufficiently. This raises doubts about other facets of their experience and viability. Since there's always room for someone who is good, I don't discourage them but they should know what they're going up against and whether their model is innovative enough to warrant these sorts of transaction costs.
5. Speaking of costs is the matter of spending priorities. Everyone is in love with their idea and want to protect it. The problem is spending their entire budget on legal devices and have nothing left to pay for product development -of which the value may be questionable.
Above all and in consideration of the above, the biggest problem with NDAs is that one runs the potential risk of alienating solid contractors ("manufacturers"). More established firms won't sign them for these reasons and because they don't need to. The only reason they've endured with a solid customer base is because of their integrity; they don't need legalese to be honest in their business dealings. That's a hint btw. You're better off finding a contractor who is not actively soliciting new business than you are in going with a business soliciting you. It's the opposite of what people think. It's not all cases obviously but if you think a business will do better by you because they're hungrier than the one who isn't, think again. And here's another shocker: a contractor who isn't beating the bushes for your business often has lower minimums and costs. Just sayin...
I'm not saying people shouldn't protect their intellectual property. I am saying there's better ways to do it than with NDAs. Think counter intuitively.
Tamara,
You're right to say that a NDA provides far less protection than a patent or other legal protection. However, all NDA's should include a statement that the recipient of the confidential information will not use the information themselves. This at least gives you a claim based on the contract if the recipient then uses your concept without paying for it.
Scott Landsbaum
Licensing Attorney
Tamara,
I think you put it well where you said, "An NDA is not useful as a replacement for other intellectual property protection, such as a patent or a trademark." I think it's important to point out that an NDA is a contractual agreement between an inventor and one other party. The problem arises when a third party not mentioned in the agreement starts using the idea. How do you enforce the contract against this third party? That raises another question, how did the information leak out? That’s a proof problem you don’t have with patent protection.
But if the inventor can overcome the problems you point out; i.e “will a prospective licensee sign such an agreement?,” it could be a modicum of protection at the start of negotiations.
Vincent G. LoTempio
Registerd Patent Attorney
This info is well worth reading...I couldn't agree more. Thanks!
jackie
http://www.kiesque.com
Great info! I've often wondered this myself. I do have NDA, and some companies will sign it, but as you said, others won't. Thanks as always! kg