To NDA or Not to NDA?
--That is the Question --
What do to if your potential business partner refuses to sign a Non-Disclosure Agreement
The client is desperate for advice. “What do I do? My prototype maker refuses to sign an NDA, and I can’t find anyone else to make the invention for me! I don’t want my invention to become public domain! Suppose he steals the idea from me?”
This sort of situation occurs more often than you’d expect, and for the most part, I cannot really advise the client to go one way or the other. The reason is simple. These are business decisions, and I can only give legal advice. In other words, I can tell the client what the potential consequences of any action might be, but I can’t make the ultimate decision for them.
Figuring out what to do in a situation like this requires that you understand what a Non-Disclosure Agreement can and cannot do, and moreover, what your options are if someone you want to do business with refuses to sign such an agreement.
1. What is an NDA?
A Non-Disclosure Agreement is a contract, plain and simple, and is governed by applicable contract laws in your State or jurisdiction. By signing an NDA, both parties agree to be bound by the terms of the contract for the duration of the contract. A typical NDA, properly drafted, contains a few key provisions:
A. The parties agree not to disclose each other’s confidential information to others
B. The parties agree to return all documents and information supplied by the other in the event no agreement is reached with regard to the invention.
C. The parties agree not to use each other’s confidential information without compensating the other party.
In addition, there are usually other provisions that may limit the scope of an NDA. For example, information might not be deemed “confidential” if it was already known to the receiving party or is known and used by others.
Some companies spoof the entire concept of the NDA by reversing the primary terms completely (See my article NOT INVENTED HERE). In these NDAs, which I call “disclosure agreements” the receiving party agrees to keep your invention secret…unless they decide not to! Thus, it pays to READ CAREFULLY any proposed NDA before you sign it. Regardless of whether the title says “Non-Disclosure Agreement” the agreement may provide you with little or no rights.
2. Why won’t they sign an NDA?
Simply put, when you sign an NDA, you are signing a CONTRACT, and any contract may obligate you to perform certain acts. More importantly, for each contract you sign, you are exposing yourself to potential litigation liability for breach of contract.
Thus, as a large company, if you sign hundreds or thousands of NDA contracts, you are incrementally exposing yourself to more and more liability. In a country where you can get sued for serving hot coffee, the odds of getting sued for signing all those NDA’s is pretty high.
So there is no point in a large corporation agreeing to sign an NDA with a solo inventor, unless the NDA is one of those bogus “disclosure agreements” referred to above.
If you think about it, it makes sense. And if you were to advise a company, you’d advise them NOT to sign an NDA. For example, suppose you represent a carmaker. Most of the ideas submitted will relate to cars. If your client signs all these NDA’s with potential inventors, chances are, one of them will submit an idea similar or identical to an idea already under development in your client’s lab. You’ll end up getting sued, as the inventor will claim you “stole” the idea. Better off to advise your client NOT to sign any NDA’s.
Venture Capitalists (VC’s) historically have refused to sign an NDA, and in fact, to ask them to do so is considered an insult and a sure way to put an end to your “elevator pitch”. Again, since VC’s listen to hundreds, if not thousands of invention pitches over the years, the chance that they will hear the same idea more than once (or a similar idea) is pretty great. If they sign NDA after NDA, they slowly paint themselves into a corner, to the point where they cannot back any new idea without the chance of some previous inventor claiming a breach of an NDA.
Frankly, the proposition of an NDA is a bit absurd. Someone comes to you and says they want to tell you a secret. BUT, before they will, they want you to sign a contract agreeing to draconian consequences if you tell the secret to anyone else. Suppose the secret is not all that great? Suppose everyone already knows about it, or more to the point, someone in your company does? It really is a risk not worth taking.
So, there are various good reasons why people will refuse to sign an NDA. If you think about it, chances are, you’d refuse to sign one, too!
3. So What Can I Do?
Again, I can’t tell a client what they should or should not do. But I can advise them of their options and the possible consequences.
The first option is to walk away. Try to find another vendor or company that IS willing to sign your NDA. This might not be a workable option, as there might not be a lot of companies willing to sign an NDA. Moreover, if you walk away, there is no chance of getting your invention built, licensed, or promoted. If you want to play, and they have all the marbles, you might not have a choice here.
The second option is to rely upon your Patent rights or other intellectual property rights. This presumes you have a Patent on your invention or a Patent Pending, and that such Patent was competently drafted and will provide claims of sufficient scope to protect your invention. The downside to this is that you might not have any rights until the Patent issues. Moreover, if the Patent is not sufficient in scope, a company might be able to design-around your Patent claims and avoid paying you any royalties at all.
Both paths are fraught with RISK. But risk-taking is what business is all about. You cannot make money (or develop an invention) without taking large risks. The best you can hope to do is MANAGE risk, by trying to use an NDA and by getting your invention Patented. But you cannot avoid risk entirely.
4. Will My Invention Become “Public Domain?”
This is a tricky question, and one that illustrates why most companies refuse to sign a real NDA.
Suppose you come up with an invention and file for Patent protection. The Examiner does a search and discovers that your invention was actually invented by someone else in 1935. Your Patent Application is rejected, and you get no Patent.
Your invention does not “become” public domain, because in fact, it already was. Thus, if you rely upon Patent protection alone (with a pending application) and end up with no Patent, you have no protection for your invention. But on the other hand, if someone else already invented it, you weren’t entitled to any protection to begin with.
However, if a company signed an NDA, they might still be liable. They would have to prove in court what the Patent Office already proved – that you were not entitled to any rights to the invention in the first place. This additional level of proof is an additional burden to any company signing an NDA, which is one reason they prefer to rely upon Patent rights.
To add insult to injury, if you invention is not Patentable, the company who signs your NDA might find themselves unable to use your invention, while other companies (who did not sign NDA’s) are free to copy your unpatented design. That’s the Catch-22 of the NDA. If the company who signs your NDA produces your invention and pays you a royalty, others (who didn’t sign and aren’t paying you royalties) are free to make the product with impunity – unless you can get a Patent.
So, yes, there is a chance your invention could become “public domain” if you do not use NDA’s before disclosing your invention. However, if you are not entitled to invention protection from a Patent, chances are, you won’t get much protection from an NDA – as your invention is “public domain” anyway.
5. A Real-World Example
A client comes to me with an idea for an invention. We submit an Invention Disclosure Document to the Patent Office to “date stamp” his date of conception. We file a Provisional shortly thereafter, and within one year, a formal Patent Application.
In the interim, he wants to market and develop his invention. He approaches a model maker who is in a similar line of business and asks him to sign an NDA. The model-maker refuses. What is he to do?
I advise my client of the potential consequences and he decides to go ahead without an NDA. Once the model maker sees the invention, he is skeptical that it will work, and even asks my client to sign a release, releasing him from any damages to 3rd party equipment should the device fail. Obviously the model-maker doesn’t think much of my client’s invention!
But once the model is complete, it turns out to be a smashing market success. The model-maker starts selling it himself and telling anyone who will listen that he invented it! More than a year after our filing date, he files for his own Design Patent on the invention.
Meanwhile, my client struggles with a recalcitrant Examiner who stubbornly refuses to allow the Patent. After an Examiner Interview and some amendments, he finally allows my client’s Patent – over a year after the model-maker gets his.
A disaster story? Hardly. The model-maker is now over a barrel, so to speak, as he clearly “swiped” my client’s invention and moreover fraudulently Patented the invention. The invention is now widely in use, and my client’s Patent, now issued, can collect a lot of royalties from various infringers.
If my client had kept quiet about his invention and it was never adopted in industry, no one would be using it, and obtaining royalties from the Patent would be difficult to do. Sometimes it is a good thing when people infringe. In fact, you should hope that people do. You can’t sue a non-infringer, and a non-infringer has little reason to take a license.
So you see, even in this “worst case scenario”, where someone not only refused to sign an NDA, but tried to steal and sell the invention, things worked out OK for the inventor. Had the inventor resorted to secrecy to conceal his invention from the world, chances are he never would have made a dollar on it.
6. Some other NDA questions
So why do people use NDAs? I mean, SOMEBODY has to be using them, right?
Well, this is true. Some smaller companies are willing to sign NDAs with solo inventors, as they are eager to obtain new concepts and ideas. Perhaps they are also more willing to take risks (risk being sued) as they need a ‘leg up’ on the competition.
Large corporations also use NDAs, typically with suppliers and the like. Since they have leverage with such suppliers, it is not hard to get them to sign an NDA. Also, such a supplier might not be able to get any business from companies if they are known as being loose-lipped.
But outside these limited areas, NDAs are largely ignored. And the NDA can often be an impediment to business. It was the NDA that caused Microsoft to be what it is today. IBM originally approached Bill Gates to write the “DOS” program for the IBM PC. Gates turned away the work and referred IBM representatives to the inventor of the then-dominant CPM operating system. After days of negotiation over the terms of IBM’s NDA, IBM representatives got fed up and said “Let’s go ask this Gates fellow again!”. And the rest, as they say, is history. People can get so focused on things like NDAs that they lose site of the big picture.
Can an NDA can “toll” the bar date under 35 USC 102(b)? Under 102(b), you have one year from the date of first use, sale, offer for sale, or publication, to get your invention on file – or it becomes public domain.
If you disclose your invention to a 3rd party under an NDA, does this trigger the one year filing “clock” under 35 USC 102(b)? The answer is a qualified “maybe”.
Strictly speaking, the best answer is to file your Patent Application as early as possible, so you don’t have to make such grey-area judgment calls. Whether a disclosure under an NDA qualifies as “public” disclosure could depend upon a number of circumstances and facts. For example, an offer for sale under an NDA is still an offer for sale. I don’t think an NDA can stop the clock for you there. However, sending out a prototype part to be made by a vendor under an NDA might not be considered a “public” disclosure, as this is still part of the inventing and development stage.
To be on the safe side, I would suggest you file early. You never know what a court will say on the matter, and relying on NDAs to delay filing your Patent Application is never a sound idea.
Why do so many “inventor help” books recommend getting someone to sign an NDA? I am not sure of the answer to this one. Some of these books (and websites) suggest that you can forego the Patent process and instead “protect” your invention with Non-Disclosure Agreements. I disagree.
Sure, it would be great if you could get a company to sign an NDA and then sue them under that NDA if they produce your invention. But as I noted above, the odds of this happening are slim. And there is something unwholesome about using a contract to “trick” a company into paying you royalties for an invention, which, once manufactured, will become public domain.
Should my Patent Lawyer sign an NDA? When I started my practice, I told potential clients that if that made them feel more comfortable, I was more than happy to sign an NDA. Lately, however, I have been backing away from this policy, merely because it seems duplicative and time-consuming. If a client doesn't trust their Attorney, it is not the basis for a good Attorney-Client relationship.
I am nor aware of any Attorney, Agent, or even Invention Broker who has made a business of stealing ideas from inventors. The reasons for this are multiple. To begin with, a Patent Attorney is licensed with the Patent Office, and the State Bar where they practice. If an Attorney were to "steal" an idea, he would face disbarment and lose his livelihood in short order.
Second, most inventions never amount to much – maybe 90% or more. So stealing inventions is a pretty poor scheme. This is why crooked invention brokers want to steal just your money – there is little or no profit in stealing inventions. In order to make money from an invention, you generally have to spend a lot of time, effort, and money promoting an invention, and for a crook, this is just too much work.
Finally, stealing inventions would seem to be a pretty dumb crime. If an inventor has properly documented his invention by writing down an invention disclosure, having it signed and dated and witnessed, he has established a paper trail that any invention thief would be hard–pressed to overcome. It would be suspicious, to say the least, for an Attorney to claim to have invented something immediately after talking with an inventor who claims to have invented the same thing!
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So what should you do if someone refuses to sign your NDA? I can’t tell you for sure – that’s a decision you have to make on your own. However, I can tell you that at some point along the line of invention development, you have to engage in risk-taking. And at some point, your invention will be publicly disclosed (otherwise it will never generate money). Relying upon secrecy and NDAs to “protect” your invention will rarely result in your making money from the invention. While you may be able to get one company to sign an NDA, once the product is public, their competitors are free to copy it. You are better off to get a Patent for your invention, rather than try to trick people into signing contracts.
