NDAs - what you should know

Every entrepreneur understands the importance of maintaining control over the brilliant idea driving their business dreams.

What can be done about moving the business forward without losing control of the idea?

A Non-Disclosure Agreement (NDA), is the obvious solution.

However, an entrepreneur should understand the pitfalls of these agreements.

First, if the entrepreneur is looking to patent anything to do with the brilliant idea, once disclosure is made, even under an NDA, the entrepreneur can still loose control of the information.  If the recipient of the information leaks the information, the clock starts ticking on patenting the idea.  Suing the recipient of the information will not regain the right to patent an invention.  There is little that can be done by way of collecting damages because the entrepreneur must prove “lost profits”.  This is not possible when a business is not even off the ground.

If a recipient of information is all too willing to sign an NDA, the entrepreneur should be concerned. 

What should happen, is the entrepreneur should learn about IP and what needs to be done to put in motion an IP portfolio.  Of course, this is expensive if an entrepreneur simply hires a patent attorney or lawyer to do it for them.  The entrepreneur needs to be educated about IP and then decide what to do.

Another pitfall of NDAs is when an entrepreneur has too many of them.  They have expiration dates, after which time, the information recipient is under no obligation to maintain secrecy.  The entrepreneur should understand that the more NDAs that are outstanding, the more watered down their control over the information becomes.

It is important that the entrepreneur, upon a nearing expiration of the NDA, should demand all material to be returned or a promise that they have been destroyed.  This takes contract management.  Without this step, the information is public as far as patents and trade secrets are concerned.

IP Australia has a NDA generator available on its website which should be used with caution. 

IP Australia suggests:

To secure confidentiality, you should get a signed NDA before telling or showing someone else your:

·       Ideas

·       Inventions

·       Designs

·       Plant breeding secrets

·       Recipes

·       Business methods or processes.

This includes when you're working with:

·       Potential business partners, employees or contractors

·       Industrial and graphic designers

·       Manufacturers

·       Stockists and distributors

·       Accountants

·       Financial and business advisors

·       Marketing and PR firms

·       Investors

·       Potential new owners when IP changes hands.

Most companies who agree to see your invention will not even sign an NDA.  Be prepare for that.  If that is the case, seriously consider getting your patent applications filed.

Another issue is what information is defined as confidential information.  This is critical.  For the disclosing party, a very broad definition is best.  However, any savvy organisation will not sign such an agreement.  The definition of Confidential Information that IP Australia proposes is far too broad and is as follows:

Confidential Information means information that:

(a)               is by its nature confidential;

(b)               is designated by the Disclosing Party as confidential; or

(c)               the Receiving Party knows or ought to reasonably have known is confidential in nature;

This term is so broad it includes everything.  Do not use this definition or anything like it.

What should be done is create a schedule attached to the NDA and referenced in it the schedule are items that identify what is to be disclosed, without disclosing the information.  It is critical to keep your disclosing discussion to only those items.  It is then best to follow up any discussion with a summary of what was discussed by way of email, for example.  This way it is clear what was discussed and what was intended to be maintained in secrecy.

Some agreements will state that the disclosing party must follow up the disclosure with an email within 30 days indicating what was discussed.  If your agreement has such a term and you do not follow up withing 30 days, your secrecy is destroyed. 

A recent case in Texas found this exact case, where inventors made a disclosure and did not follow up even though their own NDA included that 30 day term.  The recipient of the information went on to use the trade secrets and made money.  The disclosing party sued and lost because they failed to follow up.

NDAs are useful but should be understood by the entrepreneurs as they should understand all agreements to which they become parties.  It is not enough to rely on a lawyer to do all things for them – while it is beneficial to use a lawyer’s advice.  If an entrepreneur’s business gets off the ground, they will be inundated with contracts.  They need contract management, their NDAs being the first to be scheduled.