At some point in the startup formation, entrepreneurs often have to share their concepts with potential investors or customers. For startup companies that are based on new technological innovations, the prospect of another company learning about and potentially stealing their ideas is a very reasonable possibility. This article discusses some of the pros and cons of non-disclosure agreements versus filing patent applications.
There are at least two methods of protecting confidential intellectual property rights: Non-Disclosure Agreements and under patent law. In general, non-disclosure agreements (NDAs) are contracts between two or more parties in which parties agree to hold information confidential. Often, NDAs may be required in the context of an employment or independent contractor arrangement where the employer want to ensure that employees are warned about trade secrets or confidential matters.
The use of NDAs with potential customers and investors may be more problematic. Often people or companies who review ideas or business plans on a regular basis do not sign NDAs as they may fear legal liability for even an appearance of impropriety. There may also be issues of ownership of concepts if meetings may be later perceived as being brain-storming sessions among multiple parties. To be clear, having an enforceable, well-written NDA may have benefits and may provide another legal means to enforce confidentiality.
Entrepreneurs may also rely on patent law to protect their ideas and concepts. The process for obtaining patent protection is well beyond the scope of this article, and persons should seek the advice of legal counsel. Let’s consider how NDAs and patent laws may provide protection.
Suppose an entrepreneur A is approaching angel investor B. Investor B signs inventor A’s NDA, and A discloses his invention to B. No deal is reached, but inventor A later sees his invention being produced by another company C owned by investor B. A sues B in state court. B claims that NDA is invalid and that B contributed most of the ideas during a joint brain-storming session. The court has to determine if the NDA is enforceable, that the subject matter of the invention was covered by the NDA, and determine the damages caused to A if any.
Suppose that the entrepreneur A also filed a patent application with the US Patent and Trademark Office, and that the USPTO determined that the patent application was patentable and issued a patent covering the inventive concepts. As before, no deal is reached and A learns that company C is manufacturing a product infringing on A’s patent. Here A can sue company C in federal court to exclude C from manufacturing the infringing products. A may also sue C for willful infringement seeking damages. In this scenario, because A filed the patent application before meeting with B, A has stronger evidence of the ownership of the inventive ideas. In this scenario, A may have recourse under both state laws for the NDA as well as federal laws for patent protection.
This article is not meant to provide legal advice, but rather to inform. For legal advice, please seek the advice of legal counsel who fully understands your circumstances.