Unraveling the Nondisclosure Agreement (NDA)
Nondisclosure Agreements, or NDAs, come up all the time in IP law. NDAs have a few very important purposes and functions. Primarily they are used to protect patent and trade secret rights. We’ll discuss how and why we use NDAs today.
What is an NDA?
A nondisclosure agreement is a contract between two parties where one party has information that they will share with the other in exchange for the other party’s promise to protect that information. I say they promise to protect that information because it is not necessarily a promise to never ever share the info with anyone. It might be a promise to keep a secret themselves, but just as often, it is a promise not to share it with anyone outside of a trusted group.
Lets look at an example: Suppose you have developed a great new health supplement. It's a secret recipe that you spent a fortune developing. Its ready to sell, you just need a manufacturer. How do you make sure nobody takes your recipe that you worked so hard on?
The answer is an NDA. The owner of the manufacturing company signs an NDA with you that protects your proprietary recipe. Obviously, the employees of the manufacturer are also going to need the recipe if they are actually going to make the supplement, so the owner will promise that all the employees also promise not to share the info, and that they all have NDAs with the owner.
In short, every NDA describes a boundary between a private group and the public. The info can never freely flow to the public- it is always kept fenced in, even if the private group is quite large.
NDAs almost always include non-use provisions as well. This means that signees will promise not to use any valuable information they receive for their own profit. Again, in the case of a supplement company, if you bring the recipe to a manufacturer, the manufacturer will also have to promise not to make the supplement to sell themselves. NDAs will generally prevent any competition against the person sharing the information.
Where would we use an NDA?
There are two very important uses of NDAs: protecting patents and trade secrets. We’ll begin with a brief introduction to each. A trade secret is proprietary information that is commercially valuable because it is secret. This can include recipes, customer lists, manufacturing methods- anything that gives a commercial advantage and that the owner takes reasonable steps to keep secret from outsiders. A patent, on the other hand, is information that inventors make public in exchange for a limited period of ownership over that information. The policy behind patents is that we want inventors to share their inventions with the public- we want to add to the pool of public knowledge. A key to this concept is that if you invent something and make it public, you only have a year to claim it in a patent. If you wait too long, the government will say that your invention is already public knowledge, and you no longer have any rights over it.
Why do we need an NDA for trade secrets?
We need NDAs for trade secrets because, as previously mentioned, a trade secret is info that is valuable because it is secret. There are actual laws that protect trade secrets from being stolen. Essentially, a competitor can only steal your trade secret if you are taking reasonable steps to protect it. This is where the NDA comes in. The recipe for a Coca Cola is a trade secret. If another soft drink maker were to somehow surreptitiously gain access to it, they would be breaking the law and would be liable for money damages. Coca Cola has to take steps to keep it a secret to maintain that protection though, so everyone who has access to the recipe has signed an NDA. The NDAs are considered a necessary step to keep information secret in the eyes of the law. NDAs form the foundation for trade secrecy protection.
Why do we need an NDA for Patents?
For patents, NDAs are used to extend the time that an inventor has rights to claim the invention in a filing. Often times the invention and development of a technology is a lengthy process. It could take several years of refinement before a technology is commercially viable. Sometimes an inventor will need to find investors, manufacturers, distributors, or other business relationships as groundwork even prior to filing for patent. Under patent law, as soon as you share your invention with the public, you have exactly one year before you lose all rights to file for a patent on it.
The definition of public under patent law is extremely broad: it includes relatives, close friends, and certainly business acquaintances. Therefore, if an inventor is not yet ready to file for patent, but he needs to discuss the invention with other people, what can the inventor do? He can define who is public and who isn’t. An NDA is used to create a private circle. If a business partner has signed an NDA, you can tell her all about the invention, but it would not be a public disclosure. The NDA lets the inventor keep the invention secret, develop it further, and defer filing for patent until ready to do so.
Early disclosure to investors is the single biggest reason I see inventors losing patent rights. It happens all the time. Usually it happens because inventors don't know there are any legal consequence to sharing their invention. Talking to an IP lawyer early is critical if you are considering sharing your invention with others. Similarly, a trade secret is only a trade secret until it gets shared with the public. It is extremely important to consult an IP attorney if you have proprietary information. Sometimes more than just NDAs are required if you have important trade secrets, and a trade secrecy program should be put in place to protect your business.
What do I do if I need an NDA?
NDAs are not all created equal. Different levels of secrecy and rigidity are called for under different circumstances. Additionally, the laws around trade secrecy regularly evolve and are often enforced under state law, so it is important to understand the trade secrecy laws of your jurisdiction if you need protection. IP lawyers handle NDAs regularly so they don't have to be expensive. A good IP attorney can draft a nondisclosure agreement that meets your specific needs and circumstances.