Watch Your Mouth!

If you don't want to lose the rights to your idea, don't talk about it--without a nondisclosure agreement, that is.
Magazine Contributor
8 min read

This story appears in the August 1999 issue of Business Start-Ups magazine. Subscribe »

With whom have you shared your great idea? Your best friend? Your spouse? A consultant or manufacturer? If you've told any of these people, watch out! If they didn't sign nondisclosure agreements, your loose lips may have sunk your ship to future fortune.

The laws regarding idea disclosure have become more defined over the years. Today, showing or telling someone your idea without proof that it was shared in confidence can be very risky. Lacking evidence to the contrary, the U.S. Patent and Trademark Office will consider that revelation a public disclosure and the start of your idea's one-year countdown: From the time you share your idea, you have one year to file a patent application (regular or provisional). If you don't, your idea will no longer be protected and you'll lose your rights to it. And if you had hopes of protecting your idea worldwide, forget it. Many foreign countries (such as Taiwan) require that your patent application be on file before any public disclosure is made.

That being said, there are some things you can do to protect yourself if you realize you disclosed your idea prematurely. First, you can run to everyone you've shared your idea with and tell them you shared it in confidence. As long as they haven't told anyone else and agree to hold the information in confidence, your idea will be protected. An even better solution is to have each person you shared your idea with sign a confidentiality or nondisclosure agreement.

What are these agreements? Confidentiality agreements, nondisclosure agreements (also called NDAs) and confidentiality disclosure agreements are all essentially the same thing: a contract between you and someone else that prohibits that person from sharing certain information except under specific terms outlined in the agreement.

These agreements come in many flavors, and therein lies the rub. If your agreement doesn't fit the intended situation, it could be worthless. "Poorly written and inappropriate NDAs are a big problem," says Robert M. Chiaviello Jr., an intellectual property attorney at Baker & Botts LLP in Dallas. "Addressing legal issues associated with do-it-yourself NDAs is an area where more and more patent attorneys are spending their time." The lesson to be learned: Don't assume one NDA will fit every situation.

Tomima Edmark, the woman famous for her Topsy Tail invention has now turned her creative talents to the competitive retail arena of intimate apparel, HerRoom and HisRoom.

NDA Specifics

A legally binding NDA must include the following: consideration, description and procedure. For an agreement between two parties to be binding, both sides must benefit; this is called consideration. Otherwise, the agreement could be considered coercive. The consideration might say something like, "I, the inventor of ABC, am disclosing my idea to XYZ Co. for possible funding or commercialization."

It's also critical to define what's "confidential." If it's not made clear, the other parties could later claim they didn't know what they had been told was to be held in confidence. To simply say the entire meeting should be considered confidential isn't reasonable either. The easiest solution is to state that everything that's to be kept confidential will be deemed as such. Then you need to make sure everything you show the other party has the word "confidential" on it.

How the other party will use the confidential information is identified in the procedure section. A phrase such as "This information is being shared to procure a manufacturing bid" is a typical way of expressing this idea.

If you don't want your information copied or distributed, the procedure section is the area in which to make this known. And it's also a good idea to specify what's to be done with the materials once they've been used for the purpose specified. Requesting that all confidential items be destroyed six months after the date of the NDA is one option.

Smart Business

Who should you make sign an NDA? Just about anyone you bring in on your little secret.

  • Family and friends. Generally speaking, it's not necessary for your immediate family members to sign an NDA. However, your uncle, brother-in-law or cousins are another matter. To be safe, it's best to have them sign some kind of NDA.

The most common compensation offered in family situations is one dollar. A family member signs the agreement, and you in turn compensate him or her with one dollar. The same NDA you use with your family can also be used with friends and acquaintances you aren't doing business with.

  • Business associates. Showing your idea to people or companies that might help you with it is another matter and requires a different NDA than the one signed by friends and family. Their consideration will be the opportunity to do business with you. For example, you show your idea to a plastic injection molding company so it can give you a quote on building a mold. Its consideration is the opportunity to sell you a mold. If you share your idea with a consultant, the consultant's consideration is possible consulting fees.

In these cases, consideration is more clear cut. In fact, courts have a tendency to designate such disclosures made without the signing of an NDA as confidential since it's necessary to speak with such people to get an idea off the ground. But it's still better to be safe than sorry and get an NDA signed.

  • Buyers. Asking a potential buyer of your idea to sign an NDA is problematic. Let's say your idea is for a new type of watch. To ask a potential buyer who is a watch manufacturer to sign an NDA will probably bring a swift end to your meeting. Chances are, they have a research and development department working on new watches all the time. If they sign your NDA and your idea is something they're already working on, they've just precluded themselves from their own idea.

A more likely scenario in this situation is for the watch manufacturer to ask you to sign a nonconfidential agreement. Such an agreement typically states that you agree to disclose your invention on a nonconfidential basis and rely only on the patent laws to protect your interests. This is why it's so important for you to file for a patent.

Sound Advice

"An NDA is only as good as the person signing it," says patent attorney N. Paul Friederichs III of Angenehm Law Firm Ltd. in Coon Rapids, Minnesota. "An NDA signed by a person with low integrity is of little value." Friederichs adds that inventors' risks are compounded because you can't monitor what the disclosee really does with the confidential information.

So keep your brainchild to yourself as long as possible. And when you reach the point where you must share your idea with those who will help you make or buy it, do some homework on the other party before disclosing any information. Get referrals from associates, check the Better Business Bureau for complaints, determine whether the company has been involved in lawsuits, and talk to current and former clients if possible. This won't eliminate your risk completely, but it's still the best way to avoid disreputable companies.

When you meet with the company's executives, ask for a card from everyone in the room; then at least you have some evidence that you met them. And write a thank-you note after the meeting. Be sure to include the place and date of your meeting, the people present and any follow-up actions mentioned. Make a copy for your files, then send it. This note can later serve as an uncontradicted record that you demonstrated your idea to the party.

Balancing Act

An inventor with a nonpatented product must walk a very fine line. If your paranoia is too severe, your stringent attempts to safeguard your idea will turn off other parties. But if you're not careful enough, you could lose the rights to your own idea.

Don't be penny wise and pound foolish when it comes to NDAs. Hire an attorney to write them for you. If you think that's too expensive, write the NDAs yourself and have your attorney edit them. But remember, your idea could be your future. Invest in it wisely.

Before you sign on the dotted line . . .

Make sure your nondisclosure agreement (NDA) meets these standards, or it won't be worth the paper it's written on:

  • The title of the document must match its contents.
  • The NDA must be appropriate for the party (i.e., family and friends or business associates).
  • When dealing with business associates, the person signing the NDA must be a designated officer of the company.
  • Consideration must be exchanged between parties.
  • The NDA must be valid where you intend to do business. An NDA drafted in one state may be invalid in another.

Next Step

The following Web sites contain sample NDAs for you to view. These documents are only examples; discuss any NDA document with your attorney before activating it.

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