A potential client recently asked us about the risks when discussing the client’s product idea with a third-party manufacturer after signing a non-disclosure agreement (NDA) or after filing a patent application.
Let’s start with the basics.
What is an NDA? An NDA is a contractual agreement between two parties to keep information secret, not to disclose the confidential information, and to only use the disclosed information for the limited purpose it was disclosed. Importantly, if trade secrets will be discussed, the term of the NDA as applied to the trade secrets should not expire (see blog post).
What is a patent application? A patent application is an application for a patent, that if granted, is enforceable in a country against any party that is using/ making/ selling your claimed invention. A patent application teaches others how to make your invention and – importantly – establishes a priority date for when you “invented” your claimed invention. Priority dates are important because in the U.S., as around the world, patents are awarded to the first filer. Additionally, in certain countries like Europe, an inventor’s right to a patent is contingent on the inventor not making public disclosures about the invention before filing.
Now let’s examine some of the pros and cons of NDAs.
And, let’s examine some of the pros and cons of a patent application.
And, lets see how this plays out in a few scenarios. For these scenarios, I assume that the inventor’s product idea is patentable.
1. No NDA, no patent application filed.
Given that the inventor’s idea is patentable, the inventor should not make any disclosures, until at least an NDA is in place.
Without a NDA, there is no written duty to keep the discussed information confidential. Second, depending on what is said, the inventor may be making a public disclosure and thus limiting its ability to obtain patent protection. Third, if the receiving party is not honest, the disclosures may allow the receiving party to file its own patent application for the invention. Fourth, the inventor most likely will have no effective remedies if the receiving party fails to maintain the confidentiality of the disclosed information.
2. NDA, no patent application filed.
Because there is a NDA, the receiving party has an enforceable duty to keep the disclosed information confidential. However, the mechanics of enforcing that duty reveal its limitations. If the receiving party starts to make a product that embodies the inventor’s idea, then the inventor would have to sue the receiving party for violating the NDA (i.e., breach of contract). Assuming you can prove the breach, you still have to prove your damages for the breach of the contract. Moreover, if another “unrelated” party starts to make a product that embodies the inventor’s idea, then the inventor may not have any claims against them, unless the inventor can show that the unrelated party is working with the receiving party.
3. No NDA, patent application filed.
Without an NDA, there is no written duty to keep the discussed information confidential.
Fortunately, having filed a patent application provides some key benefits. It (1) demonstrates that the inventor understands the value of its invention, (2) provides the inventor with a priority date that will be before any disclosures, (3) permits the inventor to mark its products as “patent pending”, (4) may dissuade dishonest people from attempting to file their own patent application on the invention based on the inventor’s disclosures, and (5) in limited situations, it may permit the inventor to reach back in time before the patent is granted and receive damages. Finally, upon grant of the patent, the inventor can assert its patent against everyone – the receiving party and an unrelated party.
4. NDA signed, patent application filed.
This is the optimal scenario. The receiving party has an enforceable duty to keep the disclosed information confidential, and the inventor receives all of the benefits of the filed patent application.
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As discussed, there are pros and cons to NDAs and patent applications. While each situation is different, there are some important takeaways (when the invention is patentable).
First, a NDA is better than nothing.
Second, a patent application is better than a NDA.
Third, having both would be the optimal scenario.