Is an NDA a Good Substitute for a Patent?
What is an "NDA"? N.D.A. is an acronym that stands for "Non-Disclsoure Agreements". They are sometimes called "Confidentiality Agreements". In sum, they are agreements by which people or companies agree to keep information confidential, and not tell others the secret information they discuss.
What is the relevance to patents and inventions? One of the most common things I am asked is whether a person is safe to pitch their idea to a company if they get them to sign an NDA. If you are wondering that as well, let's take a look at how things might play out if you did tell a company your idea, and then later saw your product on the market. Not a fun thing to imagine, but when it comes to ideas and inventions, following this scenario is probably the best way to understand what NDAs are good for and what they are not good for.
First, it is important to note that a Non-Disclosure Agreement is a contract. And contract law is an entirely separate field from patent law. In fact, how contracts are interpreted is a matter of state law, and thus will vary state to state. So while I am fully qualified to discuss matters of patent law (which is federal, and thus the same throughout the United States), depending on where you are located, I might not know the details of how a contract would be interpreted by your state courts. And as always, my purpose in writing articles is not to give legal advice, but to inform. When you need legal advice, seek the competent advice of legal counsel who is fully apprised of the facts and circumstances in your situation.
Fortunately, the principles we are going to discuss here are not about the details, or about specific advice. What will be discussed are the general principles and strategies that will help you understand when NDAs are useful, when they are not, and when relying on an NDA could be downright harmful.
First, let’s consider the possible outcomes if you used an NDA versus patenting your concept. Let's imagine you have a new concept/idea/invention today, and a couple of years from now you see that someone else has put it on the market. I know - you don't want to think about that. But let's use it as an example to understand the difference between using an NDA and patenting what you have.
You go to XYZ company and have them sign an NDA. In the NDA they agree to keep everything you show them about your concept confidential. They agree that they will not use this information for their own benefit, but solely to evaluate the possibility of working with you.
Then, imagine that two years later one of these two things happen:
1. You find out that XYZ has put out the same product idea you discussed with them. Now assuming that you can prove what you showed them after the NDA was signed, and assuming the NDA was written so that it is clear they violated their agreement, you can sue them - probably in state court - for "breach of contract". That is, you would have the opportunity to prove that they broke the contract by not keeping your idea confidential. Assuming you are able to prove this, the court would probably wrestle with the question of what damages are owed to you. What you would get, would just be whatever damages you can prove resulted from them breaking the contract.
2. You find out that ABC company (who you never told your idea to), has put out the same idea that you had. Unless you can somehow prove that someone at XYZ violated your contract by leaking your idea to ABC, you won't have any grounds to go after ABC. And imagine how difficult it would be to prove that the ABC product was the result of some wrongdoing at XYZ. In reality, however, we live in a very connected world, where people have contacts in a lot of diverse places. Colleagues, family members, former co-workers, etc might be at one of the two companies. Especially in the same industry, it is very possible that people in different companies know each other. Proving that ABC pursued the product idea AS A RESULT OF someone at XYZ violating their confidentiality agreement, however, can be next to impossible. If this is the way it plays out for you, you are likely out of luck! There is a concept in contract law know as "privity". Because of privity, under most circumstances you can only sue people who were a party to the contract. Except in some very specific circumstances, you cannot sue third parties.
You file a patent application that covers your product idea/invention. You go to XYZ company and show them your concept. Some time later, the USPTO (United States Patent Office) approves your patent application, and you are issued a United States Patent that covers your idea.
Then, imagine that two years later, one of these two things happen:
1. You find out that XYZ has put out the same product you discussed with them. Your patent attorney agrees that the product they are producing is covered by your patent. You can bring an action in federal court for patent infringement, to stop them from producing the infringing product and to seek damages. Federal courts are well versed in deciding how to account for the money you are owed for cases of infringement. The measure of damages can include what a royalty should have been if you had licensed the product to the company, lost profits, etc. In addition, in this situation you might be able to prove that the infringement was willful, and the court might award you triple damages. The bottom line is, patent law provides a very clear path for you to recover your losses.
2. You find out that ABC company (who you never told your idea to), has put out the same idea that you had. You cannot prove how they found out about your idea, but it doesn't matter! If it is clear that your product is covered by your U.S. patent, you can sue them in federal court for patent infringement, to stop them from producing the infringing product and you can seek damages. The bottom line is, patent law will provide a clear remedy, where as simply relying on an NDA would not.
an NDA can be useful when the same person (or company) that signed the NDA goes ahead with the idea. When you have a patent, however, and someone replicates whatever is covered by your patent, your prior relationship with that person (or company) matters very little. When you have a patent, even people who innocently and coincidentally come out with the same product could be held liable for patent infringement.
So when are NDAs Bad?
They are bad when you attempt to use an NDA as your sole protection, especially when disclosing your idea to people you don't fully know and trust! If patent protection is available, having even just filed for a patent prior to disclosing the idea to a company will put you in a much better position. Filing the application will establish your priority and can prevent them from attempting to patent it themselves.
The question typically is - whether what you have is patentable. If what you have is valuable, and losing it would be devastating or even detrimental to you or your company, it is worth having an evaluation performed to find out if it is patentable. Over the years, I have helped many people get patent protection. Many clients I was able to achieve patent protection for, had previously thought an NDA was their only option.
So when are NDAs useful, helpful, or good?
Here are a few instances where having an NDA is beneficial:
1. They help honest people to keep things quiet. Imagine that in the absence of an NDA, even an honest but somewhat careless person might tell a friend about the cool idea you told them about. When an NDA has been signed, however, they are more likely to remember that this is supposed to be confidential information, and therefore remember not to blab out it. So even between people that trust each other, a simple NDA is a reminder that keeping this information confidential is serious business.
2. They are a great back up for other forms of IP protection. Sometimes there may be doubt about whether your former joint venture partner is infringing your patent. When an NDA was signed, it can provide additional grounds for showing that their later activities stemmed from early confidential discussions you had with them, and therefore can provide you with additional remedies.
3. They can be helpful in establishing trade secrets. Trade secret protection is used under certain circumstances to protect a company's valuable secrets. When information is stolen, it is important to establish the steps that the company took to keep the information confidential. So having employees sign NDAs obligating them to keep corporate information confidential can be extremely important, if for example, a competitors product can be linked to a leak (whether intentional or inadvertent) from one of your employees.
4. They are helpful when the concept/idea is not patentable, and not easily protected with other forms of IP protection. For example, certain business concepts, marketing or advertising ideas, and the like might not qualify for patent protection. In those cases, signing an NDA might be the best you can do. It will provide a basis for a working relationship, that will help keep the parties honest. Be careful, however, not to jump to the conclusion that the NDA is your only option. Having your idea evaluated, to determine the best available strategies for protection is essential - if what you have is valuable to you.
Final word regarding NDAs and patent attorneys: I am sometimes asked to sign an NDA. My response is that if you have one already prepared for me to sign, I'll sign it. The truth is, both federal and state laws require patent attorneys to keep clients and potential clients' information confidential. So when a patent attorney signs such an agreement it only duplicates an obligation that the law has already imposed upon us. Some patent attorneys are insulted by being asked to sign an NDA. My opinion - if it makes you more comfortable so that we can move the action forward, I have no problem with it.