Confidentiality agreements can protect the idea behind your product or service
By Howard A. Caplan
Partnering with a larger company can be a powerful way to positively exploit acommercial product or service, but you must take care to protect the idea behind the product or service. Premature or non-protected disclosure can allow the “partner” to proceed without you.
Limited disclosure of ideas or information occurs in a number of business areas. One of the more common is protecting your idea when pitching it to another party. Your goal is to sell or license the idea, which may be a product or service provided by you or your company.
Licensing is more common because of the difficulty of determining a realistic value before the idea is commercialized. Another common circumstance is when a prospective buyer of a business wants information from the seller. The buyer is doing his due diligence investigation. The seller wants to protect the buyer from using the confidential information if there is no sale.
In either case, you would use a confidentiality and non-disclosure agreement to protect against the improper use of your information. This agreement is only a prelude to the ultimate contract you will enter into for the actual commercialization of your idea or the sale of your business.
Protecting your pitch
How do you protect your idea when pitching it to a company that could use the idea in a commercially viable manner?
Perhaps the most important thing to remember when you have an idea that you think is valuable is that your amazing idea may only be amazing to you. Approaching companies with ideas can be extremely difficult. Many companies, more so larger companies do not readily accept ideas from outsiders or have strict rules about how outside ideas are received.
For example: Your lawyer speaks with the head of U.S. research and development for a large pharmaceutical company about presenting your idea. The director seemed to express an interest though he never gave your lawyer an address to send a confidentiality agreement to.
Yet suppose he had given your lawyer the address. Then your lawyer would have sent him an agreement that would provide for the limited disclosure of your idea, but would not contain the idea. The agreement is often called a confidentiality and non-disclosure agreement (CNDA).
The CNDA is how you protect yourself from unauthorized use of your idea by the other party. Some companies that accept outside ideas will accept your CNDA. Others will modify it, and others will use theirs.
Many companies that do accept outside ideas will only do so from your attorney or certain other professionals. Companies have many reasons for this limitation. One is protection if they are working on a similar idea. Another is the expectation of dealing with a non-impassioned party if discussion ensues. And another is avoiding infringement claims.
Depending upon the nature of the idea and the company you are approaching, you may be better served by a one- or two-step approach. If the company is interested in using your idea then you will enter into a sale or licensing agreement.
Some important points to consider in either a one- or two-step approach are:
•How to disclose enough information about your idea for the company to decide if it has an interest in your proposal;
•If the company is interested, then when and how much more of your idea will you disclose. If appropriate, when will you provide product samples;
•How long does the company have to let you know if it is interested in pursuing your idea, not pursuing your idea, or advise you that it has already been pursuing a similar idea;
•Limitations on the company’s use of your information to assess the idea;
•Protecting you if the company claims no interest or that it is pursuing a similar idea, yet actually uses your idea;
•The next step or steps if the company is interested in your idea;
•The application of patent, copyright, or trademark laws to your idea;
•What state’s law will apply if a dispute arises and where that dispute can be addressed; and
•If you need to agree to keep confidential any information from the company.
Prepare a contract
Whether you sell or license your idea is less important at this stage then getting your foot in the door. If the company is interested in using your idea, it is paramount to have a solid, well-drafted contract to protect your rights.
Success can be measured in two ways: one is contracting for the positive commercial exploitation of your idea, the second is if the idea is a commercial success. But a commercial success alone may be of little comfort.
There are many instances when a successful product did not bring success to the person with the idea. A good contract is crucial.
For example: In two high-profile instances, the person who sold or licensed the idea to the company (or the persons later owning the licensee rights) prevailed in court because they had well-drafted agreements.
In one case, Peter Roberts was wrongly told by a Sears Craftsman Tool Division officer that his quick release ratchet would be a side line. Mr. Roberts sued Sears and won over $8 million. In another case, the licensee of Listerine won the right to continue receiving royalties even though the trade secret formula had become public knowledge.
The right deal
For every high-profile case there are many modest cases, and for each of these cases there are many successful ongoing license agreements. This last point merits attention. You can sell your idea for a set fee. Or perhaps the idea is such that you can sell a product or service to the company. You can license your idea and receive an on-going royalty.
The royalty can be for a specified time or perpetual, as in the case of Listerine. Or you can both sell the idea and receive a royalty. Again, for every successful Slinky or disc operating system there are hundreds of marginally profitable deals.
In conclusion, the only certain way to protect your idea is to have restraints on the party whom you expose the idea to. The best method of placing restrictions is a CNDA that sets the boundaries for when and what you will disclose, the scope of investigation by the other party to assess interest in your idea, next steps if there is an interest, and remedies if the other party uses your idea without authorization.