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Is an NDA a Good Substitute for a Patent?

Non-Disclosure AgreementNDA is an acronym that stands for “Non-Disclosure Agreement.” These 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 their relevance to patents and inventions? Inventors frequently ask whether they are safe to pitch their idea to a company if they get the company’s representatives to sign an NDA. If you are wondering that as well, this article will give you an overview of 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’s important to note that an NDA is a contract. And contract law is an entirely separate field from patent law. How contracts are interpreted is a matter of state law, and interpretations vary from state to state. Our firm practices patent law, which is federal, and so is interpreted uniformly throughout the United States. Our purpose in publishing articles is not to give legal advice, but to inform. When you need legal advice, seek the advice of legal counsel who specializes in the relevant field(s) of law and is fully apprised of the facts and circumstances of your situation.

That said, the principles discussed in this article are not about the details, or about specific advice. What will be discussed are general principles and strategies that may help you understand when NDAs are useful, when they are not, and when relying on an NDA could be harmful to your interests.

On to NDAs: Imagine that 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. Let’s consider the possible outcomes if you used an NDA versus patenting your concept:

Scenario 1

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 happens:

1. You find out that XYZ has put on the market the same product idea you discussed with them.
Now, assuming that you can prove exactly what you showed them after they signed the NDA, and assuming that the NDA was written so that it’s 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. Generally speaking, the monetary damages you’d be awarded would be whatever damages you could prove resulted from XYZ breaking the contract.

2. You find out that ABC company (to whom you never told your idea), has put on the market the same idea that you had.
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. So, unless you can prove somehow that someone at XYZ violated your contract by leaking your idea to ABC, you won’t have any grounds to go after ABC in court.

And imagine how difficult it would be to prove that the ABC product was the result of some wrongdoing at XYZ. 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 your NDA, can be next to impossible. If this is the way it plays out for you, you are likely out of luck.

Scenario 2:

You file a patent application that describes in detail your product/idea/invention. You go to XYZ company and show them your concept. Some time later, the United States Patent and Trademark Office (USPTO) approves your patent application, and you are issued a United States Patent that protects your idea.

Then imagine that, two years later, one of these two things happens:

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 owed to patent holders 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, your lost profits, etc. In addition, in this situation you might be able to prove that the infringement was willful. In cases of willful infringement, the court may 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 (to whom you never told your idea), 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 the 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 would provide a clear remedy, whereas simply relying on an NDA would not.

Lesson Learned

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 know and trust fully. If patent protection is available, just having 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 the idea 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’s worth having an evaluation performed to find out if it is patentable.

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 tell others out it. So even between people who 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. If 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 competitor’s 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 by 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: The truth is, both federal and state laws require patent attorneys to keep client’s—and potential clients’—information confidential. When a patent attorney signs such an agreement, it only duplicates an obligation that the law has already imposed upon all patent attorneys. So, if it makes you more comfortable, you can ask a patent attorney to sign an NDA before discussing your idea—but it’s not really necessary.

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