Confidentiality Agreements Generally
Confidentiality agreements, also known as non-disclosure agreements or NDAs, are simply contracts between two or more parties where the subject of the agreement is a promise that the information conveyed will be maintained in secrecy. These agreements can be mutual agreements, where both parties are obligated to maintain secrecy, or they can be unilateral agreements, where only the receiving party becomes obligated to maintain secrecy. The former type of agreement is useful when both parties will be conveying confidential information, as with inventor groups. The latter type of agreement is useful when only one party is turning over confidential information, perhaps to a potential investor.
You can use a nondisclosure agreement to protect any type of information that is not generally known. The creation of a confidential agreement is really the creation of a confidential relationship. Generally speaking, such confidential relationships can be created either in writing or verbally, but because a confidentiality agreement is a contract, state law will dictate. Therefore, before entering into a confidentiality agreement, it is necessary to know the particular rules and laws in your state that are associated with both contract law in general and confidentially agreements in particular.
Before going any further, it is critical to point out that, while in some jurisdictions, the verbal creation of such a relationship is permissible, you should never anticipate or rely on the possibility that a court will enforce a verbal agreement. Even if you are in a jurisdiction that would allow the creation of such a contractual obligation, there is simply no way to reliably prove the existence of a verbal agreement. Similarly, some jurisdictions will allow confidentiality agreements to be formed as the result of certain actions or activities that suggest an agreement has been reached. Again, you should not anticipate that a court will interpret action to mean the presence of an agreement. You should always obtain confidentiality agreements in writing. Do not put yourself in the situation of needing to argue that a verbal agreement or certain actions act as a confidentiality agreement. You should always get the agreement in writing, even if you need to water it down slightly in order to get a signature.
First, using a confidentiality agreement provides important advantages with respect to U.S. patent law. For example, one cannot obtain a patent if the invention was described in a printed publication in this or a foreign country more than 1 year prior to the filing of a US patent application. If an inventor were to circulate a written description of his or her invention at a conference or other presentation, this would likely be considered a printed publication and may ultimately prevent patenting. An appropriate confidentiality agreement can be used, however, to prevent the written description from being considered a publication.
Second, if you enter into a confidentiality agreement with another who then subsequently uses your secret without authorization, you can request a court to stop the violator from making any further disclosures, and you can sue for damages.
Third, a confidentiality agreement is critical when the information being conveyed is or consists in part of a trade secret. Trade secrets are only protected under state law to the extent that the information remains not generally know (i.e., secret). To ensure that trade secrets remain protected, one must extract a promise to keep the secret confidential prior to disclosure.
The use of nondisclosure agreements has become commonplace in the business world today. Nevertheless, it still remains difficult in many instances to get another to sign and agree to the terms of a routine confidentiality agreement. It is particularly difficult when an inventor, entrepreneur, or small business is attempting to locate financing. This is because a confidentiality agreement exposes the party who has agreed to secrecy to potential liability where no liability existed previously. This is compounded by the fact that venture capitalists and funding brokers commonly receive many proposals, some of which may be quite similar. If they sign a confidentiality agreement and then decide not to invest with you but with a similar proposal instead, you will feel as if they have stolen your idea and secret as well as violated the agreement. Furthermore, under trade secret law, any individual who innocently discovers or otherwise innocently comes across your secret information may use the information without penalty. What all of this means is that the investor may find himself facing a law suit that may seem more meritorious than it really is. In short, investors do not want to undertake liability where none would otherwise exist.
Thus, when approaching investors, it is important to understand this fear. You may have to agree to disclose information without an agreement (which can have significant negative consequences) or just accept the fact that sources of funding will be quite limited. One way to get around this problem is to file a patent application detailing your invention and then attach a copy of the patent application to any business plan or other materials submitted to potential investors. This is appealing because once a patent application has been filed, you have locked in your priority date. Even if an unscrupulous investor were to try stealing your invention, you would be able to prevent that, assuming of course that a patent ultimately does issue. Before going this route, it is probably a good idea to consult a patent attorney to discuss the potential pitfalls that might lie ahead when charting this course.