IP Protection Tip #1: Confidentiality

Posted on February 24, 2012

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Article Highlights:                    

  • The single best tactic for protecting one’s intellectual property is to keep it confidential.
  • The best way to obligate a third party to keep certain information confidential is still considered to be the Nondisclosure Agreement, or NDA.
  • If a third party does sign the NDA, then the business should be aware of the limitations of the document.
  • If you want to build value in a trade secret, remember the first rule in confidentiality — don’t tell anyone.

If you do not want anyone to steal your idea, if you do not want anyone to know how much you made, do not tell anyone.  Every time you tell someone information, you increase the chances of the secret becoming common knowledge. Thus, the single best tactic for protecting one’s intellectual property is to keep it confidential.  However, in the business world, this is not always practical since instances when information needs to be shared with potential investors, employees and other third parties can and do arise.

So how do you create a duty of confidentiality? Many intellectual property owners believe that marking a document as “CONFIDENTIAL” and sending it to a prospect is enough to create an obligation on the receiver.  However, merely marking it as “CONFIDENTIAL” is not in and of itself enough to impose such a duty, and it is certainly not the best way to send confidential information.

The best way to obligate a third party to keep certain information confidential is still considered to be the Nondisclosure Agreement, or NDA. A NDA is an agreement between two or more parties not to disclose information that another party provides to them. Inventors use NDAs so they can show the invention to a third party without fear that the other person will take the idea and use it as their own.  Entrepreneurs get investors to sign NDAs so that their business plan remains confidential.[1]

Employees also are often the parties that are creating intellectual property on behalf of their employers.  As such, having employees sign a NDA or confidentiality agreement is crucial in keeping the innovations confidential. In addition, the employee should sign an agreement that states that all intellectual property they create while working for the company is a work for hire, and if not, that the creator automatically assigns ownership of the intellectual property to the company upon creation.

If a third party does sign the NDA, then the business should be aware of the limitations of the document.  These include, but are not limited to:

  •  The NDA is only as good as the parties signing the documents. If the other party breaches the agreement, then the inventor will probably have to file suit to enforce the agreement.
  • The inventor can only enforce the NDA against the party that signed it. This means that it cannot be enforced against a third party to whom they disclosed the information since they were not a party to the contract.
  • It can be prohibitively expensive to enforce NDA agreements.

As you can tell, using an NDA is certainly not a fool-proof method of ensuring confidentiality. One recommendation is to disclose only as much information as necessary to outside parties and choose the recipients carefully. It is not a good idea to disclose to businesses that you directly compete with in the marketplace.

Beyond just the business implications of having your secrets known, if a business wants to assert its legal rights, it has to prove that the subject matter is truly confidential. If you have a history of disclosing the information to people with no regard for confidentiality, your ability to prove that the information is a trade secret may be fatally flawed. The circle of information has been described as a ‘trust tree’ where each participant who knows must be linked to the trust tree by an obligation (whether through contract or by virtue of a relationship, such as an attorney client relationship). If the information gets out of the trust tree, then the information is no longer confidential.

The quintessential trade secret is the Coke formula.  As you think through that, remember that what made it such the quintessential trade secret is the purported lengths – lock and key, etc. — that Coke went to keep that secret. If you want to build value in a trade secret, remember the first rule in confidentiality — don’t tell anyone.

Mike Goodrich
Goodrich Firm, LLC


[1] The use of NDAs in the invention and the investor context is the subject of our next two articles.

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