How can I protect my innovative idea against copycats?

How can I protect my innovative idea against copycats? – This may well be the first question to be asked upon conception of an idea. If that question is not answered to satisfaction, the innovation may later be stillborn.

In the pre-digital world, size mattered. In the digital world, it is all about speed. “Speed wins the startups game!” (Howard Tullman, a former CEO of digital startup incubator 1871)

Your innovative concept can only turn into successful business, if you are fast to implement your innovation. In order to be fast, you need support. Support requires sharing. Sharing requires trust. However, while necessary, trust alone may be insufficient. In fact, to rely only on trust, might even be stupid. So, you need a satisfactory answer to that first question: How can I protect my innovative idea against copycats?

In discussions, we hear that question a lot. The answer can be complex, since an innovative concept typically has multiple facets that require different means of protection: inventions, i.e., technical innovation, trademark ideas, design ideas, a business plan, ideas on how to build a supply chain, market intelligence and lists of identified potential customers. Accordingly, in the beginning the innovator faces a challenge of filing for patents, filing for trademark registrations, filing for designs, documenting business plans in detail – to then do what? Ideally, all those people that the innovator needs to talk to should obligate themselves to secrecy. But how can that be achieved?

The author:

Benjamin Fechner is a German patent attorney. Benjamin specializes on startup companies. For more information on Benjamin, visit his personal website.

The law affords protection in the event that the third party acquired a trade secret without permission. However, if you deliberately disclose your trade secret to a third party, i.e., to somebody else, for example, embodied in a product or by way of description, then you don’t have any right to stop the third party from reverse engineering the product or copying the description in order to understand and keep your trade secret.

Fortunately, the law also affords protection in the event that the third party was in breach of a contract. This is why a so-called non-disclosure agreement (NDA) can be important.

What is a non-disclosure agreement (NDA)? An NDA is a contract between parties wherein either one or both parties agree to keep specific information for the other party a secret. An NDA can be used in many circumstances. See the below for a succinct definition of an NDA and an exemplary use case.

Apart from privacy, specifically in business, which information can be covered by the NDA? The NDA can cover any trade secret, i.e., any information that provides a business with a significant competitve and commercial advantage: Technical designs, prototypes, processes, software, recipes, patterns, business plans, supplier lists, customer lists, cost and pricing information, etc.

Initially, the innovator may be all on his or her own. Filing for patents and trademarks may not be an option before money was collected from someone. Therefore, the first step will be to implement non-disclosure agreements with all those people that you require to share your innovation with in order to get started.

That seems daunting! You should be forgiven, if you ask, “Do I really need to protect my secret information by non-disclosure agreements?”

The answer should be “Yes”. Typically, in order maintain the status of a trade secret, the law requires you to take reasonable steps to protect the confidentiality of your know how or other trade secret. For example, the European Union’s directive „on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure“ requires for information to qualify as a trade secrect that this information is subject to reasonable steps under the circumstances to keep it secret. A non-disclosure agreement is such a reasonable step.

Many non-disclosure agreement templates can be found on the Internet. Rather than just adding another template, we shall give a brief summary of elements that a non-disclosure agreement should have, list template clauses and comments for your information.

A non-disclosure agreement (NDA) will typically state

  • the parties to the NDA,
  • a positive definition of what is confidential information,
  • a negative definition of what is excluded from confidential information,
  • the effect of the NDA, in particular, obligations of the receiving party,
  • miscellaneous rather legal provisions, and
  • relevant time periods.

Bearing these elements and our comments in the sidebar next to the template terms below in mind, you can modify the free template clauses to arrive at your own NDA. (*)

7 May 2018, Benjamin Fechner

Footnote(s):

(*) The exemplary template is a so-called one-way NDA. If multiple parties each provide confidential information in an exchange, then the terms need to be adjusted accordingly. You may also simply use an additional one-way NDA that is completed to reflect the reverse flow of confidential information.

Keyword(s): contribution, idea protection, innovation protection, nda, non-disclosure agreement, template

Non-disclosure agreement (NDA)

Important disclaimer: Information related to general legal matter is NOT legal advice. Use the template wording at your own risk or obtain legal counsel, for example, from a qualified practitioner and contributor to startup-together.com !

Comments:

 

1.          Parties to the non-disclosure agreement

This Non-Disclosure Agreement (AGREEMENT) is made by and between

[person A], having its address of business / office registered at [address of person A]

represented by [name and title of signatory for person A]

          – hereinafter referred to as DISCLOSING PARTY –

and

[person B], having its address of business / office registered at [address of person B]

represented by [name and title of signatory for person B]

          – hereinafter referred to as RECEIVING PARTY –

The parties section:

Who should be party to the NDA? Parties to the NDA should be the person who discloses the secret information and the person who receives the secret information. „Person“ can mean, as the case may be, a „natural person“ and a „legal person“. If the party is a company, then the company is a legal person. The legal name stated in the NDA must be correct, i.e., the name must be then one used when the company was incorporated. Sometimes that name gets confused with or forgotten over an abbreviated name that the company uses in trade and business.

2.          Purpose

The DISCLOSING PARTY considers to enter into a development / investment / business relationship with the RECEIVING PARTY based on secret information; and

the RECEIVING PARTY is interested in obtaining information for the PURPOSE of evaluating the opportunity with the DISCLOSING PARTY to enter into the relationship.

The purpose section:

Why do the parties enter into any agreement at all? This question can be important when, for example in a dispute, an interpretation of the NDA is required. Many agreements have a preamble that explains the agreement. However, a preamble may sometimes not be seen to be binding on the parties. For the sake of clarity, we prefer to expressly define the purpose in the agreement.

3.          Definitions

3.1.          CONFIDENTIAL INFORMATION is any information of the DISCLOSING PARTY, disclosed by the DISCLOSING PARTY to the RECEIVING PARTY under this AGREEMENT that at the time of disclosure was of proprietary secret nature.

3.2.          CONFIDENTIAL INFORMATION excludes any information which the RECEIVING PARTY can prove,

(a)          at the time of disclosure is already public;

(b)          is received by the RECEIVING PARTY without obligation of secrecy from a any other person who did not receive the information from the DISCLOSING PARTY;

(c)          was in the RECEIVING PARTY’s possession prior to receipt from the DISCLOSING PARTY;

(d)           is independently developed by the RECEIVING PARTY.

3.3.          EFFECTIVE DATE is the date of execution of this AGREEMENT.

3.4.          CONFIDENTIALITY TERM is a period of [X years] from the date of most recent disclosure of CONFIDENTIAL INFORMATION to the RECEIVING PARTY under this AGREEMENT.

3.5.          SURVIVAL TERM is a period of [Y years] from expiration of this AGREEMENT.

Definitions of keywords:

For the sake of clarity, keywords of the agreement should be expressly defined. It is good practice to place definitions in a dedicated section. In the template text, we write expressly defined keywords in capital letters.

Most important is a definition of what constitutes confidential information. We provide the definition in two aspects: First, from the disclosing party’s point of view (the information is secret …) and, second, from the receiving party’s point of view (… but not, if the information is public anyhow).

The so-called effective date defines the date from when the contract should take effect.

The confidentiality term defines a duration of how long the secrecy of the information should be guarded. In the course of discussions, each provision to the receiving party of a document or other material, provided that it embodies the confidential information, i.e., any new disclosure of information should trigger a new beginning of the confidentiality term.

The survival term of the NDA is a term that defines for how long certain obligations under the agreement live on after expiration or termination of the agreement. Therefore, the survival term is important in order to avoid that the obligation to secrecy expires together with the end of the NDA.

4.          Obligations

4.1.             During the CONFIDENTIALITY TERM, the RECEIVING PARTY shall

(a)              keep secret all CONFIDENTIAL INFORMATION, wherein the RECEIVING PARTY shall use no less than a reasonable degree of care to prevent the CONFIDENTIAL INFORMATION from disclosure;and

(b)              use all CONFIDENTIAL INFORMATION solely for the PURPOSE, wherein the RECEIVING PARTY shall use no less than a reasonable degree of care to keep the CONFIDENTIAL INFORMATION from unauthorized use.

4.2.          The RECEIVING PARTY shall limit access to the CONFIDENTIAL INFORMATION to selected persons as needed, wherein the selected persons

(a)          are obligated to secrecy for the CONFIDENTIALITY TERM; and

(b)          are obligated to use the CONFIDENTIAL INFORMATION solely for the PURPOSE.

4.3.          The RECEIVING PARTY shall

(a)          not reverse engineer or modify any tangible objects that embody CONFIDENTIAL INFORMATION; and

(b)          not file for intellectual property right protection for CONFIDENTIAL INFORMATION.

4.4.          The RECEIVING PARTY shall return all tangible objects with CONFIDENTIAL INFORMATION to the DISCLOSING PARTY, or the RECEIVING PARTY shall destroy such tangible objects upon

(a)          written request by the DISCLOSING PARTY; or

(b)          upon expiration of this AGREEMENT.

Obligations on the parties:

It may seem self-evident that the receiving party should keep the confidential information secret. However, the question is what “keeping secret” or “keeping confidential” actually means. The obligations state a minimum level of care that the receiving party also applies to its own trade secrets.

Further, since personal of the receiving party cannot be bound by this agreeement, instead the NDA requires the receiving party to obligate its employees and others who obtain the secret information to keep that information secret.

Do not forgot that, beyond keeping the confidential information secret, the receiving party should be obligated not to use the confidential for anything but the particular purpose that gives rise to the NDA.

The receiving party should be obligated to return or delete the confidential information. These days, a lot of confidential information is provided digitally and ends up on backup drives.

5.          Rights, no warranties and remedies

5.1. Nothing herein obligates the DISCLOSING PARTY to disclose any particular information.

5.2. The RECEIVING PARTY has the right to refuse to accept any information under this AGREEMENT prior to disclosure of the information.

5.3. All CONFIDENTIAL INFORMATION disclosed to the RECEIVING PARTY under this AGREEMENT shall remain the property of the DISCLOSING PARTY.

5.4. The DISCLOSING PARTY does not make any representation or warranty or accept any liability in respect of the accuracy, completeness or usefulness of the any of the CONFIDENTIAL INFORMATION.

Provisions on rights, no warranties and remedies:

From the disclosing party’s point of view, it is important to keep control of all confidential information both, disclosed (keep the property right) and undisclosed (no obligation to disclose). Also, whatever the receiving party does with the information, the disclosing party should not become target of any claims because of having disclosed the information.

From the receiving party’s point of view, given its obligations to keep the confidential information secret, it is important to be able to stop the flow of unwanted confidential information.

6.          Misellaneous

6.1.    The place of performance of this AGREEMENT is [location]. This AGREEMENT shall be governed by and construed in accordance with the laws of [location]. The court of competent jurisdiction for [location] shall have sole jurisdiction for all controversies under this AGREEMENT.

6.2.    Should any provision of this AGREEMENT be or become invalid or unenforceable, the remaining provisions shall remain valid. In the place of the invalid provision, a valid provision is presumed to be agreed upon by the parties which comes economically closest to the one actually agreed upon; the same shall apply in the case of an omission.

6.3.    Any changes or modifications of this AGREEMENT have to be made in writing. The requirement of written form can only be waived in writing.

6.4. This AGREEMENT takes effect on the EFFECTIVE DATE [dd.mm.yyyy] and expires upon termination by one party or, at the latest, on [dd.mm.yyyy]. Any obligations under this AGREEMENT survive the expiration for the duration of the SURVIVAL TERM.

Misellaneous provisions:

Provided a party has its place of business in a country with a rather reliable system of justice, typically this party will prefer to use a court in that country and to follow the procedural rules of that country’s jurisdiction. Sometimes, for fairness or other reasons, parties agree on using the law of an altogether other country where neither party has any place of business. That looks like a particular ineffective and expensive way to resolve disputes!

Make sure that the agreement won’t get stalled by one clause or provision of the agreement being void for whatever reason. Also make sure that any interpretation of the agreement should be aligned with the apparent interests of the parties at the time they agreed on the NDA.

At least in some jurisdictions, still today, “written” literally means signed by hand. Make sure that such a signature is always required when amendments are made to the agreement.

RECEIVING PARTY

Place: ……………………………………..

Date: ……………………………………..

By: …………………………………………

Name: [                                         ]

Title: [                                           ]

Place: ……………………………………..

Date: ……………………………………..

By: …………………………………………

Name: [                                         ]

Title: [                                           ]

DISCLOSING PARTY

Place: ……………………………………..

Date: ……………………………………..

By: …………………………………………

Name: [                                         ]

Title: [                                           ]

Place: ……………………………………..

Date: ……………………………………..

By: …………………………………………

Name: [                                         ]

Title: [                                           ]

Signatures:

Who should sign the NDA? If signing for a company, the natural person signing the NDA must at least appear to have the powers to bind the company in such an agreement. However, the appearance counts for nothing, if the other party knows for a fact that the person is not authorised. If in doubt, you should request written confirmation from the company to confirm that the person who signed the NDA is authorised to enter into such an agreement with you.

If you are dealing with a large organisation that includes other companies than the one you do this NDA with, you’d rather have the NDA executed for all of those other companies whose employees receive your information, even though this NDA obligates the receiving party to implement NDAs that obligate the other companies to secrecy (Section 4.2. “selected persons”). For example, you meet for a discussion of your innovation with an employee of an international holding company and with an employee of a local subsidiary of that international holding company. In this case, you’d better execute an NDA with both companies, the holding company and its subsidiary.

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