Non-disclosure, non-solicitation and non-compete agreements

Scenario 4: Non-disclosure agreements

You are an entrepreneur with a brilliant idea. You want to share your confidential invention with Allegiant Inc. to see if you can form some sort of joint venture with them so they can help bring your invention to market. You have not filed for any patent protection yet, so you don’t want to leave any documents with them and you want to discuss the information verbally.

You know you need to enter into a confidentiality agreement with Allegiant Inc., and Allegiant suggests that you sign their standard non-disclosure agreement (NDA).

While reviewing the NDA, you notice specific clauses that cause you some concern. Some of the potential issues that you may want to speak to an expert about are identified below.

DEFINITION OF CONFIDENTIAL INFORMATION

In the agreement, the only information that will be considered confidential is information that is presented in writing and is explicitly marked as confidential.

You are going to be sharing information only verbally, so the current definition wouldn’t apply to the disclosure you are going to make and that you want to protect. In other words, you have to be careful about how the term confidential information/trade secrets is defined in the clause. You should consider amending this clause to ensure that the secret information you share verbally is protected. Alternatively, you could modify your approach and commit to writing all of the information you want protected.

TIME DURATION

In the agreement, the obligations of confidentiality apply for a period of six months from the date of disclosure, but you know that it is going to take more than12 months to get your product to market even if everything gets rolling right away.

The duration of protection is likely too short. The term has to be long enough to give you adequate protection. In reviewing a provision that defines how long the information will be maintained as confidential, careful consideration should be given to the applicable term of protection. For example, some experts suggest that you stipulate a finite term of protection for information you deem to be appropriate to protect your confidential information, given its nature and the nature of your industry (for example, two to five years are common benchmarks) and then you identify, separately, what your trade secrets consist of and stipulate that, with respect to your trade secrets, the term for protection lasts for as long as the information remains a trade secret.

WARRANTIES

There is a provision that says:

Each party warrants and represents that the information shared and any information which can be manufactured or marketed based upon the information which is shared will not infringe on any third party intellectual property rights.

You might want to be careful about agreeing to warranties in the NDA or agreeing to other ancillary obligations.

For example, a warranty of this kind can be dangerous because you often cannot be sure that an invention or other materials you are relying on do not infringe on someone elses IP rights. Agreeing to such a commitment can create unnecessary liability for you. Another common provision that you might want to be careful about is one that says that you will not sue the other party, even if they are infringing on your patents or other forms of IP (commonly known as non-assert clauses). Generally, it is preferable to negotiate these sorts of provisions in transactional documents other than NDAs where you can spell out the details of these obligations and potentially limit your exposure through more balanced commercial terms.

PROVISION ON COMMERCIALIZATION

There is a provision stating that if the party proceeds with commercialization of the product, each party reserves rights in their own confidential information/trade secrets, provided, however, that the proceeds from any commercial offering of the product will be divided equally as between the two parties.

You would be right to be concerned about delineating how revenues will be shared between the parties in an NDA.

Typically, NDAs do not cover important commercial rights and obligations such as payment obligations, indemnities, termination and so forth. These things should be addressed in transactional agreements that spell out the commercial rights and obligations and hence more exhaustively define the parties’ rights and obligations. These agreements may incorporate the NDA by reference so that it is clear that what is exchanged in the context of the commercial relationship is covered by confidentiality obligations.

SIGNATURE BLOCK

On the signature block, the entity that is listed is Allegiant USA Inc., and the person who is going to be signing the NDA is Michael Jones, a summer intern at the company who has been setting up some of the meetings.

You should make sure that you are signing the agreement with the party to whom you are making the disclosure (in this case, you are disclosing to Allegiant Inc. and not to Allegiant USA Inc., which is the party that is named in the NDA). You should also make sure that the person signing on behalf of the company has full authority to legally bind the company. In this case, the fact that a junior person is being asked to sign the NDA should be of concern to you.

If you are dealing with a company that has a multitude of entities, it is preferable for you to enter into the agreement with the party that has the most assets that you can go after, should there be a breach of the NDA.

You might also want to make sure that all of the affiliates of the entity that you are dealing with are covered by the NDA and that you have identified an appropriate recourse or recourses if any affiliate breaches the obligations of confidentiality.

Let’s look at a different scenario

What if Allegiant Inc. doesn’t want to enter into an NDA at all?

You may have to consider filing for a patent, limiting your discussions to information that is public knowledge or of limited concern to you, or taking the risk and trusting them.

Last modified: Friday, 4 September 2020, 10:53 AM