From the Nolo eCommerce Center

If you’re trying to license your invention, you run the risk that someone will rip you off. Here are some ways to avoid trouble.

If you’ve developed a potentially marketable invention, you are faced with a dilemma. To make money from the invention, you must generally license the rights to it to another business, often a manufacturer or distributor. But in pitching the invention to potential licensees, you run the risk of disclosing so much information that the invention might be stolen or no longer protected by law.

Horror stories abound of unscrupulous businesses who feign disinterest in the hard work of an inventor, only to turn around and use the inventor’s description of her work to steal the invention for themselves – and reap huge profits. Some inventors have fought back in court and won millions – money that rightfully should have been theirs in the first place. One study determined that trade secret owners prevailed in 75% of the cases – poor odds for parties planning to steal. But winning these cases isn’t easy or cheap.

Using Disclosure Agreements

So how can you shop your invention around without jeopardizing your rights? If your invention potentially qualifies for a patent, it may be worth your while to file a provisional patent application ($75 for small entities) and obtain “patent pending” status. Most often, this will deter ripoffs. However, if you determine that the invention is probably not patentable, the best way to protect yourself is to execute a disclosure agreement (sometimes called a non-disclosure agreement or confidentiality agreement) before you disclose any secrets to a prospective licensee. If someone signs a disclosure agreement and later uses your secret without authorization, you can sue for damages.

Disclosure agreements vary in format. Generally, they contain these important elements:

  • definition of what is and what isn’t confidential information,
  • obligations of the receiving party, and
  • time periods.

What’s Confidential. Every disclosure agreement provides a definition of confidential information or trade secrets. Every disclosure agreement also specifically excludes some information from protection, meaning that the receiving party has no obligation to protect that information. Information is not protected if it was created or discovered before or independent of any involvement with you.

Obligations of the Receiving Party. The person or company you’re sharing confidential information with generally must hold the information in confidence and limit its use. Under most state laws, the receiving party cannot breach the confidential relationship, induce others to breach it or induce others to acquire the secret by improper means. Most companies accept these obligations without discussion. If you enter into a mutual disclosure agreement, you should also feel comfortable with these requirements.

Time Periods. How long must the information be kept confidential? This issue is often a subject of negotiation. Disclosing parties want a long period; receiving parties want a short one. Five years is a common length in the United States, although many companies insist on two or three years. In Europe, it is not unusual for the period to be as long as 10 years. Ultimately, the result depends on the relative bargaining power of the parties.

One factor in negotiations may be the shelf life of your idea. Ask yourself:

  • How long will it be before others stumble upon the same innovation?
  • If the product were licensed in the next year or two, how long would it be before the secret would be figured out?

If the answer to these questions is only a few years, then you are unlikely to be damaged by a shorter (two- to three-year) period.

Disclosing Without an Agreement

It’s always safest to get a prospective licensee to sign a disclosure agreement, but you may not always be able to convince them to do so. When that happens, you are left in a vulnerable position. If you disclose crucial information without the agreement, you risk losing your rights to the invention. If you don’t disclose it, you risk losing a business opportunity.

Probably the most important factor to consider is the reputation of the person or company you’re dealing with. If the company has a poor reputation, the dangers of losing your secrets outweigh the business opportunity.

How Intellectual Property Law Applies to Inventions

Under trade secret law, if you reveal your secret to the public, you lose your rights to the secret. In other words, once you’ve disclosed the secret, you can no longer claim that you own exclusive rights to it.

Under patent law, if you disclose details of an invention to the public before obtaining a patent, you must apply for patent protection within one year of making the disclosure. If you don’t, the invention will no longer be patentable, meaning anyone can use it. If you have filed a provisional patent application, you still must file a regular patent application within one year.

If you decide to go ahead and disclose, proceed cautiously. Here are some tips.

Disclose “Around” the Secret. A licensee is primarily concerned with two questions about your invention: What does it do? and Is it profitable? Try to determine if there is a way to present your invention and an estimate of its costs without disclosing trade secrets. If you can give a company this information, it may enter into a disclosure agreement.

Establish a Confidential Relationship. A confidential relationship can, in some cases, be established without a signed agreement. An “implied” confidential relationship occurs when the conduct of the parties indicates that they intended to create one. An implied confidential relationship gives you legal rights similar to those created by a written agreement, but it is always more difficult to prove that an implied relationship existed.

A confidential relationship can be implied if certain factors are present:

  • the person you gave confidential information to solicited the idea from you – you did not send it without prompting;
  • you indicated that the invention was a business proposition and hoped for payment;
  • at the time of disclosure you requested that the information be kept secret; and
  • the information is a trade secret – it has commercial value and is not known by competitors.

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