Tuesday, 18th September, 2018

Confidentiality agreements: Keep your secrets in the cone of silence

You don’t want others swiping your valuable ideas and running with them. But without the right confidentiality agreements in place, that’s exactly what could happen.

Non-disclosure agreements, or NDAs, are vital when you're disclosing new ideas or information to people outside your business. They're also important to use when you're receiving confidential information from others, because they clearly outline your obligations and theirs. Without a written agreement, you may find yourself in a tricky 'we said, they said' situation with obligations that go way beyond those of the typical NDA.

When start-ups take their new initiative to market, they usually have to engage the help of others. Before you disclose anything to an outside party, have them sign a confidentiality agreement or a NDA.

This may not be necessary if your idea is a technology and you've already filed a patent application for it. But if you haven't, a NDA is vital. Patent law in most countries requires the technology to be in what's called the 'cone of silence' at the date of the initial patent application. If those that you've disclosed information to have signed NDAs, it's easier to prove that your idea hadn't left the cone of silence until after the patent process began. Some companies or investors receiving confidential information may refuse to sign a NDA, but if this pitfall is pointed out to them, they may be more understanding of the situation.

On the flipside, it’s also important to understand why some companies refuse to sign NDAs. I recently helped a client engage with engineering and electronics conglomerate, Philips. Before Philips was willing to receive external technology ideas, they insisted that my client first filed a patent application. Philips generally does not sign NDAs with outside companies wanting to licence or sell IP to them. This approach protects them against legal claims of breach of confidentiality in case someone internally happens to be developing the same idea. Phillips is a large organisation, which is why they are having to take this approach.

Large corporates with R&D programmes often follow this approach too, so don't be put off if they refuse to sign your NDA. There are other ways you can progress with them, so get in touch with AJ Park if you need advice on this.

What is 'confidential information'?

Under a typical NDA, the person receiving information (the receiver) agrees not to use or disclose the confidential information of the other person (the discloser), other than for a specific purpose.

The definition of 'confidential information' in the document is critical. It should clearly state what is and isn't to be treated as confidential.

There are two viewpoints about what information should be treated as confidential. An approach that works best for the receiver is to generally state the nature of the information to be disclosed. This means the receiver isn't bound to keep secret, anything 'off topic' that the discloser tells them. The best approach for the discloser, however, is to state that everything they tell the receiver must be kept confidential, unless a specific exception applies.

'Standard' or template confidentiality agreements can pose problems. Many don't prevent the receiver from using confidential information for their own benefit. Others include limitations of term, which means that once the term expires, the receiver can do what they want with the confidential information they now have. And most standard agreements don't capture ownership of any improvements made by the receiver of the information.

NDAs are typically used during early-stage exploration. Some situations call for more than a NDA to be signed. When things progress between the parties, NDAs should be followed up with different agreements such as a design-commissioning agreement if the recipient of the confidential information is engaged to help develop the technology further. A standard NDA often does not deal with different obligations that arise once the relationship progresses beyond the initial discussions. 

Verbal agreements don't usually deal with the exceptions to confidentiality and are therefore unwise to enter into. Whilst it is easy to say to someone that you will keep their idea secret, there are good reasons to do so in writing. The most common exceptions are when the:

  • information is already in the public domain
  • receiver already knows the information
  • receiver can get the information from a third party who's not under obligations of confidentiality
  • receiver is under a legal obligation to disclose the information.

Receiving companies often insist on using their own form of NDA. This can be dangerous for a discloser if they don't check what they're signing. Receiver-friendly NDAs often say that any information the discloser hasn't provided in writing must be supplied within a certain period after disclosure (eg, 30 days). If not, it will no longer be regarded as confidential. Watch out for this particularly nasty provision because it means that anything you disclose verbally could be treated as non-confidential.

A good NDA should also specify how long the receiver's obligations of confidentiality last. Do they continue until the information is no longer a secret? Or do the obligations expire after an agreed period of time?

A major risk in disclosing something new is that the receiver will springboard off your ideas. Make sure your NDA specifies that if the receiver makes any developments based on the original information disclosed, that the start-up will own any IP rights that come from those developments.

These are just some of the pitfalls to watch out for. If you have any questions about NDAs and your rights or obligations, send us a message and one of our experts will be in touch.

An edited version of this article first appeared on The Icehouse website.