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Make Non-Disclosure Agreements Work for You!

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© 2002, Gallagher & Dawsey Co., LPA
February 2002

It's common for inventors or designers to ask recipients of confidential information to sign non-disclosure agreements. What's less commonly known is that the best of these agreements work both ways to protect the discloser and recipient of information.

An Agreement is No Agreement Until It is Signed
It's very common for intellectual property attorneys to have a generalized form of non-disclosure agreement that they customize to fit an individual client's needs. This alone shows that the form and content of non-disclosure agreements are subject to a near infinite degree of variation. The presentation of a non-disclosure agreement by one party should not be a "take it or leave it" proposition, but an invitation to engage in a meaningful discussion about intellectual property security aimed at benefiting both parties. The bottom line: Don't be hesitant to suggest changes to a non-disclosure agreement and be prepared to offer reasons why these changes are fair and will benefit the working partnership!

Unilateral vs. Bilateral Non-Disclosure Agreements
The most common "stock" agreement is a unilateral non-disclosure drafted by the inventor that spells out the responsibilities of the recipient of confidential information. But it's equally possible to craft a bilateral agreement that recognizes the rights and responsibilities of both parties. For example, manufacturers may have confidential information about fabrication processes that could benefit the designer or inventor who needs to craft reasonable product specifications. These trade secret processes may be more valuable than the article that is the subject of the agreement. Another example is the sharing of evaluation results. Often, a manufacturer will conduct extensive evaluations of proposed products. These evaluations often contain valuable commercial discoveries by the manufacturer. While it might be highly advantageous to share this information with the inventor, the manufacturer needs to be protected against "shopping" this information to another company.

Consider The Length Of "Lock Ups" Carefully, But Realistically.
Inventors have a reflexive wish to "lock up" confidential information for as long as possible, often forever! Recipients, of course, seek the shortest possible time. Look at lock up periods with a view toward the market value of such information. If disclosure is of a basic process of wide applicability, fairness suggests a longer confidential period. High tech processes of narrow applicability may have no commercial value within a few years, as technology speeds ahead. You may be able to negotiate better overall terms in a non-disclosure agreement by remaining flexible on lock-up times, at no real market cost to yourself.

Watch Out For "Prior Knowledge" And "Parallel Development" Problems.
"Prior knowledge" is information that the discloser believes is secret, but which in fact the recipient already knows from his own experience or from other sources. The best agreements provide for prior knowledge by imposing both a right and a responsibility for the recipient to notify, within a reasonable time, the discloser that certain information is already in its possession. "Parallel development" covers information that the recipient, if it has an ongoing development program of its own, might develop on its own that duplicates the discloser's secrets. This can be a difficult issue to resolve when the recipient company has an active R&D program of its own, but needs to be addressed early because of the difficulty in establishing proof of parallel development at a later stage.

Who Should Sign?
Many non-disclosure agreements provide only for the signatures of the principals, that is, the inventor and the individual or company receiving the information. This can be a mistake, more from a practical than a legal point of view.

Principles of agency law generally make a company liable for the acts of its employees, so a company would normally be responsible for any unauthorized disclosures made by its staff. However, studies have shown that employees who are required to sign personally are more careful and responsible in handling confidential information. Additionally, requiring employees to sign indicates a recipient's commitment to manage information carefully and to control its use on an ongoing basis. The best non-disclosure agreement is one that's on the mind of everyone handling information, while the worst is one, unread on the shop floor, gathering dust in an attorney's office. While the chance of successfully pursuing a low-level employee who makes an unauthorized disclosure may be small, having the employees sign an agreement does create a legal cause of action against errant employees. More importantly, it provides a moral and psychological stimulus for employees to respect a discloser's confidences.

Both parties benefit from non-assignability in non-disclosure agreements, that is, neither party may assign its rights and responsibilities under the contract to another party. For example, a builder may not sell its right to build a product to another and include the confidential information it has received under the non-disclosure agreement. The bedrock of non-disclosure in the real world is the level of trust and thorough investigation that an inventor undertakes before revealing information, regardless of any written agreement. An inventor should not be expected to give up the right to that kind of subjective character decision. Remember, a non-assignment agreement is evidence of a special form of personal and business relationship, and neither side should want uninvited third parties at the table.

The take-away from this brief discussion of non-disclosure agreements is this: Don't look on these as "form" documents to be signed, filed, and forgotten. They can be tools for both sides to protect their interests and to forge a commercial cooperation that leads to benefits, and hopefully profits, for both sides.

© 2006 Gallagher & Dawsey Co., L.P.A. - Cincinnati, Columbus, Dayton, Ohio

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