Creators and entrepreneurs can protect their intellectual and financial interests by using non-disclosure and confidential agreements.
When inventors create trial versions of innovative products, investors explore business opportunities, authors write books, or playwrights and screenwriters prepare story treatments or preliminary scripts, they all expose themselves to a particular risk: the risk that their ideas, financial data, proprietary information, trade secrets or intellectual property in general will be misappropriated by a third party. In other words, it can be stolen.
For example, if an author shows his or her draft book to a “gentle reader” for reaction and input, that reader may take the story line and adopt it into his or her own book. (How does the author prove that script was his work-product?)
Or if an inventor shows a set of design plans or a preliminary proof-of-concept for a paradigm-shifting prototype to a colleague for review and critique, the colleague could rush a patent application in advance of the inventor. (Can the inventor claim a superior right to patent over that colleague?)
Or if a business owner thinking about selling his or her company to an investor provides that prospective investor the company’s books, records, methods, trade secrets and plans, that investor may use the information in other investments or — even worse — provide that information to other people who could benefit from it. (How does the business owner link the data to the unintended end-user?)
Does this prospective risk mean that creative inventors, entrepreneurs and other creators must adopt a “bunker mentality” to protect their valuable intangible assets, “circle their wagons” and never attempt discussions to advance their activities by involving new external partners? Simply put, no.
Creators and entrepreneurs can protect their intellectual and financial interests by using non-disclosure and confidentiality agreements. “NDAs” permit limited third-parties access to the demonstrator’s ideas, information, and data subject to promises (aka covenants) not to disclose the information beyond the recipient’s principals and to hold that information confidential — often indefinitely — particularly if “the deal” does not close. The circle of parties permitted to view the restricted information can be expanded to external individuals and business entities with a specific “need to know,” such as accountants, lawyers, bankers and insurers, especially if those external people further agree to maintain the non-disclosure and confidentiality covenants.
Significantly, the non-disclosure and confidentiality covenants can be made mutual because in certain transactions both parties need access to the other party’s otherwise restricted information. For example, consider a seller who is considering the sale of real property to a prospective buyer. To engage in seller-financing, by which the seller effectively loans the buyer the funds to purchase the property, the buyer/ borrower wants to know the suitability of the real estate for its intended use and the seller/lender wants to know that the buyer has the means to pay over time.
Non-disclosure and confidentiality agreements typically contain remedies to allow relief to a party whose valuable intangible property is improperly circulated or misused. Examples of remedies include injunctions by which a judge orders a party who unlawfully used restricted information property to cease and desist from continuing to do so. Sometimes, a judge will order financial damages because often the disclosed information cannot be “reeled back in,” causing permanent damage to the confidential information’s owner.
Non-disclosure and confidentiality agreements need not be especially long or complicated, but as already noted, they do need to contain a set of definitions (such as the information to be disclosed and the parties who are bound by the NDA), limits on that information’s use, and available remedies in the case of improper circulation and use.
An additional point to consider: While the NDAs considered above have addressed the ramifications of disclosures of confidential information to external third-parties, they can be just as important with disclosures to employees and even independent contractors. It is often important as a matter of business development to share confidential information with technical practitioners who will use that information on a daily basis. As a result, employment contracts, employee handbooks and manuals, and production and performance contracts frequently contain non-disclosure and confidentiality provisions much like those used in third-party situations (for example, limiting the right to disclose confidential information, imposing time-limits on “black-out” periods and creating remedies if improper disclosures are made). These sorts of “internal” NDAs can also allocate the ownership of confidential information inventions, work product, or other intellectual property between an employer and employee. The ownership often stays with the employer because the employer provides the resources, basic “knowhow,” and capital the employee uses to create or further progress innovations.
The centrality of scientific, technological, financial and process innovation in the business community is discussed in detail throughout this edition of Business in the Heart of Florida. None of these innovations occur in a vacuum but rather with the collaboration of various external and internal partners. The employment of non-disclosure and confidentiality agreements throughout the creative process serves to protect the intellectual and financial interests of the creative parties involved and should be adopted as early in that process as possible. They are proactive risk-management tools well worth considering…and using.
Notice: The article above is not intended to serve as legal advice, and readers should not rely on it as such. It is offered only as general information. Readers should consult with an attorney regarding their legal matters, as every situation is unique.
Philip N. Kabler, Esq. joined Bogin, Munns & Munns in 2014 as Senior Counsel. He has almost 29 years of experience in the practice of law. Kabler adds a broad spectrum of practice areas in the fields of business entities (formations, operations, contract negotiating/drafting/review, transactions, finance, human resources, risk management, asset and equity dispositions), real estate (commercial and residential), banking and the equine industry. For more information, call Philip N. Kabler, Esq. of the Gainesville, Florida, office of Bogin, Munns & Munns, P.A. at 352-332-7688.