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NDAs: Trick or Treat - Do They Help,
and Should You Want One?
Michael J Foycik Jr
by Michael J Foycik Jr.
June 21, 2013

The author is a patent attorney with over 28 years experience in patents and trademarks. For further information, please email at IP1lwyr@gmail.com, or call at 877-654-3336.

If you're an inventor, you've probably seen an NDA (Non-Disclosure Agreement).  Do NDAs really help?  And, can NDAs be enforced?  Is there anything tricky there?  Good questions, and you might be surprised by the answers!

It would help to know that an NDA covers trade secrets.  Yes, you want to show your invention to someone, and that invention is covered by a patent application.  But, that means your invention is a trade secret (assuming you haven't already published it already).  So, your invention can also be your trade secret. 

If your invention is stolen (misappropriated), you would probably prefer tort damages, instead of contract damages or patent damages.  Here's why: tort damages can be punitive in nature and can therefore be big even when the infraction is small.  Contract damages tend to be limited to the provable amount of money lost (there are exceptions).  Patent damages cover actual infringement situations, provide a percentage of the lost profits (as one example, and there are exceptions), and require an issued patent.  Every case is different, and the above is just a rough guide – you'll need to talk with a lawyer for specific advice.  Note that an NDA is a contract and often specifies the damages and the law to be applied. 

Here's the tricky surprise for the unwary:  An NDA on its face seems to be a way to switch from trade secret damages to contract damages.  The inventor, i.e. the trade secret owner, may very well not be too happy about that.  Companies that want to look at inventors' trade secrets probably should like NDAs, and that's just what we often see.

Does an NDA really take away trade secret rights?  That's hard to tell exactly, as it may well depend on the specifics of the situation.  One may well expect an uphill fight to get trade secret damages if an NDA is involved. 

It actual practice, let's say there is a minor breach of the inventor's trade secret rights (i.e., “the idea is stolen”).  Trade secret damages could be quite high, especially where intent is proven.  Contract damages are often limited to the actual harm such as lost profits, or to an amount specified in the NDA.

By way of contrast, if that breach were to be covered under patent law, damages would probably be relatively small (a percentage of the profits or the selling price).  One could easily lose money trying to enforce patent rights in that case. 

In theory, an NDA means the recipient can't show anyone.  And, since it is normally a signed agreement, it is also a contract.  First surprise!  That means it intends that the transaction is to be covered by contract law, not trade secret law.  Big difference!

Many NDAs include an arbitration provision.  It sure sounds good, but who does it help?  Well, clients are surprised to hear the costs for arbitration.  The costs can be quite high – the parties have to pay for the arbitrator's time.  There are other factors, related to the fact the arbitrator's actual authority is nowhere near that of a courtroom judge.   On the other hand, if you file a case in court, the court filing fee is relatively small.  For an inventor with little money, the high cost of arbitration could be a real deterrent to enforcement of their rights.

The above is not legal advice, and is merely a simplified explanation.  If you feel you need legal advice then you should consult with an attorney that can assist you.

The author is a patent attorney with over 28 years experience in patents and trademarks. For further information, please email at IP1lwyr@gmail.com, or call at 877-654-3336.