How can non-disclosure agreements protect your intellectual property rights?

Companies nowadays have to be as innovative as possible in order to be successful in today’s competitive market. Therefore, at the root of every successful business lays the proprietary information that makes the company unique, giving it competitive edge and a better position than the competition. Some examples of business information are: technological information about the company’s product, prototypes or a list of key customers. Such information relates to intangible assets, falling under the scope of intellectual capital, but lacking protection under the intellectual property rights system.

So how can companies manage to protect their business information and know-how?

One of the single most important agreements companies can use in order to protect their intellectual property is a non-disclosure agreement, also known as an NDA. An NDA is a legally binding contract that establishes the “conditions under which one party (the disclosing party) discloses information in confidence to another party (the receiving party)”.[1]

There are two types of NDAs, depending on the number of parties disclosing information:

  • Unilateral NDAs (or “one-way” NDAs): one party discloses information and the other party receives the information
  • Bilateral or Mutual NDAs (also known as “two-way” NDAs): both parties disclose information. An alternative to the bilateral NDA would be the signing of two unilateral NDAs.
  • Multilateral NDAs: several parties disclose and receive information.

These agreements cover a variety of information such as: know-how, scientific research results and data, chemical formulas and compositions, software-development information, among other; the common denominator being that the information is of value due to its state of being relatively unknown, and, therefore, shall be kept away from the public domain.

European Union legislation requires intellectual property rights, especially patents and industrial designs to have novelty in order to acquire protection. In Romania, similar to other EU Member States, for a creation to be considered novel, it should not have been previously made available to anyone, unless under confidence obligations.

Despite the legal differences, one can identify a general scheme of requirements that need to be complied with in order for a piece of information to be legally protected:

  • Not being in the public domain
  • Not being already known by the receiving party
  • Not becoming publicly available by other means.[2]

 

One type of valuable information that needs to be withhold from the public eye is trade secret. Broadly speaking, a trade secret is any confidential business information that allows the company to have an economic benefit (also known as a competitive advantage). This advantage derives expressly from the fact that the information is unknown to competitors, making it a critical issue in case of disclosure as it can lead to considerable economic loss for the company concerned. An interesting example of such an economic loss can be found in the Ford Motor Co. situation where one of its engineers copied thousands of Ford’s documents on an external drive and accepted a job with a competitor. Due to this leakage, Ford was estimated to have suffered a considerable loss of more than $ 50 million.[3]

Some of the most encountered trade secrets on the market are the Google algorithm, the Coca-Cola recipe or the New York Times Best Seller List. They all belong to large international companies that started as Small and Medium sized Enterprises (also known as SMEs) and reached this level of success mostly due to such trade secrets.

However, it is important to keep in mind that although trade secrets are deemed to be “treated as equivalent to intellectual property rights[4], confidential information in general is not considered “property” as other forms of Intellectual Property, such as trademarks.

Additionally, some intellectual assets, such as methods of doing business, are not considered patentable in most of the EU jurisdictions, including Romania. This basically means that in order to protect them, they need to be kept out of the public domain. But business owners often need to disclose such proprietary or sensitive information when seeking either funding, or potential partners in a venture, or even obtaining new clients. That is when an NDA comes in handy as it maintains trust while also preventing crucial information from leaking, especially if the leak undermines the profitability inherent to the information. Take for example a start-up company that intents to raise money from investors but also want to avoid their ideas to be stolen in lieu of receiving such investment. Hence, signing an NDA can preclude such theft because, otherwise, it can be a challenge to prove that the idea was, in fact, stolen.

Another situation where NDAs can be of value is when a company decides to keep the information confidential out of strategic reasons.

Or, take culinary recipes as a proper example. In order to be patentable, an invention should be “novel” and “nonobvious”, meaning that it should not have existed before or the alteration should not be obvious. Recipes are merely combinations of known ingredients in different amounts, mostly separate discoveries of preexisting recipes or even variations of known ones, which leads to the conclusion that even if the recipe is considered new, it is still obvious. That is when NDAs come in place, helping the creator of the recipe to keep his idea confidential from the public domain.

The scope of an NDA is to protect your most important business assets, which is why it is crucial to treat it just as importantly as those assets. The NDA should be drafted carefully, making sure that it covers all the points you want to deal with. Any lack of clearance with respect to what you intend to protect can lead to a defaulted outcome. Therefore, when signing the NDA, ensure that you have an explicit idea of what you can and cannot do and, in case you have any questions on the matter, consult a lawyer specialized in Intellectual Property Law.

 

Attorney at law Daniela Manolea

 

[1] European IPR Helpdesk, Fact Sheet Non-Disclosure Agreement: a business tool, published in June 2015

[2] The European IPR Helpdesk Your Guide to IP and Contracts

[3] https://www.reuters.com/article/us-djc-ford-tradesecrets-idUSTRE73C3FG20110413

[4] Case T-201/04, MICROSOFT v COMMISSION JUDGMENT OF THE COURT OF FIRST INSTANCE (Grand Chamber), 17 September 2007

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