Don’t cry “Thief” — Protect your confidential information

Your intellectual property is worth the effort

By John Love, July 23, 2020

Who invented the telephone? Alexander Graham Bell, of course. Or did he? At least he was awarded the first patent for the phone (Elisha Gray and Antonio Meucci are two inventors credited with developing a talking telegraph). Some of the greatest inventions in modern history were allegedly stolen: the telephone, radio, laser, steamboat, motion picture, television, and windshield wiper. Most of these “thefts” resulted in drawn-out and expensive legal battles, where it was often financial resources that allowed the prevailing party to win — and that party was not always the original creator. And yes, windshield wipers are great.

The lesson is that startups (and other businesses) need to protect their intellectual property. Many startups want to join an existing industry by offering a new product or redesigned service. What a lot of startup entrepreneurs don’t realize at first is that it’s usually a smaller aspect of their business that may become most valuable. Their biggest innovation might be a byproduct of the original mission, a software shortcut or the uniquely efficient component of a product, but initially they may not know the importance of what they have created.

Entrepreneurs should get in the habit of believing that their ideas and derivatives of those ideas have value and are worth protecting. Other than registering intellectual property when available (patents, copyrights, and trademarks),utilizing proper protections for trade secrets, and having new employees, workers, or service providers agree to “work for hire” agreements, there are other steps entrepreneurs, inventors, authors, and creators can take to protect information that they would consider confidential and valuable.

What is confidential?

To begin, let’s consider how “confidential information” is often defined. The term typically includes all confidential, proprietary, or non-public information that has value to the disclosing party and which would not be available to the receiving party except when made available by the disclosing party. Often a “non-disclosure agreement” or “confidentiality agreement” will further qualify the definition, stating that confidential information should include the information a reasonable person would consider confidential, or information that is marked confidential.

I recommend the disclosing party avoid narrowing the language too much. Instead, include more information by using a broad definition, which is accomplished by “all confidential, proprietary, or non-public information.” I would also caution against placing the burden on the disclosing party to indicate what is confidential by stamping materials “confidential” or other active measures – better to just assume it is. However, if there is a specific type of information that the disclosing party wants to protect (technical information, software, unique designs and techniques, recipes, trade secrets, financial information, etc.), then state expressly that the definition of “confidential information” includes but is not limited to those specific types.

Get it in writing

If there’s even the slightest chance of needing to enforce protection of confidential information, get it in writing. Do not rely on a verbal agreement, handshake, or your overall faith in the goodness of mankind.

Non-disclosure of confidential information requirements are seen in several types of written legal documents. For example, when a company is trying to obtain investors, the company may need to disclose information that it considers confidential. The “non-disclosure agreement” or “confidentiality agreement” is often used in these circumstances. Such agreements might also be used when speaking with potential employees and contractors, or looking for a partner.

At minimum, I like to see a few matters addressed in confidentiality agreements, or confidentiality provisions of larger agreements. These include (non-exhaustive list here):

  • What information is covered
  • What information is not covered
  • Disclosures are permitted to specific individuals only (and the recipient will be responsible for those individuals)
  • Disclosure permitted when required by law
  • Return and/or destruction of confidential information
  • Right to equitable relief
  • Termination (if at all); and
  • Use for a limited purpose

 

Other legal documents that may include provisions protecting confidential information are employment agreements, services agreements (e.g., independent contractor or consulting agreements), partnership and other company agreements, term sheets, letters of intent, and investment documents. If a company is using several legal documents addressing non-disclosure, it should make the confidentiality provisions consistent.

Larger institutions, such as big venture capital firms, may (and likely will) frown if a startup presents them with a non-disclosure agreement. And some attorneys might recommend against sending an agreement to a giant firm as it might suggest the startup is a novice in the capital-raising scene. My opinion is that a company that is serious about protecting its valuable information is a smart company, and custom should not get in the way. However, be aware that an investor might not want to sign a non-disclosure agreement. This is often because large institutional investors are presented with a myriad of ideas and countless sets of data, thereby making compliance with such agreements difficult, and an accidental breach, or the threat of one, a real risk.

In summary, identify each individual idea or item that makes the company unique and creates value. Then be careful about the circumstances under which those ideas and items are shared. When in doubt, remember that you always have the option to keep your confidential information just that – confidential.

If you have questions about how to maneuver through confidentiality issues, I’d be happy to discuss them with you. You can contact me at John@wrightconnatser.com.