Intellectual property agreements are necessary when you are launching your product. Prior to publicly launching your product, you may need to disclose your product (i.e., invention) to others without a patent application on file with the Patent Office. They may include manufacturers, investors, salespeople, employees, designers, engineers, potential licensees and even friends and family. Prior to the filing of a patent application, you need to rely on one or more types of intellectual property agreements (i.e., contracts) to protect your idea and yourself. Contract law is enforced on a state-by-state basis, so whichever state you are in, please speak with your patent attorney to make sure that the agreement you are using or are going to execute is right for you.
- Four basic intellectual property agreements
- I. Confidentiality Agreements for pitching your idea to investors or a potential business partner
- Examples of confidentiality agreements
- Cost and Time Benefits of pitching your invention under a confidentiality agreement
- Cons of pitching your invention solely under a confidentiality agreement
- Not everyone will enter into a confidentiality agreement
- Inventors are unlikely to enforce the contract because litigation is expensive
- Many exceptions to confidentiality
- No clear delineation between your idea and their ideas if there is any form of collaboration between the parties
- Case for incurring the cost of preparing and filing a patent application
- II. Independent contractor agreements for working with manufacturers, engineers and designers
- III. Intellectual property agreements for employees
- IV. Chinese manufacturer agreements and working with Chinese manufacturers
Four basic intellectual property agreements
The four basic types of intellectual property agreements are:
- Confidentiality agreements, which are contracts to keep confidential information of the discloser secret.
- Independent contractor agreements, a contract where the independent contractor assigns invention and copyright rights to you.
- Employee intellectual property agreements, contracts that employers normally require an employee to enter into as a condition of employment. The employee normally assigns all work-related inventions and copyrights to the employer.
- Chinese manufacturer’s agreement, which is a contract between you and your manufacturer in China.
The following are rough guidelines to help you spot the issues that you might encounter when using these agreements.
You can find many of these basic intellectual property agreements online for free and also purchase agreements from legal form providers. However, be careful that the forms do not give you a false sense of assurance. There is no such thing as a standard agreement. Each agreement is different and slight differences can change the meaning of the agreement significantly. The differences may look harmless but the devil is in the details.
You should be aware of and understand the risks involved. Get the advice of competent counsel who can provide you with the right agreement with the right language that is right for your situation.
I. Confidentiality Agreements for pitching your idea to investors or a potential business partner
A confidentiality agreement is one of many types of intellectual property agreements. It limits the recipient’s ability to use the idea or invention, and thus, in this regard, can be used to disclose your invention or idea to another with some form of protection that the other person will not steal your idea.
You may want to pitch your idea to investors or potential business partners with a confidentiality agreement and without filing a patent application (i.e., without patent pendency). Optimally, you would want to disclose the idea or invention with patent pendency. Patent pendency means that you have a written explanation of how to make and use your invention and filed a provisional or nonprovisional patent application with the USPTO. It establishes a priority date for your invention with the Patent Office.
The confidentiality agreement is a type of IP agreement that states that the recipient of the secret information will maintain the confidentiality of the information and will use it only for the permitted uses stated in the agreement. For investors and potential business partners, the permitted use is normally for “evaluation” of the idea or invention.
Related article: Confidentiality Agreement
The following is a snippet of a permitted use clause. when an investor, buyer or potential licensee is evaluating an invention, patent rights or some other intellectual property of an inventor.
In connection with a possible business relationship between the parties, the Disclosing Party intends to disclose to Receiving Party certain confidential information relating to Disclosing Party’s technology. The purpose of such disclosure is to enable the Receiving Party to test and evaluate (the “Business Purpose”) Disclosing Party’s technology.
The Receiving Party agrees that it shall use all Confidential Information solely for the Business Purpose set forth in this Agreement.
The discussion below explains the pros and cons of pitching your idea with only a confidentiality agreement and without having a patent application on file with the USPTO on your invention.
Examples of confidentiality agreements
For more information on where to obtain confidentiality agreements, see my article on Confidentiality Agreements.
Cost and Time Benefits of pitching your invention under a confidentiality agreement
The primary benefit of using a confidentiality agreement to protect yourself in lieu of filing a patent application or establishing patent pendency is cost. The cost for a confidentiality agreement is relatively inexpensive and should be in the hundreds of dollars range from a patent attorney.
If you are not launching your product or business unless you have an investor or a business partner and there is only a limited number of people that you want to pitch your idea to, then it might make financial sense to use only a confidentiality agreement to protect your invention.
The cost for preparing and filing a patent application is significantly higher than the cost to prepare a confidentiality agreement. The high cost of preparing and filing the patent application to establish patent pending status may not be justified based on the limited number of pitches that you want to make. If you spend the money to prepare and file the patent application and everyone that you pitch to declines your offer, then you may be left with nothing to show for it.
A secondary benefit of using a confidentiality to protect your idea is speed of implementation. The confidentiality agreement is easy to prepare and should take a day or two to get one from a patent attorney compared to a patent application which could take weeks to prepare and get on file with the USPTO.
Cons of pitching your invention solely under a confidentiality agreement
Not everyone will enter into a confidentiality agreement
Pitching your idea under a confidentiality agreement is not always possible. Some companies have policy of non-confidentiality. They inform and advise inventors that they are not keeping their information secret. If the inventor wants to protect their idea, then they must do so by filing for and securing a patent application, copyright or trademark to protect your idea. In this regard, this type of IP agreement will not be helpful.
I used to update the California practice guide for trade secrets published by the continuing education of the California State Bar. In that practice guide, we recommended that companies adopt a NON-confidentiality policy. The reason was that most ideas would be rejected and would only create problems for companies.
For example, if the company already had an idea in their own research and development cycle that was similar to submitted idea, then the inventor submitting the idea (i.e., idea submitter) might be able to sue the company for stealing the idea based on breach of the confidentiality agreement. With a non-confidentiality agreement, the idea submitter agrees that the company has no confidentiality obligation to the idea submitter and that the idea submitter must protect their idea with a patent, trademark or copyright.
Inventors are unlikely to enforce the contract because litigation is expensive
Some people and companies are willing to enter into a confidentiality agreement. Even if the person or company is willing to enter into a confidentiality agreement, it has been my experience that most inventors will not enforce the contract because of the high cost to litigate and the uncertainty of the outcome from the litigation. Put simply, why would you want to enforce a contractual obligation when you are not guaranteed to win and will likely have a large outlay of cash? In general, if you are starting out, you won’t enforce the contract. You will most likely go forward with a different idea.
Many exceptions to confidentiality
The duty to keep the information or idea confidential has many exceptions. For example, if the recipient already knew about your idea before you submitted the idea to them then they would have no duty to keep your information confidential. This is problematic for you because you don’t know what the recipient had in their research and development pipeline at the time that you disclosed your invention to them. You might find later that they introduced a product similar to your idea that you pitched to them but you really don’t know if they violated the confidentiality agreement.
No clear delineation between your idea and their ideas if there is any form of collaboration between the parties
After the idea is submitted to an investor or company for consideration, the parties might discuss the idea together. If the investor or company suggests modifications to the idea regardless of whether they are simple or truly innovative, there will be a dispute as to who owns those new ideas. You could argue that you already considered those aspects to your basic idea. However, that would just be an argument and the investor or company might still sue you to decide who owns those new ideas.
By preparing a patent application prior the disclosure, you can document your ideas prior to the disclosure. Anything that the investor or company suggests that is not included in the patent application would be up for dispute though.
Case for incurring the cost of preparing and filing a patent application
If you have numerous potential pitches that you want to make or if you are willing to launch your business or product on your own regardless of outside investment, then it may be better to establish patent pendency before making your pitches. The patent application if properly prepared and filed should be a document which helps the person that you are pitching to understand the invention. You can show them a portion or the entire patent application. The patent application also adds credibility to the invention.
Put simply, the large number of potential pitches may justify the cost of the patent application. Patent pendency allows you to pitch your idea without having to go through the trouble of securing confidentiality agreements from everyone and keeping track all of those agreements.
If you are willing to start your own business regardless of whether you secure an investor or business partner, then why not just incur the cost to prepare the patent application. While you might argue against paying for the patent preparation cost, having patent pendency before you pitch makes clear which ideas are yours. Without patent pendency, who owns what part of the invention is up for dispute. With patent pendency, this is all cleared up because the information contained in the patent application is clearly belongs to you.
Related article: Make sure that you own the invention rights
II. Independent contractor agreements for working with manufacturers, engineers and designers
An independent contractor agreement specifies the assignment of invention rights from the independent contractor to the invention. In this regard, this is a crucial type of agreement among the various intellectual property agreements that inventors need to utilize when hiring an independent contractor.
For anyone that will be creating drawings, artwork, engineering designs for you, they need to sign an independent contractor’s agreement. In the agreement, they promise to assign to you any inventions and/or copyrights that they create based on the work that you are paying them to do. This group of people and companies can include manufacturers, engineers and designers. They should be treated differently than investors and future business partners. These are people that you will be paying for their creative services. In this regard, you have the right to ask for certain things in return, namely, an invention and copyright assignment agreement.
Independent contractor agreements can separate out the promise to assign invention rights and the copyright rights. For example, engineers may only need to assign any invention rights to you, whereas web designers and copywriters may only need to assign copyright rights to you.
How to handle an independent contractor that does not want to sign the agreement?
Some manufacturers use their proprietary information and processes to manufacture your product for you. These manufacturers may be hesitant to assign invention and copyright rights to you. This is very understandable. They don’t want to enter into an agreement with a startup that might prohibit them from accepting work from some other company in the future. In this case, in my opinion, the agreement could be changed so that the manufacturer would allow you to use their technology only if you were to switch manufacturers. The agreement would allow you to use any technology that the manufacturer created for you to make your product. Put simply, you would be asking for a royalty-free right to use any new technology so that you can have the freedom to use any manufacturer in the future.
If they are unwilling to sign such an agreement, you need to decide if you are willing to have them be the sole source manufacturer of your product. Other solutions may exist if the independent contractor does not want to assign you their invention rights, if any. Consult with your patent attorney on how you might be able to solve this issue.
III. Intellectual property agreements for employees
As businesses begin, they usually start with a close-knit group of people. Such ties can often falter when they realize that the ideas, inventions and copyrights that they use in the business do not entirely belong to the company but to the individuals themselves. The company might have a shop right to use the ideas, inventions and copyrights. However, the company would be very limited in its ability to expand if the intellectual property was not assigned to the company, causing the rights to be fractured and thus devalued.
An employment attorney will be able to help you procure the proper employee intellectual property agreements that will help you to maintain confidentiality of your trade-secret information and other confidential information, and also automatically assign any intellectual property generated by the employees to the company.
IV. Chinese manufacturer agreements and working with Chinese manufacturers
You need to have your Chinese manufacturer enter into an independent contractor agreement. Otherwise, they may steal your intellectual property because their actions in China will affect your rights here in the United States and in other foreign countries. The discussion below relates to the types of intellectual property agreements you need for a Chinese manufacturer.
Chinese manufacturers are becoming more patent savvy. They sometimes file their own patent applications on the products that they make for their clients, in China and sometimes elsewhere. In this regard, you may need to have one or more types of intellectual property agreements to protect yourself from these situations. For example, if you order a product from a Chinese manufacturer and they file a patent application in China before you file one here in the United States, the first filed patent application which would be the one filed by the Chinese manufacturer would be prior art against your second filed U.S. patent application. Thus, not only would your product be unfairly excluded from China, you would be unable to get a patent in other countries. This is unfair. You probably have a lot of good arguments to present to a court of law. However, would you be willing to spend the money if you aren’t guaranteed to win the case? No attorney will guarantee that you will win the case.
With Chinese manufacturers, they need to sign an invention and copyright assignment agreement. The agreement should include what is referred to as a present assignment. Put simply, it is an agreement where they promise to assign in the future any invention rights and “do hereby assign” any invention created in the future. As for the basic idea that you present to them, any patent application that they file in China which includes your basic idea and is filed before your U.S. patent application should be assigned back to you. They might want to file a patent application based on their improvements. In that case, you can require them, if they would like to file a patent application on the improvement, to only file it after your U.S. patent application filing date.