How to use a contract to protect your invention?

The various areas of intellectual property protect ideas and inventions in various ways.  Patents can’t be used as a substitute for another kind of IP.  Similarly, a contract can protect your idea in ways that a patent can’t.

How do you use a contract to protect your invention? You can use a contract to control or limit what another person does with your idea or invention.  For example, a contract can:

1. Limit the other person’s ability to exploit your idea
2. Require the other person to assign an invention to you
3. Limit a manufacturer’s ability to use your tooling for others
4. Require them to keep your idea a secret

A patent cannot do any of these things.  Only a contract can do these things.  A contract is an agreement with those you have direct contact with, such as investors, independent contractors, employees, and manufacturers.

Below are basic agreements that an inventor may need when they launch their product.  They help to control the actions of those that you will interact within your business.  The four basic agreements are:

1. Nondisclosure agreements (NDA) are used to keep the invention secret.
2. Independent contractor agreements require independent contractors to assign invention rights to you.
3. Employee intellectual property agreements require employees to assign all work-related inventions and copyrights to you.
4. Manufacturer’s agreement limit their use of your idea and tooling.

The following are rough guidelines to help you spot the issues that you might encounter when using these contracts.

You can find many of these basic intellectual property contracts online for free and also purchase these contracts 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 significantly change the meaning of the agreement.  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. USE NDA to pitch an idea to investors

A non-disclosure agreement (NDA) is one of many types of intellectual property agreements.  It can limit the recipient’s ability to use the idea or invention.  For example, the NDA could expressly state that the recipient can’t exploit the idea for themselves but can only use it to evaluate the idea.  In this regard, you can pitch your idea to investors without filing a patent application if they are willing to sign an NDA.

Optimally, you would want to disclose the idea or invention with patent pendency.  (Can a confidentiality agreement protect me like a patent application?) 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. A clause in the agreement may require the recipient to maintain the secrecy of the information and to use it only for specific purposes.  For investors and potential business partners, the specific purpose is normally “evaluation” of the idea or invention. It usually prevents them from taking the idea and incorporating it into their business or product line.

Related article: Non-disclosure 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 establishing patent pendency.

Examples of nondisclosure agreements

For more information on where to obtain confidentiality agreements, see my article on Confidentiality Agreements.

Nondisclosure agreements are cheap and fast

The primary benefit of using a confidentiality agreement to protect yourself instead 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.

For many people, filing a patent application is not an option. The costs are just too much. However, they need an investor to help them with the expenses of launching a product. If you are in this situation, then it might make financial sense to use a non-disclosure agreement to pitch your invention. This suggestion is especially true if you want to pitch your idea only to a small number of people.

The cost of preparing and filing a patent application is significantly higher than the cost to prepare a non-disclosure agreement.  The high cost of a patent application may not be justified based on the limited number of pitches that you want to make.  If you spend money on 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 an NDA to protect your idea is the speed of implementation.  The confidentiality agreement is easy to prepare for a patent attorney. He or she should take a day or two to prepare compared to a patent application which could take weeks to submit to the USPTO.

Downsides of relying solely on a nondisclosure agreement 

Not all investors will enter into a confidentiality agreement

Pitching your idea under a confidentiality agreement is not always possible.  Some companies have a 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. An NDA is like an invitation to a lawsuit.

For example, the inventor could sue the company for stealing his or her idea if he or she felt as if the company took the idea. The basis of the lawsuit would be a breach of contract, the NDA. With a non-confidentiality agreement, the inventor has to agree that the company has no confidentiality obligation to the inventor and that the inventor must protect their idea with a patent, trademark, or copyright before submitting it to the company.

Inventors are unlikely to enforce the contract because litigation is expensive

Some people and companies are willing to enter into a confidentiality agreement.  However, that does not provide much protect to inventors because the inventor must sue the person to enforce the NDA. The lawsuit means time and money that the inventor has to spend to get justice. In many instances, inventors will not enforce the contract because litigation is expensive and uncertain.  Simply put, why would you want to enforce a contract when you are not guaranteed to win and you will have to spend a lot of money to win?  In general, if you are starting, 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 limitations.  For example, if the recipient already knew about your idea before you submitted the idea to them, then they have no duty to keep your information confidential.  This limitation 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.  They could launch a product later on. You might believe that they stole your idea. However, you don’t know if they already had the idea in research and development before you ever submitted it to them. You really don’t know if they violated the confidentiality agreement.

No clear delineation between your idea and their ideas 

After submitting the idea 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 variations to your idea.  However, that would be an argument, and the investor or company might still sue you to decide who owns those new ideas.

By preparing a patent application before the disclosure, you are documenting your ideas and defining which variants, improvements to the ideas are yours.  However, anything that the investor or company suggests as improvements but is not included in the patent application, the investor or company may try to claim as their own ideas.

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 

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.

rev. 8/1/19, 8/8/19