Non-Disclosure Agreements (NDAs)

Bill NaifehIntellectual Property - General, IP Management

Obviously, a company should give careful consideration to providing proprietary information to anyone outside the company.  Such disclosures should only be made on a strict “need to know” basis.

Typically, the outside party agrees to accept the information under conditions that impose a legal obligation on the outside party to maintain and protect the proprietary information as the confidential property.  Such legal obligations are usually secured through the use of a written non-disclosure agreement (“NDA”).

Companies usually use two types of NDAs: (1) a unilateral NDA, and a bilateral NDA.   Unilateral NDAs are typically used when you want the recipient to keep the information confidential, but the company is under no obligation to keep information secret received from the recipient.  For instance, a medical device company would probably use a unilateral NDA when giving drawings to vendor who will be manufacturing parts for a device.  In contrast, bilateral NDAs are used when both parties are required to keep information confidential.

Be very careful when using NDAs – especially bilateral NDAs.  NDAs could unintentionally prevent a company from developing future products.

For instance, in 1999, a surgeon and a large medical device company signed an NDA to discuss the surgeon’s inventions to treat fractures.  Interestingly, the surgeon did not file for a patent for his invention.  The medical device company apparently received designs from surgeon, but decided not to acquire any interests in the surgeon’s invention.  However, in 2000 the medical device company filed a patent application for a supposedly similar device listing other doctors as inventors.  Later another medical device company acquired the rights to the surgeons invention and sued the first medical device company.  According to the lawsuit, the invention described in the patent application was substantially similar to the one the surgeon presented to the first medical device company.  Among other allegations, the complaint alleged that first device company stole the surgeon’s trade secrets and breached the NDA.

Are the allegations in the lawsuit true?  We will probably never know because most of the court documents are sealed and the parties settled the suit.  What is important to realize, however, is that when the first device company signed the NDA with the surgeon, it put itself in a precarious position.   The first company is a giant company with thousands of consultant surgeons and engineers.  It very well might have independently developed a similar device to the surgeon’s device.  However, proving that the device company did not use the surgeon’s ideas is hard to do.  How do you prove that a conversation did not take place?

By signing the NDA with the surgeon, the medical device company created a problem and may have closed the door to developing a similar product.  Proving that a company independently developed an invention without using the subject of the disclosure may be hard to do.  That is why many companies will not accept unsolicited ideas from inventors.

Companies, therefore, should be very careful about evaluating third party inventions under confidentiality agreements.  It may be less costly to drop a potential product than to fight a lawsuit. Thus, as with any agreement that binds a company, confidentiality agreements should be used with great caution.