Confidentiality Agreement vs Patent Pending

Sometimes an inventor may wonder if he/she is safe to disclose his invention to a potential licensee if he has the licensee sign a confidentiality agreement.  Or perhaps an inventor has a patent application filed, and wonders if he should also have a potential licensee sign a confidentiality agreement just to be extra safe.  Here is my view on the value of both forms of protection. 

Many companies view independent inventors as a total waste of their time, a pain in the butt, and a potential lawsuit.  They often have policies that they won’t sign confidentiality agreements, and really don’t want to see an inventor’s invention.  The danger for them is that people in their own organization may be working on the same problem, and they could view the inventor’s stuff, reject it, then a year later come out with the product they have been working on in their lab.  The inventor could then sue them for breach of contract.  With that possibility in mind they usually won’t even look at an invention unless it is patent pending.  If it is patent pending, then the invention is defined, so then their decision becomes 1) whether their in-house product is an infringement of the claims of the patent, and 2) can they prove they conceived of it first. 

Their policy may be to never sign confidentiality agreements, to protect themselves from lawsuits by whacko inventors.

From the inventors point of view, if the potential licensee signs a confidentiality agreement and then breaches it, he can sue them for breach of contract.  That’s not too practical for most inventors, and the licensee knows it.  So its not much of a threat. 

If the inventor has a patent pending and the licensee rips him off the inventor can proceed to get the patent issued, and sue them for patent infringement.  As damages he can get triple damages if he can prove that the infringement is willful.  Patent damages start to accrue from the date that the application is published 18 months after it is filed, and he can ask for expedited prosecution if infringement is involved.  The inventor could also get an injunction against the licensee ever selling the product.  The inventor could also license the patent rights to the licensee's biggest competitor, or five of their competitors, who could afford to chase them through the courts and give them a spanking.  Once the patent infringement case was won, the infringer would pay triple damages if the infringement was willful, have to quit selling the invention, and their investment in marketing is lost, but they will have created a need in the industry for the product which will translate to lots more sales of the product to the inventor or his licensee.   

It's not likely that this sequence will happen, because the potential licensee will be able to see where things are going, and its just a lot better business to license the patent rights, and pay the inventor some money, and then for them to be able to keep their competitors out of that market if it’s a good idea. 

So if the inventor is patent pending the consequences of ripping him off are greater than if a confidentiality agreement is breached.  By being patent pending going into the meeting, the inventor conveys that he is not a dummy, he has some legal advice, and is approaching this in a business-like manner.

It would not hurt to have a confidentiality agreement as well, but I don’t think the inventor is likely to get it signed, and it doesn't buys him that much leverage anyway.

Comments

Hi Bob,

Good blog re Licensing; pretty much known by those who've been around the block ( should that be "blog") a few times but well-written so that an inventor at any level should be able to understand it. Love that outdoorsy picture of you on your site. I'm jealous!!!! Okay, I've got one from you. I'd like to read your mindset re the below - obviously when wearing your legal and creative hats.
==========================================
I have snipped from it what I deam non- essential to my question above. It was written by Mike Marra, toy/game agent at Marra Design - www.marradesign.com The entire to members can be seen in chat archives titled, "Inventors types and paths to market" dated: 10/7/2005 8:39:16 AM Pacific Standard Time

.."I decide to manufacturer and introduce my ice gripping tire and it becomes a hit product, guess what, other companies will immediately create a mechanism that does the same function but avoids my claims. To be competitive again, I redesign the gripping device using one of my other 4 designs, now I must file for a new patent and the original manufactured device is moot.

Now let me put on my inventor hat and license the patent of the tire ice gripper to a manufacturer. The manufacturer will pay me a royalty as long as they use my specific device as described in the patent claims (regardless of embodiment) and for the life of the patent.

Same scenario, a competitor emerges which forces the company to redesign outside of the licensed patent claims. The company will stop paying royalties on my device, of course we can argue moral issues.

If I happen to have a patent on my tire gripper and I license the "CONCEPT" not the patent, I get to claim any and all variations are payable and NO 20 year time limit. Now the licensing agreement is strictly about the company's performance with the tire gripper.

Whew! The "what if's" of the above can go on forever.

Here are a few thoughts for the members to pick apart.

1) When creating an idea for licensing, money is much better spent on prototyping and working out as many alternative designs and bugs as possible. Filing for a patent does two things, it eats up valuable money and time resources and it starts the clock ticking for patent life. Let's "ASSUME" it takes 5 years before the inventor secures a licensing agreement (and I'm being generous). The licensee will want to negotiate a lower royalty rate since they now have only 15 years left on the patent and most likely the life will be reduced to 12 or 13 years by time the product hits the market.

Licensing the concept without any patent application gives the licensee the opportunity to patent the item at their cost and they get the full 20 year life. In the meantime, the inventor gets the benefit of being paid for ANY current or future variation of the product and winds up with the patent anyway.

2) If the new inventor wants to become the manufacturer then considering patent filings makes sense, in hopes that it will keep competitors at bay for a short time.

Then there are those unscrupulous people that will step all over patent claims to make the same product and when caught just say, "sue me" but that's a whole other story!

If it helps my credibility at all, I've successfully designed around numerous patents (medical devices, beauty aids, lawn and garden equipment and portable displays, just to name a few) for corporations who wanted to enter a product category without violating existing patent claims. Most times our designs were more clever and crushed the other companies business.

Penny
www.inventored.org
www.piausa.org

[PENNY BALLOU]

Couple of changes to my email – (accidentally hit the Enter button too early – dang!):

1. The entire [“email”] to members can be seen in chat archives titled, "Inventors types and paths to market" dated: 10/7/2005 8:39:16 AM Pacific Standard Time

2. Place a quote mark [”] beside the last word of Mike’s email at the last word, …business.” It comes before my signature so it does not appear I wrote what was written.

Thanx!

[J. Goodwille Pierre]

Great column. I also think Money is a factor as well.

[Bob Shaver]

Penny, that's not a question, but an essay! There are a copule of clear rules that come into play in some of the issues you post:

1. Only the true inventor can get a patent. So the corporation you license to can't patent your invention. They can pay for the patent and list you as the inventor, and have you assign it to them.

2. Once you offer for sale or publicly disclose an invention, you have one year to file a patent application on it. So you can't license it first, and patent it at your leisure.

3. If you don't have a patent pending, you don't own anything to license. A patent application defines what you own and gives you a filing date.

4. Good luck licensing the idea with no patent. Its a great concept for inventors, but no company would license an idea with no ability to keep competition from copying the product. It might happen once in a while, but as far as I know its so rare as to basically never happen.

5. Having competition design around patent claims. The job of your patent attorney is to make your claims broad enough that they are hard to design around. To do that, he may get the inventor to brainstorm with him about alternate embodiments, and claim it as many ways as they can think of. The breadth of patent claims depends on what prior art exists. If there is lots of close prior art, you may not be able to get broad claims.

6. Why have a patent if you can't get broad claims? Sometimes a manufacturer is starting a project where he knows the prior art is pretty close, and if he gets a patent it won't be very broad. However, being patent pending alone has some value. Compared to the cost invested in the venture, the price of a provisional and utility patent application is quite small. While he is patent pending his competition won't know what his patent claims are, when he filed, or when or if it will issue as a patent. That will cause him to hesitate before he commits money to tool up and market a product. If being patent pending keeps a competitor out of the market for a year or so, it has bought a headstart to the inventor. When it finally issues, the competitor might still find it hard to get investors when they do a due diligence on the product and find the inventor's patent, which might cause the investor's money to be lost.

Also when you start the patent process you try to get broad claims. By the end you may find out that you can only get narrow claims, so the choice becomes: do I get what I can get and have a patent, or let it go and not have a patent.

Designing around patent claims. If the patent claims are narrow, they might be able to be designed around. If they are broad, it may be impossible to design around them and still have a competitive product. If all patent claims were easy to design around no one would get patents, especially the companies who could afford to litigate them. If you look at the posts in this blog you will notice that in about every case the inventor (Otto, Benz, Daimler, Evans, everybody!) got a patent, started a company, followed it up with other patents, and the company is still around 100 years later in some cases. All those companies started with one patent, followed by improvements and other patents.

That's my rant and I'm sticking to it!

Bob

[Dawn Smith]

Hi Bob,

My husband has designed an invention for the hunting industry. What is the best way to go about getting the product out there for a manufacturer to see and produce. We have a patent pending and one of the manufacturers that we contacted has signed a confidentiality agreement and his staff. We want to approach other manufacturers.

[Ronald L. Brooks]

I have a patent pending (Business Method), which I followed the procedure of filing a Provisional Patent (Feb. 20, 2007) and then filed the Non-Provisional (Feb. 17, 2008), which I have been granted a U.S. Application Number. During this time, to no avail, I have been searching for investors. I have a concept which will draw the attention of investors, but calls for publically disclosing my idea. How can I or can I disclose my invention in this manner without concern for the "first to invent" provision in the U.S. Patent System? Thank you in advance for your guidance on this matter.

[Narconon VistaBay]

I never realized that there was so much more to this. I have been so naive about this whole situation. I am currently pending a patent and never realized that some of these things could happen.