January 2007 - Legal Affairs

The Critical First Step to Protecting Your Product

By Gary P. Kohn

A wise old sage once proclaimed: “An ounce of prevention is worth a pound of cure.” We’ve all heard this sound advice many times before, but have we heeded the counsel of this sage? Whether you are a product inventor with the next hit product or a marketer who has acquired the marketing rights to a product with homerun potential, you should take steps to protect that product and your confidential information. Assuming that filings for intellectual property protection already have been done, before you disclose any proprietary information about your product to a third party, you should insist that the third party sign a confidentiality agreement commonly known as a Nondisclosure Agreement (NDA).

The most common situations in which you would want to enter into an NDA include: pitching a product, business concept or technology to a potential financier, marketing partner or distributor; presenting sales information, financial projections or media results to a proposed purchaser of your business; and disclosing customer information, marketing strategies and other non-public information to vendors rendering production, marketing or manufacturing services. A well-crafted NDA usually consists of the following provisions, among others: (1) designation of the parties; (2) definition of confidential information or proprietary information to be protected; (3) extent of the confidentiality obligations; (4) exclusions from the confidentiality obligations; (5) description of the use of the confidential information (e.g., for the purpose of determining whether to invest in a product); (6) term of the NDA; and (7) legal protections, such as the right to seek an injunction, governing law, jurisdiction and venue clauses in the event of a dispute or breach, an attorneys’ fees clause and restrictive covenants. Some NDAs are mutual or reciprocal and impose confidentiality obligations on both parties, whereas other NDAs may only restrict one party. The main purpose of an NDA is to protect your valuable confidential information by using a strong contract with teeth to act as a deterrent so the recipient does not use or disclose your confidential information.

The definition of confidential information identifies the proprietary information sought to be protected. This information could include a list of specific “trade secret” items, such as product descriptions, ideas, concepts, outlines, summaries, research, analyses, sales and media reports, financial proformas, memorandums, proposals, specifications, drawings, designs, photographs, business plans, inventions, and patent, trademark and copyright applications or registrations. Or, it could include generally any information furnished by you-whether orally or in written form or otherwise with respect to your business and your proprietary product, idea or technology. Some NDAs specify that in order for information to qualify as “confidential information” it has to be marked as such. This type of provision is not recommended for two reasons: (1) there is a substantial risk that a party may not be diligent about marking every document as “confidential”; and (2) any proprietary information communicated orally would not be covered as “confidential.”

Customary exclusions from the definition of confidential information include: (a) information which is or becomes known publicly (i.e., public domain) through no fault of the recipient; (b) information obtained by the recipient from a third party entitled to disclose it; (c) information that has been independently developed by the recipient or already known by the recipient before receipt of the confidential information; and (d) information requested or required by any federal, state or local court or agency. In the instance of information independently developed or already known by the recipient, the recipient should verify that fact to the disclosing party immediately following receipt of the confidential information. In the case of information required to be disclosed in accordance with law or court order, an NDA may provide that the recipient of the legal demand notify the disclosing party of the demand to enable the disclosing party to seek a protective order or other appropriate remedy to prevent the disclosure of its confidential information.

An NDA should provide that the recipient of confidential information should not disclose or use the confidential information for any purpose other than that set forth in the NDA, and that the recipient should agree that it will disclose the confidential information to its employees and representatives on a need-to-know basis only. Moreover, the recipient often agrees that a laundry list of its representatives, such as its officers, directors, shareholders, members, managers, principals, employees, affiliates, licensees, distributors, successors, assigns, attorneys, parent companies, subsidiaries, contractors, representatives and agents (collectively, “constituents”) will be bound by the restrictions contained in the NDA. Also, the recipient shall remain liable for any breach or violation of the terms of the NDA by the recipient or any of its constituents. Some disclosing parties insist that the recipient require each of its constituents to sign separate NDAs, but that practice is cumbersome and often times impractical.

Since the ultimate goal of a disclosing party is to enter into an agreement with the recipient for the purpose described in the NDA, the NDA should provide that the recipient shall not proceed, directly or indirectly, with the development of any ideas or products presented to it as part of the confidential information unless the parties enter into a definitive written agreement. If the parties do not enter into a definitive written agreement, the NDA should provide that all product information, client information, opinions, financial records, budgets, files, records, copies of documents, photographs, worksheets and other proprietary materials obtained by the recipient from the disclosing party shall be returned promptly, and that the recipient may not retain copies or duplicates or attempt to duplicate the confidential information directly or indirectly, or for any third party.

The term or length of the NDA is an important but often overlooked issue. For the disclosing party, the preference would be the longest possible term, and several NDAs provide for the confidentiality obligations to extend in perpetuity. Often recipients of confidential information opt for a shorter period of time, ranging from one to five years, with three years being common. The term of the NDA should permit the disclosing party to keep the recipient out of the marketplace long enough to give the disclosing party the opportunity to develop and capitalize on its confidential information. If the NDA has an early termination provision, it may be necessary to specify that the confidentiality obligations survive the termination of the NDA for a specified period of time.

In the event of a dispute or a breach of the NDA, important legal protections for disclosing parties include the following: a provision stating that monetary damages would be insufficient in the event of a breach of the NDA and that the non-breaching party shall be entitled to seek enforcement of the provisions of the NDA by injunction; a clause providing that the governing law for the NDA shall be the state in which the disclosing party resides; jurisdiction and venue clauses providing that the courts in the state in which the disclosing party resides shall have jurisdiction over the dispute and that the dispute will heard in the city and state in which the disclosing party resides; and an attorneys’ fees clause providing that the prevailing party in the court action or arbitration proceeding, as applicable, shall receive its attorneys’ fees and costs.

Of critical importance to any person or entity possessing valuable confidential information is to take steps to protect the secrecy of that Information. An NDA should be your first line of protection. Oftentimes, getting to the market first-and thereby maintaining the competitive advantage-may be the difference between success and failure of a product or marketing campaign. Like the proverbial cat out of the bag, once disclosure of confidential information is made, there is no way to reverse the damage.

Gary P. Kohn practices entertainment and corporate law and specializes in inventor, marketing and direct response contracts. He is licensed in both California and New York. He can be reached at (310) 670-7311, or via e-mail at [email protected].


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