By: Madeleine Kuhns-Baione
Startups that do not utilize Non-Disclosure Agreements (“NDA”) are at higher risk for financial instability or failure. Even if an entrepreneur feels that they can trust others, utilizing NDAs is one of the easiest yet most effective ways to protect a business.
What aRE ndaS?
Non-Disclosure Agreements, commonly called confidentiality agreements, are binding agreements where parties are legally required to keep specific information confidential. Parties to the NDA cannot share the information with third parties or use it for their benefit. NDAs are useful for all aspects of business, including sales meetings, negotiations, discussions with financiers, product suppliers, etc. Most commonly though, NDAs are used with employees and business partners.
What are THE BENEFITS OF ndAS?
1. Protect Intellectual Property
NDAs protect confidential information including, but not limited to – trade secrets, client information, marketing strategies, proprietary processes, coding techniques, and other sensitive information. NDAs give business owners the power to decide what information is confidential and protected. With this power, business owners can establish employee expectations regarding what information is protected and the consequences of violations.
2. May Minimize Competition
If a startup utilizes an NDA, the parties to the NDA are legally bound to keep confidential information from competitors. In addition, they may not legally use this confidential information to start their own competing business while utilizing the same processes, trade secrets, clients, etc. However, NDAs are not the “end all, be all” to minimize competition. NDAs only assure that a business’s confidential information is legally protected.
3. Provide the Ability to Pursue Legal Recourse
The utilization and enforcement of NDAs are particularly helpful for setting employee expectations and legally binding employees and third parties to abide by the agreement. However, an NDA’s effectiveness within a business is never guaranteed, as employees and third parties may choose to violate the NDA. Luckily, NDAs provide fairly easy legal recourse when a breach occurs.
If confidential information is shared in violation of an NDA, a business may file one of the following claims: breach of contract, breach of fiduciary duty, misappropriation of trade secrets, copyright infringement, or other intellectual property law violations. It is important to note that NDAs offer broad protection. Within an NDA, a business may include proprietary and non-public information that does not meet the standard of a “trade secret,” that other claims require. For example, a misappropriation claim would require that the confidential information meets elemental requirements for a trade secret, while an NDA may not.
If a business does not use an NDA and confidential information is shared, proving that the information is a trade secret may be more difficult. With an NDA violation, a business may file a breach of contract claim, seek an injunction to prevent the employee or third party from further violating the NDA, or the business may file a lawsuit for financial damages for the losses they suffered resulting from the breach.
HOW Can You Ensure That the NDA Is Enforceable?
An NDA is an enforceable contract. For contracts to be enforceable, there must be consideration. In plain language, contracts require a bargain between the employer and the employee or third party. In the case of an NDA for employment, the employer is receiving the protection of confidential information. To enforce the NDA, the employee must receive something in exchange. Some courts have held that at-will employment is sufficient for the NDA to be enforceable. Regardless of the circumstances, NDAs should always be thoroughly reviewed with an attorney, if necessary, to ensure that the NDA will be enforceable.
Even if an NDA appears enforceable, a court may find it is not. This finding may occur when the NDA includes broad language, information that is not confidential, or something illegal. To mitigate these issues, language and word choice should be extremely precise and specify what information is considered confidential under the agreement. Further, if the information stated within the agreement has been widely disclosed or is public knowledge, it is extremely unlikely that a court will uphold the NDA. Lastly, NDAs cannot force employees to engage in illegal conduct, such as legally forcing them to withhold reports of something they are required to report by law.
Although NDAs are easy to draft and utilize, businesses should give them significant time and effort to ensure they will be enforceable. If an entrepreneur utilizes an enforceable NDA, they are taking a big step toward protecting their business and preventing the disclosure of sensitive and confidential information.
This post has been reproduced and updated with the author’s permission. It was originally authored on February 1, 2023 and can be found here.
Madeleine is a 3L at Penn State Dickinson Law pursuing a joint JD/MBA degree. Madeleine studied International Business and Management at Dickinson College for her undergraduate education. Before attending law school, Madeleine worked as a Claim Manager at a 9/11 Victim Compensation law firm in NYC. Madeleine is interested in pursuing a career in business and/or healthcare law.
Advertisement plays an integral role in the success of any business. Large corporations allocate significant budgets annually to promote their products and services to customers. The rationale behind this investment is that even a minor impression can lead to an actual purchase. Therefore, the key to effective advertising lies in implanting brand awareness in potential customers.
When someone utilizes an established mark without proper authority or approval, it can cause harm to the true owner of the mark. Such unauthorized use can lead to customer confusion, resulting in a customer accidentally purchasing alternative products or services. In more severe cases, it can generate a negative perception of the products or services. In legal terminology, this situation is called trademark dilution.
Coke or Pepsi? D.C. or Marvel? It’s safe to say you probably prefer one of each category or dislike both options. But why? After all, Coke and Pepsi are both Colas. D.C. and Marvel both make comic books. The answer is obvious. You prefer Coke or Pepsi because of the flavor recipe and pick D.C. or Marvel because of the specific characters and stories.
In the 2010s, a technology manufacturer headquartered in Loveland, Colorado, tested this idea. Aleph Objects produced a 3D printer line called the “Lulzbot.” What made this product interesting was the “open ethos” behind its production. Not only was the product developed using open-source technology – technology produced and published without securing intellectual property rights – but the device itself was “open.” The recipe of the hardware components used to build the physical printer was available online through Aleph’s website. The software used by the printer was fully open-source as well. Nothing in the device’s makeup was proprietary. Individuals were free to build their own Lulzbot without paying the company anything.
Employing an open model can reduce research and development expenses. If you produce open-source software and hardware, your customer base can contribute to the development of your company. As customers tweak the product with minor improvements and revisions, you can implement these changes in your production model. Under this scheme, you aren’t solely dependent on your R&D engineers (which, as a startup, may just be yourself) for good ideas. A limitless team of people can make suggestions, all for free.
Let’s face it, in most industries, this model can’t work. You won’t beat Coke by making your own Cola and publishing the recipe online. If you’re trying to beat D.C. and Marvel, letting them use your characters in their stories will not help. This business model may be effective in the technology industry, but perhaps nowhere else. Open-source software is already an industry standard, and open hardware has been done before, as seen with the Aleph Objects example.
It is impossible to recommend an “open ethos” model to all business owners. The model is too industry and circumstance specific. Lawyers usually recommend that business owners secure intellectual property for a reason. However, for some entrepreneurs (particularly those with very progressive views regarding the philosophy of ownership), the “open ethos” model may work. Playing while showing your hand is a bold strategy in any card game, but you can still win if your cards are good enough.
Most start-up pharmaceutical, biotechnology, and medical device companies are formed with the intent to eventually be bought out by larger, well-established companies such as Abbott, Sigma Aldrich, or Bayer. However, the option of being bought out only comes to fruition once a start-up has established scientific proof that leads to medical or pharmaceutical advancement. In the course of novel scientific innovation, start-ups and inventors are often quick to get a patent. But, when being bought out, one might find themselves confused about the status of their application or the ownership of the patent. This blog post aims to explain (1) the ownership and assignment of a patent when it is first filed, and (2) how assignment rights can be transferred when a company is bought out.
Utility applications and patents are the most common type of filings and are what people often think of when hearing “patent.” Scientific developments will always be utility applications that end in utility patents. However, these filings come in many types including provisional, nonprovisional, divisional, substitute, continuation, and continuation-in-part applications. While the precise differences between these applications and their functions are irrelevant to this post, it is important to note that a nonprovisional application is always a parent application. The remaining types of applications, except provisional applications, stem from the originally filed parent application and are therefore known as child applications. Provisional applications themselves are not a type of application that leads to a patent, but rather, they act to “hold your place in line” at the United States Patent and Trademark Office (“USPTO”).
While not required, it is always best to record an assignment at the USPTO. Recording the assignment provides public notice of the assignment and prevents your company from losing rights if a later transfer occurs to a third party as they will be aware of the original assignment. While that may sound complicated, it simply means that recording the assignment prevents any later transfers to a third party because the first party to record and publicly claim ownership in good faith is given priority in ownership.
If the start-up only holds partial ownership in an application or patent, the transfer does not provide the assignee with complete ownership but is rather defined as an “assignment of patent rights.” In other words, you can only assign the percentage of rights held by your start-up. This situation is often seen in joint ventures between two companies or where multiple inventors exist and fail to unanimously agree to assign the application or patent. To illustrate this, if four inventors each own a 25% interest in the application or patent, with two refusing to assign to the start-up, the start-up can only obtain 50% ownership, and may only further assign that 50% right to another. The main issue in this scenario is that all owners must act together if the application undergoes prosecution before the USPTO. This can create difficult scenarios where application owners have differing opinions on how to proceed with prosecution, thus slowing down the entire process and ultimately leading to more issues.
There are four legal requirements for patentability: the invention must be (1) useful, (2) patentable subject matter, (3) novel, and (4) nonobvious. Patentable subject matter includes machines, processes, methods of manufacture, or compositions of matter. This definition excludes laws of nature, natural phenomena, abstract ideas, and business strategies.
Subject Matter: Trade secrets may protect things that are not patentable subject matter. This allows things such as customer lists and pricing information to be protected as a trade secret in some instances.
Coryn Hubbert, at the time of this post, is a recent graduate of Penn State Dickinson Law. She has a B.A. in Political Science with a Pre-Law minor from Arcadia University. Since attending law school, Coryn has interned with the Honorable Judge Royce Morris at the Dauphin County Court of Common Pleas and with Pennsylvania’s Office of General Counsel, Department of Conservation and Natural Resources. Coryn currently works at Marshall Dennehey Warner Coleman & Goggin in Camp Hill.
How many Intellectual Property (“IP”) markers can you spot around yourself?
A trademark is a word, logo, or package design that identifies the source of the goods or services, such as the examples above. Companies invest significantly on advertising to create a unique and recognizable brand identity, and trademark is a tool to reinforce and protect that.
Copyright protects artistic and literary works like books, movies, and music. In the business context, it also protects original and creative works like software, video games, documents, and marketing materials. A copyright owner has the exclusive rights to reproduce, distribute, display, and derive from their copyrighted work. Such exclusive rights allow you to issue a license to others to use your work. Depending on your business, a licensing fee can be a lucrative source of income. A common example is software license.
Patent protects inventions, designs, and asexually reproduced plants. Some famous patented inventions include the electric lightbulb, Apple’s first personal computer, GPS technology, CRISPR gene editing, and the shaving razor.
Trade Secret, as the name suggests, protects secret business information. It protects almost any information that is valuable because it is not known and is sufficiently secret, such as formula, process, software, recipe, customer list, budget plan, marketing data. The two most famous trade secrets are Google’s search algorithm and Coca-Cola’s recipe.
For many nascent entrepreneurs caught up in the many layers of starting their business, building an intellectual property portfolio is not at the top of their priority list. In light of fundraising capital, navigating the real estate market for the ideal property, and building initial inventory, thinking about intellectual property filings might stay on the back burner. However common this scenario may be, it is a mistake—one of the most critical elements of any business is its name (and subsequent branding!), and ensuring that your preferred name is both available and enforceable should be a main prerogative.
When you think about the marketplace giants that we interact with every day—like Apple, Amazon, and Google—you will notice that their names are concise, unique, and recognizable. Entrepreneurs brainstorming a name for their product or business should try to emulate this blueprint, and not just because it is a smart marketing strategy, but because these names are likely to be more easily trademarked.
These nuances are important to keep in mind as an entrepreneur selecting a name for their new business. If you would like to explore what options might be taken already but have not yet retained an attorney to assist with your start-up, you can go to the USPTO website and use their 