Before You Talk to Investors or Potential Partners About Your Invention . . .
One of the most significant tasks many start-up companies face is finding investors to provide sufficient capital to get their businesses off the ground. Out of necessity, many start-ups often begin reaching out for assistance early in their development.
Investors, on the other hand, want to know that they are likely to achieve a sufficient return on their investment from start-ups to make an investment worthwhile. To demonstrate the value of their fledgling businesses, start-ups are often forced to disclose confidential product development plans to potential investors. They are understandably concerned about whether their ideas will be taken without compensation and how best to protect themselves. After all, once the investor has the ideas, why does it need the start-up?
Here are some strategies to help reduce the risk-or at least the resulting harm-of an investor or other potential partner from stealing your idea:
File a patent application before disclosing your idea
If your product has features that may be patentable (i.e., features that are novel and non-obvious), you should consider filing a patent application before you disclose the idea to anyone. If and when you get an issued patent, you can sue anyone using the invention for patent infringement, allowing you and collect damages and/or possibly get an injunction to stop their infringement.
Also, if the third party tries to file its own patent application for the idea, you will be first and will be able to defeat its rights to get a patent. This issue will become even more critical with the "first to file" provisions of the America Invents Act. Under current law, you can defeat another's rights to obtain a patent by showing that you were the first to invent. Once the first to file provisions take effect on March 16, 2013, that will no longer be the case. Subject to certain exceptions, you will have to be the first to file to defeat the rights of another. In a case where a third party takes your idea and files for a patent application on it, under the America Invents Act you may be able to ultimately institute a "derivation proceeding" to remedy the situation. However, it is far better to be the first to file than to have to rely on that process. If possible, have the third party sign a non-disclosure agreement.
If possible, have the third party sign a non-disclosure agreement
While your patent application is pending, you have no enforceable patent rights. You cannot file a patent infringement lawsuit or otherwise stop anyone from using your invention until your application issues as a patent. Therefore, you should have the other party sign a non-disclosure agreement or "NDA." In an NDA, the other party will agree not to use or disclose the information you provide it for any purpose other than evaluating your business opportunity. This gives you the ability to file a breach of contract lawsuit if the other party improperly exploits your invention, even while your patent application.
Having said that, keep in mind that certain companies may refuse to sign an NDA for fear that they could invite future litigation. It all comes down to leverage. If the investor is well-heeled and has numerous investment opportunities, it will be less motivated to sign an NDA.
Also, many (or most) NDAs allow the third party to use information that is already publicly known, even if it is not specifically known by the third party at the time. Of course, if product information is publicly known, you will also likely be unable to get a patent for it.
An NDA is no substitute for a patent. An NDA only provides rights between the contracting parties. A patent is enforceable against anyone who infringes it in the country in which it is in force. Also, the recoverable damages from a breach of an NDA may ultimately be more limited than those recoverable in a patent infringement lawsuit, especially if the breach occurs at a time before the product has achieved commercial success.
Of course, the foregoing suggestions present a "chicken or egg" problem. Some companies cannot obtain the resources necessary to get a patent application on file without outside financial help. In that case, they are forced to assume the risk of having their ideas taken without compensation in order to get them money they need. If there is no other way of proceeding, they may have to accept this risk to move forward. However, the attorneys fees for a typical NDA are far less than those for a typical patent application, so at least an NDA should be pursued.
Some inventors at least try to file their own provisional patent applications for engaging in discussions with third parties, and this can help. The U.S. Patent & Trademark Office has a good primer on provisional patent applications that can be obtained at http://www.uspto.gov/patents/resources/types/provisional_app.pdf. This approach is not ideal. As we reported in our December 2011 newsletter, a poorly written or "thin" provisional may ultimately provide little protection. However, when resources are scarce, putting together your own provisional can provide some measure of protection, but only if a full, non-provisional application is filed within one year of the provisional application's filing date.
|