Types of Confidentiality Agreements for Business

Confidentiality Agreements

Should Your Business Use Confidentiality Agreements?  

Should your company use confidentiality agreements?  If your business has information it needs (or wants) to keep out of the public domain, then yes. Information of this type may include:

  • Certain types of intellectual properties
  • Company information disclosed to potential investors and investors identities
  • Customer lists
  • Employee salaries
  • Independent contractor identities
  • Research and development assets
  • Suppliers identities
  • Tax returns
  • Trade secrets, etc.

As a general rule, once information enters the public domain, you can’t make it private. You have to be proactive.

Three Types of Confidentiality Agreements 

1)        Confidentiality Agreement

This agreement can be used when the involved Parties agree to hold the information disclosed in “strict confidence.” When the Parties become adverse or one of the Parties is seeking to avoid the terms of the Confidentiality Agreement, the Parties may argue over:

  • What was the information disclosed in “strict confidence?” (It is helpful to specifically identify the information covered in the Confidentiality Agreement itself)
  • What the Party receiving the disclosed information must do with the information
  • Which State’s law controls the provisions of the Agreement
  • Where the venue and personal jurisdiction will be, should litigation become necessary

2)        Confidentiality and Evaluation (CE) Agreement

Potential Patent rights (or Patent rights) can be the subject of a CE Agreement. A CE Agreement specifies that the subject matter disclosed is to be held in “strict confidence” and that the information is provided solely for the purpose of evaluation.  In the event one Party is dissatisfied with the CE Agreement, the same issues as identified in the above (Confidentiality Agreement) section will apply here. Additionally, this type of agreement will need to specify:

  • Is audible disclosure a disclosure to be held in “strict confidence?”
  • Is visual disclosure a disclosure to be held in “strict confidence?”
  • What happens when the Party receiving the disclosure evaluates the audible or verbal disclosure outside the jurisdiction where the Parties are domiciled?

This matters because any public disclosure related to potential Patent rights (prior to the filing of the Patent Application) can bar any future Patent related to the disclosed information

3)        Confidentiality, Evaluation and Noncompetition (CEN) Agreement

As with the two agreement types above, almost anything that one Party wants to be kept in “strict confidence” can be the subject matter of a CEN Agreement. Along with Confidentiality and Evaluation, a CEN Agreement also includes a Noncompetition (anywhere in the world) provision for the Party receiving the information. Whenever possible, Business Patent Law, PLLC recommends its clients use a CEN Agreement.

In the event one Party is dissatisfied with the CE Agreement, the same issues as identified in Sections 1) and 2) above, may also be grounds for argument between the Parties.

An example of when a CEN Agreement might be used: Private/nonpublic companies often have corporate bylaws that require shareholders to execute CEN Agreements before shareholders can be issued stock.

If a Business Fails to Use Confidentiality-Type Agreements 

Unless some type of Agreement between the Parties is executed, the disclosing Party has minimal legal recourse against the receiving Party repeating publically the disclosed information or using the disclosed information for another reason.

Here are a few ways such disclosures could become a problem:

  • Public disclosure of the company’s private information will likely temporarily disrupt the company’s operations
  • What would happen if all the company’s employees were aware of each employee’s salary?
  • What would happen if the company’s competitors were aware of the company’s research and development information?
  • A trade secret disclosed publicly is no longer secret and the secret is lost forever

What You Need To Know About Confidentiality Agreements

  • Confidentiality Agreements between trustworthy Parties can improve profits for both companies
  • The bargaining power of the Parties tends to influence the type of Confidentiality Agreement executed  (A publicly traded company will likely have a Confidentiality-type Agreement that is more favorable to the publicly traded company when contracting with a business having annual sales of $2M)
  • Bad actors tend to exploit the other Party to a contract (Character of the Parties matters)
  • Agreements executed between Parties who were not represented by legal counsel may be unenforceable
  • Confidentiality Agreements that were drafted for a first purpose may not be acceptable for a second (but similar) purpose
  • Without the advice of legal counsel, parties my draft contracts for almost anything they feel is important at the time the contract was allegedly executed (Some of these contracts may be enforceable, some may not)
  • If the alleged contract is only partially in writing, there may be issues when memories fade ten years later  (Get it in writing)
  • Perspective matters (Three different eyewitnesses can witness the same event and three distinct testimonies may be offered into evidence)
  • Written, properly executed agreements can minimize business disruptions

If you have questions about intellectual properties or agreements, please contact Business Patent Law, PLLC. We are here to help you grow your business and protect your intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Retain Control of Patent Assets

Control Patent Assets

Who controls a Patent? Inventor? Company?

35 United States Code (U.S.C.) 101 reads as follows:

“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore . . . ” and this is the starting point for determining ownership of Patent Assets.

Last month’s blog included illustrations of how a company can lose control of its Patent Assets. This month we will explore steps you can take to retain control of your company’s patents.

Control of Patent Assets

Whenever possible, companies should limit the possibility that statutes and case law will determine the ownership of Patent Assets and other Intellectual Properties. To blindly believe that because the company paid someone to do something for the company, the company owns what was created is not always effective. It’s similar to people assuming that when they die without any estate planning, State law will distribute their property according to their wishes. It seldom works that way.

How to Better Control Company Patent Assets

Use contracts with employees, agents, and independent contractors to ensure the company’s ownership of the invention’s Intellectual Property rights. Some  conditions for control of Intellectual Property rights can include:

1. As a condition of employment, the employee agrees, in writing, that the company is the owner of:

  • all inventions invented by the employee; or
  • the inventions invented by the employee at any workplace provided by the company or with devices, tools, programs, etc. supplied by the company; or
  • the inventions invented by the employee that are associated with the company’s goods or services or the company’s pipeline of goods or services.

2. As a condition of employment, the employee gives the right of first refusal (in writing) to the company as to whether the company will own the invention.

3. Prior to hiring an agent or independent contractor, the company requires that agent/independent contractor to sign a written agreement stating that:

  • all the inventions invented by the agent/independent contractor at any workplace provided by the company or with devices, tools, programs, etc. supplied by the company are owned by the company; and/or
  • all inventions invented by the agent/independent contractor associated with the company’s goods or services or the company’s pipeline of goods or services belong to the company.

Control Your Company’s Patent Assets or Someone Else Will

An assignment document is used to transfer ownership of the invention’s intellectual property rights to the company.

If the employee will not agree to assign Patent Assets to the company as a condition of employment, hire someone who will.

The same approach should be applied to agents and/or independent contractors.

If you have questions about your company’s ownership of Patent assets, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Rental Property and Intellectual Rights

Real Estate Rental, Tangible Property and Intellectual Property Rights

Relationship Between Commercial Rental Property and Inventories

Landlords own the real property rented by tenants (rental property). Tenants have an interest in the use of that real property. A commercial landlord rents square footage to the tenant and grants the tenant permission to operate a business from the rented space. Under most commercial leases, inventory remains the personal property of the tenant. Landowners may also operate their own businesses from commercial real properties.

Real Property Cases: Traditionally Matters for State Courts, However…

For centuries, disputes involving real property and rental property contracts have fallen under the law of the jurisdiction where the real estate is located. Each State has its own version of its real property laws. However, in today’s world, federal laws can influence a State’s real property laws.

Intangible Patented Inventions as Tangible Personal Property

A Patentee can sell tangible widgets that include intangible patent rights for the circuitry, processor, and memory that cause the tangible widgets to operate differently from unpatented widgets. Patent infringement of the patented widget can result when someone who did not purchase the patented widget from the Patentee makes, uses, sells or offers to sell the patented widget without the permission of the Patentee.

Under United States law, Patent infringement cases have exclusive jurisdiction and venue in federal district courts.

When Patented Widgets are Offered for Sale on Consignment

Possible interactions between the real estate owner or the commercial tenant (hereinafter Commercial) and the Patented Widgets Owner (hereinafter PWO):

  • As long as Commercial and PWO meet the terms of the consignment agreement, both parties are probably happy.
  • When Commercial refuses to pay PWO according to the consignment agreement, the PWO could sue the Commercial for breach of contract in a State court.
  • When Commercial refuses to honor the consignment agreement and subsequently gives the patented widgets to a third party who thereafter uses the patented widgets in the third party’s plant. Under the Supreme Court’s Impression Products, Inc. v. Lexmark International, Inc., 581 US 1523 (2017) case, because there was no sale of the patented widgets by the Patentee, PWO can sue both the thirty party and Commercial in a federal district court for patent infringement. Any case by PWO for breach of contract by Commercial would likely be joined with the patent infringement case in federal court.

The commercial tenant (hereinafter Tenant) and the PWO:

  • When Tenant sublets a space for a booth to PWO and PWO fails to pay rent to Tenant, the Tenant can sue PWO in State court for collection of unpaid rent.
  • In a State that provides for commercial landlord lockouts and seizures of personal property, Tenant fails to pay rent and the landlord locks out and seizes all inventory including PWO’s patented widgets. Under the lease, Tenant did not have a right to sublet space to PWO and the landlord is unaware that PWO’s patented widgets are not part of Tenant’s inventory. After seizing PWO’s patented widgets, the landlord sells PWO’s patented widgets to a third party who resales the patented widgets to a fourth party who destroys the patented widgets and sells the junked parts to a recycler. Under Impression Products, Inc. v. Lexmark International, Inc., 581 US 1523 (2017), because there was no sale of the patented widgets by the Patentee, PWO could sue the commercial landlord, the third party and the fourth party for patent infringement in federal court. For the landlord, the third party and the fourth party, reliance solely on real estate law is insufficient to prevent a patent infringement lawsuit in federal court.

Have More Questions About Intellectual Property?

Contact Business Patent Law, PLLC  to get your questions answered and to discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Patent Maintenance Fees & Annuities

Patent Maintenance Fees and Annuities

In most jurisdictions, utility-type Patents require that periodic patent maintenance fees or annual annuities be paid to maintain the Patent. These payments are usually made to the appropriate governmental body. Most jurisdictions, other than the United States, also require the payment of annual annuities.

United States Patent Maintenance Fees

Title 15 of the United States Code requires the owner of a utility US Patent to pay maintenance fees at three and one-half, seven and one-half and eleven and one-half years subsequent to the issue date of the US Patent.

What Happens if the US Patent’s Maintenance Fee Is Not Paid?

The Patent will expire if the fee is not paid prior to the expiration of the fourth, eighth or twelfth year subsequent to the issue date of the Patent.

An Example Case: Unpaid Patent Maintenance Fees

Due to a Programmer’s Error, Company A did not Generate the Payment for the Seven and One-Half Year Maintenance Fee for Company A’s US Patent for “Gizmo.”

At this point, Company B approaches Company A regarding a license of the “Gizmo” Patent. Is it possible for Company A to enter into a Valid License Agreement with Company B?

Scenario 1

Seven years and nine months subsequent to the issue date of the Gizmo Patent, Company A discovers the maintenance fee was not paid:

  • Pursuant to 37 CFR 1.362(e), by paying the maintenance fee and the surcharge during the “grace period,” Company A and Company B can enter into a license for the Gizmo.

Scenario 2

Nine years subsequent to the issue date of the Gizmo Patent, Company A discovers the maintenance fee was not paid:

  • Pursuant to 37 CFR 1.378, by filing a petition with the Director of Patents stating that the failure to pay the maintenance fee was unintentional, paying the USPTO fee for the petition and the required maintenance fee, the Director may reinstate the expired Gizmo Patent. As a general rule, the Director usually reinstates an expired Patent as long as these above mentioned conditions are met before two years subsequent to the expiration of the Patent.  Subject to any intervening rights, Company A and Company B can enter into a license for the Gizmo.

Scenario 3

Ten and one-half years subsequent to the issue date of the Gizmo Patent, Company A discovers the maintenance fee was not paid:

  • Pursuant to 37 CFR 1.378, by filing a petition with the Director of Patents stating that the failure to pay the maintenance fee was unintentional, paying the USPTO fee for the petition and the required maintenance fee, the Director may reinstate the expired Gizmo Patent. As a general rule, after two years subsequent the expiration of a Patent, the Director exercises more discretion in reinstating any expired Patent. Subject to favorable decision by the Director to reinstate the Patent and any intervening rights, Company A and Company B can enter into a license for the Gizmo.

If you have questions about your company’s Patent maintenance fees or annuities, please contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

Securities for small businesses

Federal Securities Laws and Your Small Business

Small business is not automatically exempt from the federal securities laws. Depending on the circumstances of the transaction, these laws can apply to any company, partnership or organization.

What is a Security?

The Supreme Court test for determining if something is an investment contract, i.e., security:

If something is an investment contract, it is a security. In the case of Securities and Exchange Commission v. W. J. Howey Co. 328 U.S. 293 (1946), the US Supreme Court defined an investment contract as follows:

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party

Examples of Securities Utilized by Small Businesses

Securities can include such investment contracts as bonds, derivatives, leaseholds, intellectual property investment syndicates, options, leaseholds, publication syndicates, ownership interests in limited liability companies, corporations and partnerships and stocks.

Is Your Security Exempt?

If a security is associated with your business, it will fall under the registration and reporting requirements of the 1933 and 1934 Securities Acts – unless your business has obtained an exemption from registration.

  • Obtaining an exemption from the 1933 and 1934 Securities Acts is important – most small businesses cannot afford the costs of registering the security
  • Violations of the 1933 and 1934 Securities Acts can bankrupt most small businesses
  • Be cautious in accepting any risk capital investment from a potential investor who is not an “accredited investor” as defined in SEC Rule 501 of Regulation D
  • Be cautious in accepting any risk capital investment from a potential investor where your business has not first provided the potential investor with a private placement memorandum
  • Exempted securities can be an excellent source of capital for your company, partnership or organization

Before your company accepts the at risk investment capital, contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter.

manufacturing and business strategy

Business Strategy: Patent Portfolios and Holding Companies

Is it a prudent business strategy for a holding company (Company H) to own the patent assets used by Company A in manufacturing products sold by Company A?

Perhaps, let’s consider the following scenario:

Manufacturing/Distribution Considerations

  • Company A has been in business for several years and has an impressive twenty percent market share for its Widget.
  • The Widget generates one-half of Company A’s profits.
  • Company A has a superb engineering staff that has patented various improvements of the Widget invention creating a profitable patent portfolio for Company A.
  • Company A also generates royalties from its patent license agreements with other companies.

Supply Chain Problems

  • For several years, SupplyCo provided Company A with 99% pure Critical Composition to manufacture its Widgets, but due to temporary utility power supply limitations, Company A was able to deliver only 96% pure Critical Composition to Company A.
  • To meet pressing needs of its customers, Company A shipped 20 tons of Widgets made with 96% pure Critical Composition.
  • During the subsequent six week period, due to the number of injuries to the users of the Widgets manufactured with 96% pure Critical Composition, a national recall of the 20 tons of Widgets was initiated by Company A.
  • Unable to weather the recall and the pending lawsuits, Company A was forced to declare bankruptcy and the Widget patent portfolio was eventually sold in liquidation by the bankruptcy trustee.

Could the Sale of Company A’s Patent Portfolio been Avoided?

Generally – Yes – as long as the transactions between Company A and Company H are arms’ length dealings.

To minimize devaluation of an intellectual property portfolio, management can use one or more holding companies in their business strategy, such as limited liability companies to stabilize the value of the portfolio in the event the “unthinkable” occurs.

Advantages of Using a Holding Company for Intellectual Property

If Company H had owned the Widget patent portfolio and granted Company A an exclusive license to make, use and sale the patented Widgets, then:

  • The Widget patent portfolio would not have been part of Company A’s bankruptcy and liquidated by the bankruptcy trustee.
  • Company H would remain in business and could grant an exclusive license to Company X to make, use and sale the profitable Widgets.
  • Company H could sell the valuable Widget patent portfolio to Company Y.
  • It is likely that royalty income to Company H would be deemed as passive income.
  • It is probable than any sale of the Widget patent portfolio to Company Y would be determined to be a long term capital gain.

Other Considerations for Using a Holding Company as a Business Strategy

  • Better supply and manufacturing quality control – thereby avoiding the Widget recall and the ultimate demise of Company A.
  • Remove Company A’s engineering department from Company A and setup Company E to do business with Company H, identified above, to better take advantage of the tax code’s provisions for intellectual properties.
  • Company E can provide special enticements for its engineering staff to better retain and recruit the best engineering staff that will create subsequent generations of better and more profitable Widgets for licensing by Company H to Company A.
  • Special enticements for the engineering staff apply only to Company E – not Companies H or A.
  • Company E can be easily located in an area where Company E takes maximum advantage of governmental tax incentives.
  • Regardless of what happens to Company A utilizing this business strategy, Companies H and E remain viable entities.

As you can see, there are many different business strategies which o utilize corporate structures to maximize profits and reward the best efforts of employees. This illustration provides only a few of those options.

Contact Business Patent Law, PLLC and we will discuss possibilities for your business and intellectual properties.

If you would like to stay up-to-date with news that impacts your intellectual property, sign up for Business Patent Law’s Monthly Mailer™ newsletter

legal contracts online downloaded from the cloud

Legal Contracts From The Cloud?

Legal Contracts Online

Are you considering the use of downloaded legal contracts online? Before you do, you need to know a bit more about the pros and cons of using legal contracts you may find in the cloud.

Business owners, investors and bankers consider Intellectual Properties and the products associated with those Properties to be both intangible and tangible assets. Because these assets are the lifeblood of many companies, it is wise to use a seasoned professional to prepare your Intellectual Property agreements.

Cloud Intellectual Property Contracts

With the intent of saving money, sometimes a business drags a contract for intellectual property out of the Cloud.  On rare occasions, the Cloud strategy may be adequate for the business. (This is especially true if the agreement is never challenged.)

If, however, you pull a contract off the Internet and it IS challenged, you may find yourself in an expensive legal quagmire. More importantly, you may lose the challenge along with your rights to your Intellectual Property. Consider your needs carefully before using legal contracts online.

Patents, Trademark and Copyright Agreements

When Intellectual Property contracts are prepared, each genre has its own eccentricities. For example:

  • Contracts associated with Copyright rights frequently include the phrase “all rights reserved.”
  • In many jurisdictions, the sale or license of Trademark rights must also include the goodwill associated with the Trademark.
  • License agreements flowing from Patent rights should generally include royalty milestones, among other things.

Intellectual properties are unique and the facts associated with each Intellectual Property agreement are also different. A well-drafted contract takes time and expertise to prepare properly. This is not a “one-size-fits-all” legal situation and legal contracts online are usually too general to be of use.Continue reading