Business executives and entrepreneurs often plan to outsource product development and/or manufacturing of a patentable product. If you do so without a patent, then… watch out!
You have been warned.
When you, as holder of a trade secret invention, decide to reveal your unprotected idea (e.g., to get a detailed quote on the cost of manufacturing), you are revealing some if not all of the valuable trade secret details that embody your invention.
This immediately compromises your position. To some extent, you are now at the mercy of the manufacturer.
For example, your manufacturing partner could consider your unprotected innovations, see big dollar signs, and face a temptation to misappropriate your ideas!
To be protected from such misappropriation of your trade secrets and inventions, there are some layers of protection available to you. Each layer has its own benefits and drawbacks. Disclosing your secret sauce to a manufacturer puts you in a position to rely on the following layers:
1) Moral Layer: the loyalty and morals of the manufacturer
2) Contract Layer: non-disclosure agreement to hold trade secrets in confidence
3) Patent Layer: pending patent applications or issued patents
Let’s take a look at each of these layers in turn.
Moral: Trust, But Verify
You protest that “My manufacturing partners would not dare steal my idea, would they?”
Right. Enough said.
Before I move on to the next point, I do want to share a quick tip for first time entrepreneurs who haven’t been in business for themselves for any length of time, yet. To you, I offer the following caution:
If a manufacturer tells you that they only do “hand shake deals” and never sign contracts, then handle that situation like you would a handle a scorpion. Leave it alone. You have been warned.
Contract: Treat Non-Disclosure Agreements As A Fig Leaf
You protest that “My Non-disclosure Agreement protects me!”
If you have a properly written and executed NDA, which is not always the case, then that is better than nothing.
But in reality, an NDA is typically little more than a fig leaf because most situations are such that the facts about who said what to whom are notoriously difficult to prove in court.
Memories take on a life of their own, frequently in proportion to one’s ego, and some people are not confined to the limits of the truth. In my experience, key technical disclosures are generally not recorded. If the facts are “he said” vs. “she said,” then what can you really prove?
If you have neither an NDA nor a patent pending, then congratulations, you will not make that mistake twice.
I always want you to have an NDA when you can, but I also recognize how hard it is to actually enforce it in most situations.
Patent: Command Respect
You realize that your invention is best protected by a patent.
Unless you have aspects of your invention that you can keep safely hidden from your manufacturer, then patent protection is the biggest potential hammer than you can wield. If they do run off and make a profit by infringing your patent, then you can recover lost profits and/or a reasonable royalty.
You can likely get your damage award tripled, because all you need to do is to show that the manufacturer knew about your patent, or that the patented product was properly marked with the patent.
That sort of proof is a layup compared to the NDA. And courts do not take kindly to manufacturers who knowingly double cross their own clients.
In a future article, I can share with you a great case study illustrating how a two person tech startup was able to prove their facts and successfully sued a misappropriating manufacturer… and the court awarded the startup $91 million!
Note, however, that they probably lost out on 10 times that much because they failed to simply apply for a patent. CardiaQ v. Neovasc
Patent protection is not the right answer for every product. Just because you can get a patent does not mean you should. A patent is a business asset, and should be designed to make a strong return on investment.
I will discuss in a future article how we at Thompson Patent Law guide clients when their business plan does not support a decision to get a patent.
Bottom Line For Business
When you seek out vendors such as manufacturers to build your patentable products, the clear winner answer is to consider patent protection.
If the patent is economically justified, then you can sleep more soundly knowing that your investment is not merely relying on the morals of your vendors, or a contract that is very difficult to enforce.
