In the business world, a new idea, invention, or innovation, no matter how ground-breaking, is only as valuable as the market says it is. But as a company shifts from the highly secretive invention phase to the public release of a product, legal issues can arise. Turning a confidential new idea into a marketable product often means sharing its secrets, at least in a limited way. Maybe the inventor lacks the funding to turn the idea into a product; maybe the company has a breakthrough technology, but no way to market it to consumers; maybe a new product idea has been well received on the Internet, but the company needs a partner to help with physical distribution. In each of these cases the owner of the new idea may decide to find a partner or co-venturer to help take its invention to market.
When two parties are considering a such a venture, with shared risks and rewards, it is reasonable to expect that each will want to evaluate sensitive information about the other’s businesses. Without a clear window into a potential counterparties’ business operations, it can be difficult to tell whether a potential transaction or other business arrangement would be prudent. But companies are understandably reticent to share sensitive information about their businesses with third parties, especially when the third party is an actual or potential competitor and the information is a new product idea or innovation.
To address this, potential co-venturers almost always enter into confidentiality agreements or non-disclosure agreements prior to the exchange of any information. Such agreements, which are also used between companies and their employees, ordinarily set forth a broad category of “confidential” or “proprietary” information to be disclosed and set explicit restrictions on what that information can (and, more importantly, cannot) be used for. Typically, a confidentiality agreement signed prior to a co-venture limits the use of the disclosed information to the evaluation of the particular business arrangement being contemplated.
Unfortunately, even with the benefit of perfect drafting, such agreements are not a silver bullet for all potential issues related to the disclosed information. For example, a conflict may arise if one party, unbeknownst to the counterparty, develops a business in competition with the prospective co-venture, perhaps without copying information from the other party but based on its analysis of the co-venture opportunity. Another complex legal issue can arise where, following the exchange of information, the receiving party creates a new product or work that appears to be a “derivative” work based on the information received subject to the agreement. A recent case, Opternative v. Jand, 2018 WL 3747171 (S.D.N.Y. Aug. 7, 2018), explored both of those issues.