Now more than ever, companies must think outside the box and innovate in order to remain competitive and relevant in a constantly changing technology landscape. Traditionally, innovation has been a product of internal R&D departments. In recent years, though, there has been a paradigm shift toward open innovation (OI) — that is, collaborating with external parties in product development. For companies participating in open innovation, these external parties are usually customers, suppliers or universities, but can even be competitors.

Both the traditional model, also referred to as closed innovation, and the OI model have their own legal issues pertaining to intellectual property. However, OI breeds more complex issues and consequently requires more legal oversight. OI requires careful attention to issues such as joint IP ownership, misappropriation of our confidential information, use of our IP without permission and indemnification. All of these examples are less prevalent, if not completely absent, from closed innovation. Therefore, in order to minimize our risk and protect IP interests while promoting an environment of collaboration, organizations must have agreements in place that set forth the terms of the collaborative relationship. In addition, it is important to ensure behavior matches the expectation set forth in the agreement to make it effective.

A non-disclosure agreement (NDA) is the first line of defense in protecting innovation and proprietary information that your organization develops. An NDA can be unilateral, in which one party is providing the confidential information while the other is obligated to maintain confidentiality. An NDA can also be bilateral, where both parties are providing confidential information and both parties are required to maintain confidentiality. The type of NDA depends on the circumstances of the collaboration, but in either case, an NDA must be in place before discussions begin with the external party in order to avoid the risk of loss of confidential and proprietary information.

The risks that arise if an NDA is not executed include loss of trade secrets and possible loss of patent rights. By disclosing confidential information without an NDA, you may make your trade secrets vulnerable to misappropriation without recourse. As a result, your organization will lose the confidential nature of the information and the economic value that arises from the trade secrets. As to patent rights, there is risk of losing patent protection on the subject matter due to the non-confidential disclosure. In many jurisdictions other than the United States, it is required that information remains confidential prior to filing a patent application, without exception, in order to obtain and maintain patent rights. In the United States only, patent applicants are given a “free pass” and can file one year from the date of the non-confidential disclosure of the invention. Any further delay will result in patent rights being denied or cause the patent to later be declared invalid by a court. Global companies should seek to obtain protection in multiple jurisdictions.

Relying on the grace period in the U.S. is detrimental to foreign rights. Therefore, in order to globally preserve patent rights, the importance of NDAs early in the discussion is unquestionable. Equally as important to preserve intellectual property rights is your team members’ behavior while engaging in discussions with third parties. Certain aspects of the NDA can be used in gauging the level of information that can be disclosed without destroying the confidentiality of otherwise proprietary information. First, the purpose of the confidential discussion is almost always explicitly stated in the NDA. As such, the discussion with a collaborating party should remain within these parameters for shared information to remain confidential. You can also gauge the level of disclosure permitted based upon the definition of confidential information set forth in the NDA. The definition will typically be all encompassing, ranging from general know-how to specifications of a product, but will always exclude publicly available information, information already in the recipient’s possession, or information obtained by the recipient independently. Accordingly, a thorough reading and understanding of the NDA by all team members is recommended while planning for the confidential exchange to understand which information is confidential and which is not and to ensure that the behavior of those involved does not jeopardize the proprietary rights of your organization.

If the confidential discussion leads to further collaboration, additional agreements will be necessary to protect the intellectual property that will be a byproduct of the collaboration. An NDA will only protect the communications between the parties as confidential and also enable the parties to preserve their respective unprotected intellectual property rights. However, the parties must also agree on how intellectual property owned by each party (i.e., existing IP) and intellectual property developed during the collaboration (i.e., future IP) will be handled along with ownership of, and risks surrounding, such future IP. These issues will typically be addressed in a master joint development agreement (JDA), which will be discussed in a second article.