The NDA Loophole

The NDA Loophole… 

Or what you need to know about how to protect your IP after an Offer of Sale  

It’s a common scenario for growing companies: you’ve found some success with an idea and are looking to monetize it through an agreement with another company granting that company the right to distribute, promote, market, and/or sell your idea. Typically, in this instance, you would have your legal department start drafting an NDA to protect your ideas as you prepare them for sale. But, your idea might not be as safe (or as profitable) as you think. 

If you’re offering your innovation for sale, an NDA may not be enough to protect the novelty of your invention when it comes to patent protection. Here’s what you need to know about the rules surrounding novelty and patentability in the event of an offer of sale. 

If you find your organization in a position where it needs to share confidential information, NDAs are a great way to protect yourself and we recommend them often to our clients when we meet with them for an IP Strategy Review, especially for trade secrets and ideas that may still be under development or for which a patent application has not yet been filed, (perhaps due to budget or funding delays).  

This is done, firstly, to protect your ownership of the idea and, secondly, so that you don’t trigger what is known as “public disclosure” which could affect your ability to file for patent protection in the future. BUT did you know that even in the event of a signed NDA, the 1-year grace period to file a patent application also starts if an offer of sale is made for your innovation? 

That’s a Novel Idea 

We recommend filing a patent application for an invention (especially one that is reverse-engineerable by third parties) to attempt to secure your rights against others selling and manufacturing the same invention in your jurisdiction of protection. Patent protection allows for increased company valuation and attracts investors. 

For an idea to be patentable, it must be a new idea of which the details are not publicly available. Typically, organizations and inventors can use Non-Disclosure Agreements to indicate and protect the novelty of any ideas that they may seek to protect through patent applications as these documents legally prevent others from spilling the beans on your innovation before the filing date of your patent application.  

However, in the event that your invention is publicly disclosed or for sale, the US does apply a grace period of 1 year to file a patent application since the public disclosure. After that 1-year grace period, no patent protection cannot be obtained. 

There are a few scenarios that trigger the grace period under US law: 

  • Any verbal or written form, on any medium (physical, electronic, etc.), to a recipient that is not under a Non-Disclosure Agreement (NDA) 
  • A product is offered for sale, regardless of whether the invention is visible to the public (referred to as the “on-sale bar”). 

Seller Beware 

The best way to avoid triggering the grace period is to have NDAs in place for any/all operations involving employees, co-developers, investors, clients, etc.  

Especially when trade secrets are shared, one needs to make sure that there is no limited duration clause for the NDA, and if there is, these NDAs should be extended timely, to avoid disclosing a trade secret. Generally speaking, if you disclose the details of a patentable invention under an NDA, this is not considered a public disclosure and the grace period for filing a patent application will not be triggered,  

However, there is one exception in the US where disclosure under an NDA can trigger the clock to file a patent application and that is when you use an NDA with a potential client/partner in an offer for sale. 

The Supreme Court (Helsinn v. Teva) ruled in 2019 that any offer for sale, even if done with a Non-Disclosure Agreement, triggers the 1-year period to file a patent application to protect your invention. The details of the invention need not be publicly disclosed in order for the on-sale bar to apply. The rule applies with equal force to any circumstance in which an invention is placed “on sale” publicly or privately. 

The Clock is Ticking

An NDA is of no help in the case of an offer for sale. If your product is/has been offered for sale, the time is now ticking to file a patent application. The “on-sale bar” is triggered if the invention is both:  

(1) the subject of a commercial offer for sale not primarily for experimental purposes and  

(2) ready for patenting (i.e., formation of an invention beyond the conception thereof or if the inventor had prepared drawings or other descriptions of the invention that were sufficiently specific to enable a person skilled in the art to practice the invention or if the invention close to completion of the invention at the time of the offer and has demonstrated a high likelihood that the invention would work for its intended purpose upon completion) 

To be a qualifying “offer for sale”, all the other party must do is indicate acceptance to create a binding contract. If they are negotiating or if there are key details missing from the “offer to sell” it may not be a triggering offer to sell. For example, if the price has not been settled and is not in the “offer”, it might not qualify. 

It does not matter if the offer is eventually rejected or even received by the potential purchaser. It is also not necessary that there is delivery of the product to the purchaser. A legally sufficient offer alone is all that is required. 

The goods subject to the offer for sale do not need to be “on hand” and transferred at the time of the sale or offer. The product also does not need to have been described in detail. The only requirement regarding condition for sale is that the invention must be complete and “ready for patenting”. 

Also important to note: an assignment or sale of the rights in the invention and potential patent rights is not consider a sale under the “On sale bar”. For example, licenses that merely grant rights do an invention are not included. However, a standard computer software license wherein the product is just as immediately transferred to the licensee as if it were sold. 

What Next? 

We recommend filing a patent application for your invention before you offer it for sale or plan to publicly disclose it otherwise. Whether you have an NDA in place or not, you should file a patent application within one year of any disclosure of an invention to a third party in any commercial agreement that could be considered a(n offer of) sale.  

If you would like to know whether your invention is still patentable and/or more information to protect you from doing any involuntary disclosure or being caught under the “on sale” bar, please reach out to Stratford.