If you're trying to license your invention, you run the risk that someone will rip you off. Here are some ways to avoid trouble.

If you've developed a potentially marketable invention, you are faced with a dilemma. To make money from the invention, you must generally license the rights to it to another business, often a manufacturer or distributor. But in pitching the invention to potential licensees, you run the risk of disclosing so much information that the invention might be stolen or no longer protected by law.

So how can you shop your invention around without jeopardizing your rights? To protect yourself you can file a provisional patent application (if your invention is patentable) or use a nondisclosure agreement (if it is not patentable). If a potential licensee refuses to sign a nondisclosure agreement, take extra precautions.

(To learn more about another option for making money from your invention, manufacturing and marketing the invention yourself, see Should You License or Manufacture Your Invention?)

Filing a Provisional Patent Application

If your invention potentially qualifies for a patent, it may be worth your while to file a provisional patent application ($105 for small companies) and obtain "patent pending" status. Most often, this will deter rip-offs.

Using Nondisclosure Agreements

However, if you determine that the invention is probably not patentable, the best way to protect yourself is to have prospective licensees sign a nondisclosure agreement (sometimes called a disclosure agreement or confidentiality agreement) before you disclose any secrets. If someone signs a nondisclosure agreement and later uses your secret without authorization, you can sue for damages. (To see examples of various nondisclosure agreements as well as detailed explanations of their provisions, check out NDAs for Free.)

Nondisclosure agreements vary in format. Generally, they contain these important elements:

• a definition of what is and what isn't confidential information,
• obligations of the receiving party, and
• time periods.

What's Confidential. Every nondisclosure agreement provides a definition of confidential information or trade secrets. Every nondisclosure agreement also specifically excludes some information from protection, meaning that the receiving party has no obligation to protect that information. Information is not protected if it was created or discovered before or independent of any involvement with you.

Obligations of the Receiving Party. The person or company you're sharing confidential information with generally must hold the information in confidence and limit its use. Under most state laws, the receiving party cannot breach the confidential relationship, induce others to breach it or induce others to acquire the confidential information by improper means. Most companies accept these obligations without discussion. If you enter into a mutual nondisclosure agreement (where you also agree to keep information confidential), you should also feel comfortable with these requirements.

Time Periods. How long must the information be kept confidential? This issue is often a subject of negotiation. Disclosing parties want a long period; receiving parties want a short one. Five years is a common length in the United States, although many companies insist on no more than two or three years. In Europe, it is not unusual for the period to be as long as ten years. Ultimately, the result depends on the relative bargaining power of the parties.

One factor in negotiations may be the shelf life of your idea. Ask yourself:

• How long will it be before others stumble upon the same innovation?
• If the product were licensed in the next year or two, how long would it be before the secret would be figured out?

If the answer to these questions is only a few years, then you are unlikely to be damaged by a shorter (two- to three-year) period.

Disclosing Without an Agreement

It's always safest to get a prospective licensee to sign a nondisclosure agreement, but you may not always be able to convince them to do so. When that happens, you are left in a vulnerable position. If you disclose crucial information without the agreement, you risk losing your rights to the invention. If you don't disclose it, you risk losing a business opportunity.

Probably the most important factor to consider is the reputation of the person or company you're dealing with. If the company has a poor reputation, the dangers of losing your secrets outweigh the business opportunity.