Rights in intellectual property are central to the generation of income from a newly developed invention. However, forming business relationships to commercialise a product or service often requires critical and sensitive confidential information and intellectual property to be disclosed. What can an inventor do to limit publication and disclosure risks when a deal with a commercial partner falls through?

In this article, the McCabes Newcastle Innovation team discuss some of the critical elements of an enforceable confidentiality agreement.

Before a patent is granted, disclosing confidential information to potential investors can be risky. In the absence of an effective confidentiality agreement it is very difficult to prohibit a potential investor from unauthorised commercial exploitation of disclosed intellectual property, should the potential investor not proceed with a commercial arrangement.

The process of having a patent granted requires public disclosure of all aspects of the invention and how it operates. If the patent application fails, the inventor will have failed to secure a monopoly and the intellectual property can be severely devalued as it becomes public knowledge.

Accordingly, sharing confidential information with potential investors or commercial partners can have disastrous consequences in a situation where:

  1. there is a breakdown in the business relationship; and
  2. a patent application is not granted, or fails on a challenge.

Confidentiality agreements (often referred to as ‘non-disclosure agreements’ or ‘NDAs’) are critical. Inventors must contractually prohibit disclosure of trade secrets and other confidential information in discussions with employees, potential investors, advisors and business partners. To provide appropriate protection, they must be well drafted and tailored to the circumstances and commercial development plan for the invention. The case of Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70 (the Maggbury Case) illustrates the impact of a poorly drafted non-disclosure agreement.

The impact of the loss of confidentiality

In the Maggbury Case the High Court considered whether an inventor can enforce rights contained in a confidentiality agreement against a potential investor, after the concept has been disclosed to the public through a patent application. The facts of this case were as follows:

  • Mr Allen developed an invention relating to a foldaway ironing board (the Product) and had filed for provisional patents, which vested in Maggbury Pty Ltd (Maggbury) and Gisma Pty Ltd.
  • Hafele Aust Pty Ltd (Hafele) was interested in commercialising Mr Allen’s invention and a confidentiality agreement was entered to enable discussions between the parties.
  • The confidentiality agreement required Hafele to acknowledge the right of title of the inventor in the Product and to keep the information confidential ‘forever’.[1]
  • Negotiations between the parties broke down. The patent application subsequently failed. Hafele manufactured, marketed and sold a version of the Product.

Maggbury commenced an action for breach of confidence to restrain Hafele from using any of the intellectual property provided under confidence in producing and selling the Product.

In their judgement the High Court confirmed that confidentiality agreements are a type of restraint of trade, which saw the onus fall on Maggbury to prove the agreement did not constitute an ‘unreasonable restraint of trade’. Maggbury failed to do so. The High Court found the restraint of trade was unreasonable primarily due to the requirement of keeping the information confidential ‘forever’. Contributing to the ‘unreasonableness’ was the fact that Maggbury had disclosed the ‘trade secret’ to the public via its patent application.

Rather than following English authority to find public disclosure releases the confidee from all confidentiality obligations, the High Court found disclosure via the patent application destroys the foundation of the confidential information claim. Accordingly, as the information was in the public domain, no remedies were available to Maggbury for Hafele’s use of the information gained in ‘confidential’ discussions.

The impact of this judgement is that a party can only seek remedies with regard to information that is not in the public domain, as otherwise the information will not be a trade secret, and the restraint will be unreasonable and no remedy will be available at law.

Drafting lessons from the Maggbury Case

The Maggbury Case has been applied and distinguished more than 140 times by courts in most Australian jurisdictions. Consideration of these subsequent cases shows that to effectively limit damage flowing from unauthorised use of confidential information, agreements should limit remedies to what will be seen as ‘reasonable’ by a Court. The case law demonstrates that to do this, confidentiality or commercialisation agreements should:

  • establish that once information is publicly available, confidentiality obligations on the confidee no longer apply. A well drafted agreement will make this clear, as for a restraint of trade to be reasonable, ‘it must afford no more than adequate protection for the party in whose favour it is imposed’.[2] This allows a restraint to be enforceable up to the time the information is in the public domain;
  • limit the operation of the confidentiality agreement to information not in the public domain, which could see the restraint upheld even if a patent application is published. This would prevent the confidee from using information that is extraneous to what is in the public domain; and
  • invoke the ‘Springboard Doctrine’ for breaches of the agreement at the time before the information is public, and where no patent exists. This doctrine operates on the premise that ‘a recipient of confidential information or trade secrets should not be allowed to use it as a springboard into a better position than would have been achieved from the use of publicly available information and the recipient’s own skill and ingenuity’.[3] This sees competitors who have accessed confidential information ‘handicapped’ to give the original inventor a ‘headstart period’. The headstart period is calculated by reference to the amount of time it would take a reasonable person to undergo the same innovative process.

Mitigating the impact of the Maggbury Case

It has been argued the Maggbury Case puts ‘confidentiality agreements at risk and hinders innovation’.[4] However, the loss of value of intellectual property when engaging with commercial partners can largely be avoided by careful drafting of confidentiality agreements in line with developments in case law (in addition to a well-developed patent strategy). The line of cases that have applied the Maggbury Case support the view that start-ups and entrepreneurs must get their confidentiality arrangements right before embarking on detailed disclosure of key intellectual property rights.