It is the dream of many start-up companies to enter negotiations with a third-party investor or buyer for acquisition, licensing or funding raising opportunities. Due diligence of the start-up company’s intellectual property will likely be at the forefront of such negotiations. Numerous scenarios arise that require thoughtful consideration in order to maintain confidentiality of sensitive corporate information. For example:
- Your company has developed a new technology that you want to present to venture capitalists for funding, but you don't want them to take the idea and develop it on their own.
- Your company needs to hire an expert (e.g., a consultant to assist with technology development or an expert witness to support a patent office proceeding or litigation), but you don't want him to disclose information to your competitors.
- Your company is trying to sell or license a technology to a buyer who wants details on your company’s IP, but you are concerned that the buyer will kill the deal after examining your company’s confidential information.
- Your company is involved in one or more of the above scenarios and you do not want the sharing of your information to be considered a public disclosure that would potentially bar subsequent patenting.
Due diligence in today’s digital world presents particularly challenging questions arising from communications between companies throughout the due diligence process. Adding to the difficulty and delicacy with which confidential information must be handled throughout due diligence, urgent deadlines may require immediate disclosure of highly sensitive corporate information to third-party investors or buyers. Given today’s electronic communication technologies and the speed at which information can be transmitted and copied, maintaining confidential information during due diligence is a challenge.
To meet this challenge, particularly in the realm of IP due diligence, a company may consider a non-disclosure agreement (NDA), often called a confidentiality disclosure agreement (CDA), to enable sharing its IP with third-party investors or buyers. The NDA should be carefully drafted and clearly articulate the specific purpose and, if appropriate, time-period for which information will be shared. Third-party investors or buyers, in turn, should agree to not disclose information to any party not specifically identified in the agreement. Due diligence projects often themselves promote the creation of new documents (notes, drafts, summaries, etc.) that a company may deem confidential. A marking such as "Confidential Information of ___ [Company name]" or similar words should be stamped or otherwise applied to all pages of documents for which confidentiality is desired. Marking drafts, emails, handwritten notes, company/lab notebooks as “confidential,” and keeping such documents in folders (physical or electronic) marked as confidential are simple steps a company may take to put a third-party investor or buyer on notice and to prevent the disclosure of such documents during, for example, litigation.
Keep in mind that the “attorney-client privilege” protects confidential communications between an attorney and a client for the purpose of obtaining legal advice. The privilege shields from discovery advice given by the attorney to the client as well as communications from the client to the attorney. Voluntary disclosure of privileged communications to a third party results in waiver of the attorney-client privilege unless an exception applies. The “work-product doctrine” and the “common interest doctrine,” which will not be discussed here, may protect documents prepared in anticipation of litigation by or for the attorney, or protect information shared between attorneys representing different parties without waiving privilege.
IP due diligence almost always involves the examination of confidential documents. With the sharing this information, however, comes the potential of inadvertent disclosure of confidential information and/or waiver of the attorney-client privilege. Careful consideration is therefore necessary before disclosing confidential or privileged information. Before proceeding too deep into negotiations, discussions on how confidential information will be used, shared, and how the information will be stored or destroyed upon completion of the due diligence should be understood and agreed by each involved party. Tools such as NDAs/CDAs, carefully marking documents, and understanding the principles of privilege and waiver are all topics a company should consider (and seek expert advice on, as necessary) as they enter any negotiation.
DISCLAIMER: The information contained in this article is for informational purposes only and is not legal advice or a substitute for obtaining legal advice from an attorney. Views expressed are those of the author and are not to be attributed to Marshall, Gerstein & Borun LLP or any of its former, present or future clients.