Question 4 of 7: Nondisclosure Agreements and the Canadian Patent System

Question 4: Nondisclosure Agreements and the Canadian Patent System (15 marks)

Question text not reproduced: the examination questions are © Engineers and Geoscientists BC. Open the official past paper (linked at the top of this page) to read the question, then follow the worked solution below.

Part A — Why nondisclosure agreements are used. A nondisclosure agreement is a contract that permits information to be shared while keeping it legally confidential, and it exists because product development is impossible without disclosure. A design cannot be quoted by a supplier, evaluated by a customer, tested by a laboratory, funded by an investor or reviewed by a prospective partner unless it is revealed to them, and each of those disclosures would otherwise destroy the value of the information the moment it occurred.

The agreement does four things. It defines what is confidential, usually by category and by marking, so that later disputes turn on evidence rather than recollection. It restricts use as well as disclosure — the more important half in practice, since the real risk from a prospective supplier is not that they publish the design but that they build it. It creates a contractual remedy, including injunctive relief, which is far more useful than the alternative of proving a breach of confidence at common law. And it preserves patentability: novelty is destroyed by a disclosure that makes the invention available to the public, and a disclosure made in confidence under an executed agreement is not such a disclosure. That last function makes the agreement a precondition of the patent strategy, not merely a commercial nicety.

Two limits are worth stating because they are routinely misunderstood. An agreement cannot restore confidentiality once information is public, so it must be executed before the meeting, not circulated afterwards; and it does not by itself allocate ownership of anything created jointly during the collaboration, which requires separate intellectual-property provisions.

Part B — Why patents are used. A patent is a bargain with the state: the inventor discloses the invention completely enough that a person skilled in the art could work it, and in exchange receives an exclusive right for a limited term. Five reasons a firm uses one:

1. To exclude competitors during the payback period. The right conferred is the right to stop others from making, using or selling the invention — it is not a right to practise it, which is a distinction that matters when the invention improves on someone else's patented base technology.
2. To secure a return on development expenditure. Without exclusivity, a competitor who did not fund the development can copy the result at the cost of manufacture alone, and will therefore always undercut the originator.
3. As a tradeable and financeable asset. Patents are licensed, cross-licensed, sold, used as loan security, and are frequently the largest single component of the valuation of a technology firm.
4. As a defensive instrument. A portfolio provides cross-licensing currency and freedom to operate, and deters litigation from firms that would otherwise assert their own patents without fear of a counterclaim.
5. To publish rather than to protect. The disclosure itself creates prior art that prevents a competitor from patenting the same idea and excluding the originator from their own invention.

The alternative to patenting is a trade secret, and the choice between them is quantitative. Given. An invention expected to earn CAD 260 000 per year of incremental margin; a discount rate of 9 % per annum; a Canadian patent term of 20 years from the filing date of which roughly 3.5 years are consumed by prosecution, leaving 16.5 years of enforceable exclusivity; average annual maintenance and enforcement cost of CAD 1 200; and, as a secret, an annual hazard of independent discovery or leakage of $\lambda=0.15$. Find. Which route is worth more, and how durable the secret would have to be to win.

1. Value the patent as a finite annuity. Exclusivity ends with the term, so $$PV_{\text{pat}}=(R-M)\,\frac{1-(1+i)^{-N}}{i} =(260\,000-1\,200)\,\frac{1-1.09^{-16.5}}{0.09}=\text{CAD }2\,181\,835$$
2. Value the trade secret as a decaying perpetuity. A secret has no term, but it survives only until it leaks or is independently discovered. With a constant hazard $\lambda$ the expected present value is $$PV_{\text{sec}}=\frac{R}{i+\lambda}=\frac{260\,000}{0.09+0.15} =\text{CAD }1\,083\,333$$
3. Compare, and find the indifference hazard. The patent is worth $$\boxed{PV_{\text{pat}}-PV_{\text{sec}}=\text{CAD }1.10\ \text{million more}}$$ The two routes are equal when $R/(i+\lambda^{*})=PV_{\text{pat}}$, i.e. $$\lambda^{*}=\frac{R}{PV_{\text{pat}}}-i=\frac{260\,000}{2\,181\,835}-0.09 =0.0292\ \text{per year},$$ an expected secrecy half-life of $\ln 2/\lambda^{*}=23.8$ years. The secret would have to be more durable than the patent term itself before it became the better choice — which is precisely the situation of the few famous secrets, a formula with no analysable signature, and is emphatically not the situation of a mechanical or electronic product that a competitor can buy and disassemble.

Part C — Basic requirements for a successful patent. Under the Canadian Patent Act an application must satisfy the following, and an issued patent that does not is vulnerable to invalidation:

1. Patentable subject matter. The invention must be an art, process, machine, manufacture or composition of matter, or an improvement to one. Scientific principles and abstract theorems are expressly excluded, as in practice are methods of medical treatment and higher life forms.
2. Novelty. The invention must not have been disclosed anywhere in the world before the claim date in a way that made it available to the public. Canada offers a one-year grace period for disclosures originating from the applicant — a genuine advantage over most jurisdictions, but one that cannot be relied on if foreign protection is wanted, since most other countries have absolute novelty.
3. Non-obviousness (inventive ingenuity). The invention must not have been obvious on the claim date to a person skilled in the art, judged against the common general knowledge and the prior art.
4. Utility. The invention must be useful — it must do what the specification says it does. The utility must be demonstrated or soundly predicted as of the filing date.
5. Sufficiency of disclosure. The specification must describe the invention fully enough that a skilled person could put it into practice, and must distinctly claim what is regarded as the invention. This is the consideration the inventor gives for the monopoly, and an insufficient disclosure invalidates the patent however inventive the idea.
6. Procedural compliance. Filing by an entitled applicant, a request for examination within the prescribed period, response to office actions, and payment of the prescribed fees.

Part D — Two people with the same idea: who is awarded the patent in Canada? The first to file. Since the amendments that took effect on 1 October 1989, Canada operates a first-to-file system, so where two applicants independently make the same invention the patent is granted to the one with the earlier filing date — or, where a priority claim is made under the Paris Convention, the earlier priority date. Who conceived the idea first is legally irrelevant, and there is no interference proceeding of the kind that formerly existed under the old United States first-to-invent regime.

Three practical consequences follow, and they change how a design office behaves. Filing becomes a race, which is why firms file early and often, frequently by way of a provisional-equivalent filing that establishes a priority date and buys twelve months. Careful dated laboratory records remain valuable — not to win a priority contest, which they can no longer do, but to establish inventorship, entitlement and the date of a disclosure relied on for the grace period. And the earlier applicant's application becomes prior art against the later one even if it has not yet published, so the second inventor may be blocked without ever having seen the first inventor's work. Where the same invention is made jointly, both are named as co-inventors; in Canada, co-owners may each practise the invention but neither may grant a licence without the other's consent, which makes an express co-ownership agreement essential.

Part E — What is required of the patent holder after issue.

1. Pay maintenance fees. Annual maintenance fees are due to CIPO, beginning on the second anniversary of the filing date and continuing through the 20-year term. Non-payment causes the patent to lapse; reinstatement is possible only within a limited window and on stated conditions.
2. Enforce the patent yourself. No government agency polices infringement. The holder must monitor the market, and must sue in the Federal Court or a provincial superior court to obtain an injunction, damages or an accounting of profits. A patent that is never enforced confers nothing in practice.
3. Defend validity. Any accused infringer will counterclaim for invalidity, and a third party may request re-examination. The holder must therefore maintain the file history and the evidence supporting utility and inventorship.
4. Correct the patent where necessary. Where the specification is too broad or contains an error made in good faith, the holder may disclaim or seek reissue within the periods the Patent Act allows.
5. Mark, license and administer. Marking products with the patent number supports a damages claim; recording assignments and licences with CIPO preserves priority against subsequent purchasers; and the holder must monitor compulsory-licence exposure under the abuse-of-rights provisions of the Act, which can be invoked where a patented invention is not being worked in Canada on reasonable terms.
6. Maintain foreign counterparts separately. A Canadian patent has effect only in Canada. Corresponding rights in other markets require their own filings, their own prosecution and their own maintenance fees, and the decision on which markets to maintain should be revisited as the product's geography changes.