To Disclose or Not to Disclose

09.16.16

A recent lawsuit by Palantir Technologies Inc. against some of its investors, including an investor named Marc Abramowitz, calls to mind a common question we receive from inventors and early stage companies: namely, ​“if I disclose my ​‘secret sauce’ to this investor, will he or she steal it?” 

When faced with the cost of building and growing a business, an inventor or entrepreneur often seeks sources of capital. One possible source of capital is an investment. Not only is an investor able to provide money to help grow a business, but often an investor is an experienced business advisor. Once the investment is made, it is not uncommon for an investor, such as Abramowitz, to be deeply involved in the operation of the company and to have access to confidential company information in order to provide advice on strategic issues.

However, confidential business strategies, financial information, and intellectual property are often disclosed to the investor prior to investment because an investor will not typically invest without a thorough understanding of the investment. This information is typically the core of the business and may be what provides the competitive advantage that will help the company succeed. Therefore, it is important to safeguard this information. This need can be seen in the Palantir complaint, which can be found here.

While it provides only one side of the story and the lawsuit could be the culmination of a soured investor/​company relationship, if the complaint were to be taken at face value it paints a picture of the investor that matches what many inventors believe and fear:

Palantir is a software and services company that specializes in data analytics. Palantir Technologies Inc. sued Marc Abramowitz and others for misappropriation of trade secret and confidential information. According to the Complaint, Abramowitz was ​“an early equity investor in Palantir who personally engaged in regular discussions with executives about some of the company’s most sensitive business strategies and trade secrets.” Abramowitz had access and regular visits to Palantir’s facilities. Palantir alleges to have protected its confidential information and trade secrets through agreements with Abramowitz, including a Preferred Stock Transfer Agreement and a Non-Disclosure Agreement (“NDA”). Palantir alleges that Abramowitz engaged in a scheme to claim the company’s own confidential information and trade secrets as his own, including filing three patent applications — all allegedly based upon ideas and trade secrets stolen from Palantir. It appears that Abramowitz also filed a trademark application that aligns with the company’s branding scheme, without authorization by Palantir.

So what can a business do to protect itself from this kind of behavior by investors? Ideally, an NDA that prevents the recipient (in this case the investor) from disclosing information and identifies the ownership of any information shared/​disclosed should be signed by an investor and the inventor/​company prior to disclosing confidential information. In fact, trade secrets should not be disclosed at all. Unfortunately, some investors will not sign an NDA (although this does not appear to be the case for Abramowitz). Some commonly stated reasons for this are that investors see many opportunities which can often overlap, or the investor needs to consult others in the investor’s network to perform the necessary due diligence for investment.

Even if the investor were to sign an NDA, as illustrated by the Palantir case the NDA is not foolproof. Therefore, in addition, or in the alternative to an NDA, the filing of a provisional patent application (which is maintained in secrecy by the Patent Office) can often be used to identify the information an inventor or a company owned prior to disclosure, but also lays the groundwork for securing patent rights in an invention.

In seeking investment, there are many considerations which should be carefully weighed. The decision whether or not to disclose confidential information, and how that information protected should be among those considerations. If you are considering an investment, we would encourage you to contact your legal counsel to discuss.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/​or financial advisors for legal and tax advice tailored to your specific circumstances.

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