How do I protect a product formula when joining a joint venture

I am an owner of a company that sells CBD, a natural substance derived from
hemp plants and totally legal.

This an e-commerce business recently launched may 1st of this year. It is a DBA
and I am sole proprietor owner of the company with no employees.

Currently started by selling other companies products bought wholesale, at
retail prices on my website. My current campaign is to create a CBD Vape Juice
line and then produce more products from my company and phase out all products
other than ours.

It is known locally that my formula for the CBD Vape Juice line is 2nd to known
locally and nationwide. There is another owner of a company that sells CBD
locally, and from word of mouth he has approached me several times wanting me
to work with him. He has basically told me he does not know how to create the
formulas on paper for the patents of the product.

However anyone with knowledge to create this type of product, should easily
know how to create the formula for it.

So now after me putting him off he finally proposed that we create a new
company as an LLC and ill use my formula to create the CBD juice lines, and
then sell them at each of our stores and the new one online.

However my main fear is agreeing to this, him learning my formula and then
deciding to part ways with the company and use the formula for his own personal
business. How can I protect myself, is doing this company a bad idea. I have a
gut bad feeling about it.

Asked on June 11, 2017 under Business Law, Texas

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

In answer to the most important quesetion: yes, it's a bad idea. While you could create contracts or agreements (see below) to provide protection, no protection is absolute or guaranteed: for smart- or immoral-enough people, there's often some way around the contract. The best protection is to not enter into business with someone you don't trust--contracts add a layer of protection to otherwise trusthworthy arrangements. In my experience (24 years of combined business and legal experience), you should always trust your gut: if something seems wrong, it probably is.
If you determined to go ahead, you can have him sign (*before* you disclose anything!) a confidentiality and nondisclosure agreement that he will not use the formula for his own benefit, will only use it for the LLC, will not disclose it to anyone else for any purpose other than for the LLC's benefit and only have having them execute their own nondisclosure agreement, etc. If you want to do this, an intellectual property or business lawyer can draft such an agreement for you. Between the agreement and the "fiduciary duty" (obligation to act for the LLCs benefit and to be fair other LLC members) imposed by law, you will have good protection--just not perfect protection.


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