NDAs for Employees: The Legal Implications

Posted by Legalease Solutions on 14 Dec, 2018

A nondisclosure agreement (NDA) is a legal contract that binds the receiver of confidential information to respect such information and not use it to the detriment of the party who provided it.^[1]

Understanding Non-Disclosure Agreements

A company’s revolutionary and lucrative idea can succeed only when kept away from the watchful eyes of competitors^[1]. Businesses often need to share such ideas and information with employees and independent contractors. To prevent exposure of such proprietary information, they may sign NDAs with their employees.

An NDA, also known as a Confidentiality Agreement or a trade-secret agreement, binds the parties to a confidential relationship. It protects the secrecy of the sensitive information exchanged during business transactions, and is an enforceable legal agreement that specifies information that either or both parties regard as confidential.^[2] It can be part of a larger legal document and go by the names, confidentiality statements or confidentiality clauses.

The party that discloses the information is commonly called the “Disclosing Party” and the one that receives it is called the “Receiving Party.”^[3] When the Receiving Party signs an NDA, he/she pledges to protect the secrecy of the Disclosing Party’s confidential information.^[4]

“What constitutes confidential information depends on the parties involved, the nature of transactions between them, the circumstances that they occur in, the agreements between the parties, and the particular purpose they serve, among others.”

Understanding Confidential Information

Confidentiality is purely subjective. Every employer tries to protect their knowledge, trade secrets, and products from getting into the wrong hands, and any information the employer deems classified may be termed confidential information.^[5] The Code of Federal Regulations defines “confidential business information” in an intentionally vague and verbose manner, to include a wide spectrum of information.^[6] In Evans v. Duggan & Associates, the Superior Court of California noted that confidential information means anything that the Disclosing Party “believes in good faith is entitled to confidential treatment.”^[7] However, the court exempts clandestine information relating to unethical or illegitimate business practices from being termed confidential. Therefore, what constitutes confidential information depends on the parties involved, the nature of transactions between them, the circumstances that they occur in, the agreements between the parties, and the particular purpose they serve, among others.^[8]

However, the employer should be able to identify such information with relevance and specificity. Courts are reluctant to enforce broad and ill-defined confidentiality agreements. Generally, confidential information consists of personally identifiable information and trade secrets that may help a competitor gain a business advantage. “Employers insist on signing NDAs with their employees as an employment condition, a severance package, as part of a settlement agreement or in a personal context to protect proprietary/Competitive-Advantage Information.”

Employer’s Duty to Protect and Preserve Confidential Information

A situation may arise where an employee accesses his/her employer’s confidential information without authorization or exceeds his/her authorized access for personal benefit. Employers insist on signing NDAs with their employees as an employment condition, a severance package, as part of a settlement agreement or in a personal context to protect proprietary/Competitive-Advantage Information.^[9] Also, the duty of care requires the employer to establish that they have taken all reasonable measures to preserve the secrecy of such information.^[10]

The courts have generally accepted employer policies that require all employees to sign NDAs.^[11] In Whyte v. Schlage Lock Co., the Court of Appeal of California noted “requiring employees to sign confidentiality agreements is a reasonable step to ensure secrecy.”^[12] As the United States District Court for the Central District of Illinois pointed out in First Financial Bank, N.A. v. Bauknecht, NDAs are an important evidence of reasonable measures taken by an employer to secure his confidential information.^[13]

Importance of NDAs at Workplaces

More than a third of the United States workforce is party to an NDA with their employer.^[14] NDAs are either unilateral or mutual. A unilateral NDA, the most common kind in an employer-employee relationship, stipulates that one of the involved parties cannot disclose the confidential information he/she is privy to.^[15] Mostly, employees sign this type of NDA to maintain the security of confidential information they learn while on the job ^[16], and to protect the copyright for information generated through their research. ^[17] A mutual NDA, on the other hand, is generally to secure shared information between entities that engage in joint ventures.^[18]

“The scope of the agreement plays a pivotal role in determining the rationale of the NDA’s clauses and increases the chances of the court upholding the NDA in a legal dispute.”

Legal Effects of an Employee Signing an NDA

Since confidential information is an umbrella term featuring a one-size-fits-all strategy, employers need to be cautious while drafting NDAs. As vaguely drafted NDAs can be made unenforceable, employers must ensure their confidentiality clauses are tailor-made to secure necessary information.^[19] The scope of the agreement plays a pivotal role in determining the rationale of the NDA’s clauses and increases the chances of the court upholding the NDA in a legal dispute.^[20]

One of the crucial features of an NDA is its duration. Generally, NDAs come with a time duration or are perpetual in nature.^[21] The nature of the NDA depends on the kind of information the employer is protecting and the jurisdiction that applies to the agreement. In some cases, the information in the NDA remains confidential only for the time duration mentioned in the contract, while in other cases, the information remains confidential even after the termination of the relationship between the parties.^[22]

A pertinent question that springs up is whether it is legal to ask an employee to sign an NDA after he/she has commenced his/her contract. Like all contracts, NDAs also follow the basic principles of offer, acceptance and consideration. Requiring an existing employee to sign a new NDA requires fresh consideration.^[23] At the same time, protecting the secrecy of any new confidential information is crucial to the existence of the employer’s business.^[24] A solution to this would be to incorporate a clause that requires employees to execute any future agreements as the employer deems essential.^[25]

Conclusion

From protecting confidential information to indemnifying the Disclosing Party, NDAs play a vital role in the corporate world. Although one point of view is that NDAs may destroy an employer’s chances of acquiring new talent, are redundant if the employer has secure information policies, or that enforcing an NDA is a tedious litigation process^[26], without an NDA, an employer faces possible loss of confidential information. The contract acts as a psychological deterrent to an employee who intends to disclose information while clarifying the intellectual property rights of the employer.^[27]

References

^[1] Adam Hayes, “How NDAs Work and Why They’re Important,” https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp

^[2]Rebecca K. Myers, Confidentiality, Nondisclosure and Secrecy Agreements, https://www.lexisnexis.com/lexis-practice-advisor/the-journal/b/lpa/archive/2015/11/30/confidentiality-nondisclosure-and-secrecy-agreements.aspx

^{[3,4,9,10,15,16,17,18,19,21,22,24,25]} Id.

^[5]Erica Gardner, “What is Confidential Information,” https://everynda.com/blog/what-is-confidential-information/

^[6]19 CFR 201.6

^[7]Evans v. Duggan & Associates, 2017 Cal. Super. LEXIS 851.

^[8] Supra note 7.

^[11]Elm City Cheese Co. v. Federico, 752 A.2d 1037; Business Designs v. Midnational Graphics, 2002 Iowa App. LEXIS 524; Solar Innovations v. Plevyak, 2013 Pa. Super.Unpub.LEXIS 1230.

^[12]Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443.

^[13]First Financial Bank, N.A. v. Bauknecht, 71 F. Supp. 3d 819.

^[14]Unknown Author, “Non-Disclosure Agreements (NDA’s)”, https://www.workplacefairness.org/nondisclosure-agreements

^[19] Supra note 18.

^[20]AileeneKoh, “Duration Clauses in Non-Disclosure Agreements,” https://everynda.com/blog/duration-clauses-non-disclosure/

^[23]Farrah Rahman, “Is It Legal for A Company to Ask an Employee To Sign an Nda After the Employee has Started Working?” https://blog.clausehound.com/is-it-legal-for-a-company-to-ask-an-employee-to-sign-an-nda-after-the-employee-has-started-working/

^[26]AileeneKoh, “5 Reasons Not to Sign an NDA with New Hires,” https://everynda.com/blog/5-reasons-not-sign-nda-hires/

^[27]AileeneKoh, “4 Reasons to Sign an NDA with Employees,” https://everynda.com/blog/4-reasons-sign-nda-employees/