What is a Confidentiality Agreement?
Confidentiality agreements, or confidentiality non-disclosure agreements, are commonly the subject of commercial negotiations when new business relationships are initiated. Confidentiality agreements are important because businesses try to protect their trade secrets, business methods, marketing strategies, and other confidential information by requiring parties with whom they’re conducting business to sign a confidentiality agreement.
This enables the business to request the recipient of the confidential information to not provide the confidential information to anyone, or to implement information barriers when sharing information with other divisions of the same business. Other commonly used terms in this context include: confidential information; proprietary information; corporate information; or trade secret. The definition of confidential information in a confidentiality agreement is generally broad enough to include business information that isn’t a trade secret, but is still sensitive enough, or valuable enough to warrant its protection.
The purpose of the confidential information or confidentiality agreement is to provide a remedy against the party to the confidentiality agreement who discloses confidential information to a third party , or uses the confidential information for an unauthorized purpose.
Parties should ensure however, that a confidentiality agreement does not conflict with an employee’s obligations (both during and after employment) to protect confidential information, or with special statutory obligations. For example, an employee’s confidentiality obligations to their employer may be incorporated into an employment contract.
There are specific statutory obligations owed by any person under section 35 of the Indian Trusts Act, 1882 when it comes to trustees protecting confidential information of the trust. In this case, a confidentiality agreement is unnecessary and creating one will not supersede the statutory duties that are applied when a person is a trustee.
A confidentiality or non-disclosure agreement, may also not be applicable to information that can be publicly reported under the Right to Information Act, 2005. Certain kinds of information are exempted from being disclosed under section 8 of the Right to Information Act, 2005.
It is also important to keep in mind that a confidentiality or non-disclosure agreement should not negatively impact the freedom of expression guaranteed by Article 19(1)(a) of the Constitution of India.
Defining Non-Solicitation Agreements
Non-solicitation agreements can be a protection for your business interests that are separate and distinct from other agreements with your employees. A non-solicitation agreement is an agreement in which an employee agrees to not solicit other employees away from his employer, or to not deal with customers or vendors whether of the employer or affiliate businesses. Such agreements can also be a way to enforce a non-competition agreement or part of a non-competition agreement. The purposes of visiting and revisiting non-solicitation agreements include: Ensuring that the agreement is enforceable; Educating employees about the importance of confidentiality; Educating management about their managerial obligations to protect client lists and business information; and Reassessing your needs on a periodic basis.
The agreement can also be called "non-disclosure agreements" or "covenants not to compete with the company." In Massachusetts, non-compete agreements have become more difficult to enforce and are much less common. For that reason, many businesses choose to use narrowly tailored non-compete agreements that an untrained person might just call a non-solicitation agreement.
Perhaps more than in any other situation, non-solicitation agreements can be ferocious battles when parties of unequal bargaining power are involved. That is why we recommend that you make non-solicitation agreements part of the business relationship from the beginning of that relationship and even before the employment relationship begins, if possible.
Key Components of These Agreements
Confidentiality and non-solicitation agreements are legally binding contracts that lay out the responsibilities and restrictions an employee has while working and after leaving a business. While elements of these agreements can vary between them, the most common components include:
Scope – This refers to the extent of the restrictions a business places on its employees. Scope can refer to physical locations or specific job positions, like managers only. It can also refer to the information covered in the confidentiality agreement, which should specifically indicate whether it covers all forms of communication or just electronic.
Duration – A business should have specific timeframes in mind for how long the agreement should remain effective. For example, it may state a party must not view or share confidential information for three years after the date of termination. There are generally no laws that dictate how long a company can set the duration of their agreement for, but it may make it difficult to enforce once it exceeds a certain length of time.
Enforceability – What happens if an employee breaks the terms of the confidentiality agreement? The business must be aware of how they would enforce their rights if someone shares sensitive information or tries to steal or poach clients. They could ask for preliminary relief from the courts to cease the activity from happening and also sue for any damages caused.
The specific language of these agreements is essential to ensure they hold up in court and that businesses have complied with any local or state laws. An employee who is asked to sign one of these agreements would be wise to speak with a lawyer about any concerns before putting pen to paper, as there may be elements they do not necessarily have to comply with.
Legal Considerations and Enforceability
Confidentiality and non-solicitation agreements, like many other contracts, are often subject to legal scrutiny concerning their enforceability. One common consideration is whether the scope and terms of such agreements are overly broad or unreasonable. Courts may be hesitant to enforce agreements perceived as a restraint of trade. The general rule in California is that every contract in restraint of trade is void (Cal. Bus. & Profs. Code ยงยง 16600-16601). However, this does not preclude the enforcement of agreements such as confidentiality and non-solicitation agreements.
The application of a rule of reason is commonly applied to review the enforceability of confidentiality and non-solicitation agreements. When determining the enforcing of confidentiality and non-solicitation agreements, courts will generally look at the strength of the employer’s justification for the restraint as well as how narrowly tailored the restraint is. For example, in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018), the appellate division of the Fourth District Court of Appeal of California ruled that "the rule of reason analysis applies to the determination of whether a confidentiality and non-solicitation agreement goes beyond what the employer has a protectable interest." (AMN Healthcare, Inc., supra, 28 Cal.App.5th at 918.) Therefore, courts may allow employers to balance their need for protection with the employee’s ability to earn a living.
Courts also tend to recognize the difference between confidentiality plans that have a reasonable duration and those that lack any temporal limit. (Diodes, Inc. v. Franzen (1970) 254 Cal.App.2d 537, 551-52 [holding, in dicta, that agreements with no specified time limit are void as against public policy because they deny a former employee the opportunity to compete and earn a living].)
In addition, California’s Business and Professions Code Section 16601 allows for the enforcement of non-competition and non-solicitation agreements under the following conditions: Section 16600 provides that a person may not engage in a contract "to do any of the following: (a) restrain anyone from engaging in a lawful profession, trade, or business of any kind." What section 16601 does, however, is provide an exception to this rule. Specifically, section 16601 provides that employers can enforce a contract that purports to restrain a person from competing with the employer in the following two limited circumstances: Courts will generally enforce contract provisions limiting the former employee’s ability to solicit customers and employees after termination from the company. (E.g., Paintastric v. Equilon Enterprises LLC (2018) 29 Cal.App.5th 543.) However, as indicated above, the courts will likely enforce such a provision only if the restraint is no greater than necessary to protect the employer’s interests.
Benefits of Implementing These Agreements
An employer can assure itself of its confidential information’s integrity and value by vigilantly preventing its employees from dishonestly using it. That being said, however, employers should take comfort that even poorly drafted confidentiality and non-solicitation agreements confer numerous benefits on both. Some examples include:
- Returning Company Information to the Company. The process of negotiating a confidentiality agreement invariably supplies both the employer and the employee with an opportunity to examine and discuss the information in question. Although discussions in this context are not normally the subject of any dispute, at least the employee is "on notice" that the company is claiming certain of its information is proprietary and/or confidential.
- Guarding Against Breach of Contract Claims. A company unable to prove that it took reasonable steps to protect the subject information may have its breach of contract/ breach of fiduciary duty claim defeated by the possibility of successor or concurrent use, authorization or consent. The terms of the contract act as a starting point from which the company can defend itself.
- Lawyer’s Fees. Key employee contracts typically contain "prevailing party" attorney’s fees provisions. In contrast to the usual American Rule , Illinois’ statute requiring that each party pay their own lawyer’s fees, the ability to recover legal fees pursuant to a contract provides a powerful tool to discourage litigation, and thus ease the burden upon the courts.
- Assisting Enforcement. If an employee leaves the company in violation of a confidentiality and/or non-solicitation agreement, the employer will be able to turn immediately to the court for injunctive relief and attorney’s fees, helping to prevent irreparable harm from the former employee’s breach.
- Preventing Spoliation of Evidence. Illinois law provides upon request a presumption in favor of spoliation instruction evidence when a party fails to timely produce documents of electronic information. These instructions allow the jury to presume the unavailable documents contain information supporting the moving party’s claims or defenses sufficient to establish them.
- Other Benefits. Both nondisclosure/noncompetition agreements and confidentiality agreements are important to an employer’s success by ensuring good employee relations, and by creating an expectation of stability and safety in the company’s employment force.
Drafting Effective Agreements
Careful drafting is critical to ensuring that confidentiality and non-solicitation agreements are effective and enforceable. When the agreements are too broad or ambiguous, a court may find them invalid. For example, in Fidelity & Deposit Co. v. Williams, a South Carolina federal court struck down a former employee’s non-solicitation agreement because the agreement did not contain a defined geographic term but rather simply stated "in an area in which [Fidelity & Deposit Co.] conducts business."
Here are some tips for drafting effective confidentiality and non-solicitation agreements:
- Limit the definition of "confidential information" to employees and customers. For example, it is common for a confidentiality agreement to cover trade secrets and proprietary information, as well as customer lists. It is generally more difficult to protect your information if it is publicly available for purchase than if it is limited to customers.
- Focus on your real business interests. Think carefully about what confidential information and what employees or customers you want to protect. For example, if your company is a construction company and your real concern is protecting the customer relationships of the sales representative, you would want a non-solicitation agreement that focuses on clients and the employees assigned to those clients.
- Use a general geographic term. Even if the former employee resides in a defined geographic area, the company should avoid defining the geographic area in its agreement. Generally courts prefer a more general term such as "within a reasonable time and distance from the business location where the former employee worked," but most jurisdictions have upheld a non-solicitation agreement that included "within a two-hour drive of a company office."
- Restrict the term to what you need. While most courts have found that a non-solicitation agreement that lasts one year is reasonable, some courts have found that more than two years is unreasonable. Consider the length of time that customers are likely to use the former employee and that this will depend on the employee’s relationship with them and the field in which the employee worked (the life cycle of a "buy-sell" transaction may be a few months, while the "buy-sell" transaction for a house can occur over a year or so).
- Offer valuable consideration for the agreement. Confidentiality and non-solicitation agreements must be supported by consideration. The consideration does not have to be anything significant, such as $10, or it can be as little as employment.
Common Pitfalls to Avoid
Some of the common pitfalls that we see with confidentiality and non-solicitation agreements come from inadequate drafting, or from poor follow-through with practical steps after the agreement is signed. Because the burden rests on the employer to have robust confidentiality practices in place, including implementing and communicating those practices to employees, companies should take steps to ensure that the restrictive covenants are appropriately tailored to the business’s legitimate interests.
One example of a common pitfall is the refusal of an employee to sign the agreement. Ohio is an at-will employment state, so generally courts will not view an employer’s use of at-will employment as insufficient consideration for sign-on restrictive covenants. However, a long line of cases has held that an employee must be presented with some type of benefit beyond continued employment (often called "some other consideration") in order to support the enforceability of a restrictive covenant. In practice, this means that an employee must be given a bonus, raise or stock options, if they are required to sign a restrictive covenant. Some employers get around this and use a "boilerplate" restrictive covenant that all employees are required to sign. However, many of these boilerplate agreements fail to include language that states the employee will receive, in exchange for signing the restrictive covenant, some other form of consideration. Employers can avoid this pitfall by including these statements in the agreement.
Another common issue we see is very tight timeframes for an employee who leaves the company to return company property, or to refrain from contacting other employees. Once an employee leaves an employer, the window for the employee to contact other employees begins immediately. A common mistake is an employer sending out an email blast to all employees immediately after their former employee resigns; this can trigger a breach of the non-contact provision by notifying co-workers that they are no longer employed by the company. Employers would be better served by waiting at least 24 hours to publicly announce that the individual is no longer employed. Further, employers should review their practices for ensuring the security of their confidential information, such as implementing an "exit interview" process for individuals who leave the company.
Recent Trends and Case Studies
Employee confidentiality and non-solicitation provisions remain valuable, necessary and enforceable. Although there have been recent high-profile cases in the South and the Midwest upholding such provisions, and a few cases enforcing periods shorter than one year, those are outliers and not the prevailing trends. There has been a resurgence in conflicts between state and federal law, privacy rights and proprietary information protection, leading courts to strike down otherwise-valid provisions attempting to restrict an employee’s employment options. Courts continue to grapple with the issue of enforceability on a case-by-case basis and these restrictions are likely to remain a hot topic.
Courts often weigh the interests of the employer against the potential impact on the employee industry-wide, finding very specific, narrowly-tailored provisions are enforceable, especially when the employer is protecting its substantial investment in training and technology. But when the employers’ interests are not narrowly tailored to specific information "necessary to protect … a legitimate business interest," courts are less likely to rule in their favor.
In Ferro v. W. Randolph CIBOR Realty, Kiley Ferro was a recent college graduate who began working as a real estate agent in 2009 after training as a student. She consistently produced a good sales volume and in 2012 she resigned from her employer, West Randolph Ciber Realty. Her client list, however, ended up with her new employer, Realty Executives.
Ciber filed suit for Ferro’s alleged misappropriation of trade secrets, and Ferro countered with a motion to dismiss, claiming the non-solicitation provision and the confidentiality agreement were overly broad. The court stated: "the contested provisions . . . appear to have been crafted without serious thought" and simply state that she "will not solicit clients . . . or divulge their confidential information." Furthermore, the agreement did not define "confidential information," nor did it specify the types of information that Ferro was bound to keep confidential. The court ruled that these provisions were overly broad to the point of being "unreasonable."
In L.B. Foster Co. v. Coastal Corp., the court ruled Figel could not enforce his confidentiality or non-solicitation agreement with his former employer, L.B. Foster Co, (L.B. Foster) in North Carolina courts. While Figel was a resident of North Carolina, he worked for L.B. Foster in Georgia and held the position of COO of L.B. Foster’s Southern Division, with support in executing contracts, approving expenses and directing sales. He signed a "continuing contractual relationship" with L.B. Foster, which contained a confidentiality provision, which in turn stated "Each party hereto shall treat this agreement and its contents as confidential information, and shall not disclose any of its terms to any third party without the written consent of the other party." Case law on general contractual non-competition provisions supported enforcing non-compete agreements as long as they were reasonable.
However, the court found that this contract was "one for an indefinite term" and one "generally terminable at will," which it had already ruled did not fall under the general guidelines for non-compete agreements with more specific restrictions. Because Figel was not limited to a reasonable period of time, with a specific geographical scope, the contract was, in effect, a non-compete clause. The Court of Appeals of North Carolina therefore affirmed the decision by the trial court to dismiss all but one of L.B. Foster’s claims against its former employee.