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Risky Business: The Dangers of Overbroad Confidentiality Agreements

Originally published in Employment in the Law - Spring 2012
06.06.12

Gary D. Knopf

A confidentiality or non-disclosure agreement (NDA) is a contract that requires an employee to protect trade secrets and other confidential information provided to an employee during his or her employment.  An NDA restricts disclosure both during employment and for a time after the employment relationships ends.  NDAs are particularly valuable in protecting information which may not meet all of the requirements of a trade secret under applicable law, but which the employer nevertheless has a legitimate interest in protecting.  Like other post-employment restrictions such as non-competition or non-solicitation agreements, NDAs must be tailored to protect the reasonable interests of the employer and may not be enforced if they are overbroad.  But, while NDAs can provide employers with an extra layer of protection above and beyond trade secret statutes, they have their limits. 

 

Like all post-employment restrictive covenants, the enforcement of an NDA will depend on which state’s law applies to its interpretation and enforcement – and state law requirements vary widely.  The majority of states do not require either time limits or a geographic scope for an NDA.  Georgia recently liberalized its law to aid enforcement of NDAs and other covenants and no longer requires a post-termination time limit.  Even states that generally do not recognize non-competes and customer non-solicits at all, such as California, still recognize and enforce NDAs.  This is partly because NDAs do not prohibit competition per se – they merely prohibit misappropriation and use of the employer’s confidential information.

 

Apart from possible time and geographic limits in a few jurisdictions, the types of information subject to an NDA must be truly confidential and the restrictions must be reasonably limited to serve the legitimate business interest of the employer.  In order to claim something is confidential, an employer must take reasonable steps to protect and preserve the claimed information from unauthorized access and use.  Generally speaking, an employee’s skills, general methods of performing work, and general industry knowledge, even when learned exclusively in connection with a particular job, are not protectable as confidential information.  Things such as pricing information may be confidential, but not if the employer freely distributes that information to customers and other third parties without any agreement that the client will keep that information confidential. 

 

Employers commonly make the mistake of using sweeping definitions of confidential information to include all sorts of things that either are obviously not confidential or are not subject to reasonable efforts to maintain their confidential character.  An employer cannot make information confidential by decree – it must always be able to show that information included in the definition of "confidential" has, in fact, been treated as confidential.  General prohibitions against using methods and manners learned during employment following termination of that employment will not be enforced except in unusual situations where the methods and manners are truly unique and zealously guarded.

 

For example, in Trailer Leasing Co. v. Associates Commercial Corp., an Illinois federal court refused to enforce an NDA that sought to protect "any methods and manners by which Employer leases, rents, sells, finances, or deals with its products and its customers."  In addition, in Lasership, Inc. v. Watson, a Virginia state court invalidated an NDA that attempted to preclude an employee from disclosing any information concerning the business of the employer to any person, finding that it was "not narrowly tailored to protect the legitimate business interests" of the employer.  The court explained that the provision was so overbroad that, as written, it prohibited the employee from telling a neighbor anything about the employer – including information that was not proprietary in nature or worthy of confidence – for the rest of her life.

 

While drafting broad provisions may appear to be a logical approach to deterring an employee from disclosing confidential information, it could also defeat the entire purpose of the agreement if a court finds the agreement unenforceable.  Moreover, while some states such as Georgia, New York, and Illinois allow for "blue-penciling" or judicial modification of overbroad restrictive covenants, counting on a Court to save an overbroad provision is a risky proposition.  A judge will have very broad discretion to modify the covenant the way he or she sees fit, or may choose not to modify it at all and simply refuse to enforce any part of it.  For example, in the Northern District of Illinois case above, the Court refused to modify the agreement because it would have required the Court to "rewrite the defining terms of the restrictive covenant."  

 

The bottom line is that an overly broad NDA runs a higher risk of being invalidated by a court if it is ever challenged by one of your former employees.  If other restrictive covenants in an agreement are also invalidated, you may be left without any protections beyond that of the relevant state’s trade secrets laws.  But even with regard to these statutory protections, employers should be careful not to limit trade secret protection by offering a definition of a trade secret in an NDA.  This definition is already stated in the applicable statute, and, by offering an alternative definition, you might inadvertently narrow the scope of the information you want to protect.

 

Employers should follow these simple guidelines to avoid drafting overbroad NDAs:

 

Avoid "Kitchen Sink" Provisions:  As a general rule, the narrower the scope of the confidentiality provision, the more likely the employer will be able to show the agreement serves its legitimate business interests.  In that regard, the employer should specifically define the nature of the confidential information to be disclosed (i.e., don’t include everything but the kitchen sink) and only include information that you honestly and diligently treat as confidential.

 

Identify the Purpose of the NDA:  Consider including a short paragraph defining the context in which the information will be disclosed and why the parties want to make the information the subject of a contract.

 

List Exclusions from Confidential Information: Finally, NDAs should contain various exclusion clauses that outline the types of information deemed not to be confidential within the terms of the agreement.  Generally, these types of exclusions will include:

 

  • information that is publicly available or readily ascertainable from public information;

  • information that is already known to the employee at the time of its disclosure;

  • information that is received by the employee from a third party who is not in breach of any confidentiality obligations; and

  • information that is developed by the employee or another third party completely independently.

 

Following these guidelines will reduce the risk that a court will find an NDA unenforceable.  For more information and advice drafting NDAs, contact any member of the Troutman Sanders LLP Labor & Employment Group.

 

© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.

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