What is a Non-Disclosure/Non-Compete Agreement?
Non-disclosure and non-compete agreements are crucial legal documents that govern the relationship between an employer and an employee or business partners. The main idea behind these agreements is to protect the business from unfair competition as well as unauthorized sharing of information.
Non-disclosure (also known as confidentiality or secrecy agreements) are created to prevent the disclosure of confidential information by one party to another. There are two types of such agreements between companies. The first type is a generic agreement which simply states that either party "will not disclose to any person…" any of the information given to him by the other party . The second type is more specific and actually lists all the confidential information, or the classes of confidential information. The second type is preferable, of course, because it offers more protection.
Non-disclosure agreements (NDAs) are generally time limited. Typically, they state that the party who has received the confidential information will not disclose the information for a period of two years after the last disclosure.
Non-compete agreements, of course, are used to prohibit the employee from moving to a competitor, or starting a competitive venture. Their duration is typically six months to three years. It is important to note that non-compete agreements are closely observed by courts, and in some cases, they can even be found unenforceable.
Essentials of a Non-Disclosure Agreement
A typical non-disclosure agreement will set out the essential elements necessary for an enforceable agreement. These include: (i) Definitions of Confidential Information: A formal definition of confidential information is vital to give specific content to the obligations of the parties. If the definition of confidential information is too vague, a court may have difficulty finding that something is subject to confidentiality obligations. A court will also regard the confidentiality obligations more seriously if it sees that the parties have defined and considered what information they both will be required to maintain in confidence. (ii) Parties Obligations: A non-disclosure agreement should clearly set out the obligations of both parties. At a minimum, the obligations of the recipient of confidential information should include: (iii) Duration: It is common for the obligations of confidentiality to last for three years or more after the termination of the non-disclosure agreement. It is important to consider that there will be some information that is confidential for a long period of time, but not necessarily for the lifetime of the business. (iv) Exceptions: Exceptions to confidentiality obligations will generally include: Specific information will need to be specified in the non-disclosure agreement to meet the needs of the parties and the information that may be disclosed. Enforceability depends on the context of the confidentiality agreement and the nature of the information that will be imparted or must be protected.
Essentials of a Non-Compete Agreement
While every non-compete agreement varies, there are certain elements that are vital to the enforceability of that agreement. A sample non-compete are listed above, and you’ll notice that among other things it was limited in scope, duration, geographic area and enforceability.
The Scope of the Restriction:
To what businesses is the restriction applicable?
This should be broad enough to encompass the employer’s present and anticipated markets but not so broad as to unduly interfere with the employee’s ability to engage in an occupation of his or her choice.
The Duration of the Restriction:
How long does the restriction apply after the termination of employment?
As a general rule, this one year and the courts will normally enforce restrictions of this duration but not longer.
The Geographic Area of the Restriction:
Where does the restriction apply?
You will note from the sample agreement that restrictions often are apportioned to the geographic area in which you worked and in some cases where your territory was.
Enforceability of the Restriction:
Is the restriction enforceable?
Make sure that the restriction is not overly broad to the point of being impossible to uphold.
Sample Non-Disclosure and Non-Compete Provisions
A. Sample Non-Disclosure Clause
An example of a non-disclosure clause is the following:
In consideration for the Employee’s employment with the Company, and as an integral part thereof, the Employee covenants to the Company that at all times during and after the Employee’s engagement with the Company, unless required by court order or other applicable law, the Employee will maintain the confidentiality of Confidential Information (as defined in this Section D) and will not directly or indirectly disclose, or permit anyone else to disclose to any person, firm, corporation or other entity any Confidential Information, except as required in the course of the Employee’s employment. Confidential Information means all information proprietary to and dealing with the business of the Company, including, but not limited to, trade secrets, software, strategies, technology plans, projects, customers, customers’ needs, business prospects, financial information and sources, suppliers and costs, pricing terms, new product plans, and operational methods, and includes any documents or electronic or computer records maintained by the Company in connection with any of the foregoing.
B. Sample Non-Compete Clause
An example of a non-competitive clause is the following:
The Employee agrees that he shall not, without the prior written consent of the Company, during the Employee’s employment with the Company and for a period of twelve (12) months following termination of such employment whether by the Company or the Employee, either on his own behalf or as agent, employee, independent contractor or otherwise, directly or indirectly:
(a) hire, solicit or induce any employee of the Company to leave the employ of the Company and terminate his employment with the Company for any purpose whatsoever;
(b) hire for his own account any employee or former employee of the Company who has left the employ of the Company during the twelve (12) month period preceding the date of his termination from employment with the Company;
(c) establish or work for a competitor of the Company; or
(d) engage directly or indirectly in any activities that compete in any way with the business of the Company.
Legal Considerations and Enforceability
In drafting non-disclosure and non-compete agreements, there are a number of legal factors to consider in order to maximize their effectiveness and minimize the risk of running afoul of local nondisclosure and noncompete laws.
First, in order for a non-compete agreement to be enforceable, it should be reasonable as to time and geography. Generally speaking in California, a period of two years is considered per se reasonable. But this varies by state. In order for a period longer than two years to be enforceable, the employer bear the burden of demonstrating that the longer period is necessary to protect its legitimate business interests. Similarly, the geographic scope of a non-competition clause (e.g., county wide, statewide, multi-state, nationwide, or worldwide), which is not permissible in California, is permissible in most other states, so long as the scope is reasonable for that business in that jurisdiction.
Second , in some cases, the jurisdiction where the agreement is made controls its enforceability. Therefore, it is important to include a choice of law provision in your agreement. While California courts have held that any contractual choice of law provision that would deprive employees of statutorily protected rights or violate fundamental public policy is void, by specifying where an agreement is made (and therefore subject to that state’s laws) can create some added predictability with regard to enforceability.
Finally, non-compete and non-disclosure agreements that prohibit an employee from participating in illegal activities are generally unenforceable. For example, a non-disclosure agreement cannot prevent an employee from reporting unlawful activity to the government. Generally speaking, a confidentiality agreement should not prevent an employee from disclosing information that is required by law to be disclosed.
When to Use the Agreements
When you decide to use non-disclosure and non-compete agreements is a complex question, and often depends on your business. But consider the nature of your business, the nature of your competition, the nature of the relationship you intend to create, and the type of information you share.
If you are going to have employees who will be exposed to your company secrets, or intellectual property, those employees should at a minimum be required to sign a non-disclosure agreement. Take this approach even with individuals you trust and who have great reputations. Trust and reputation won’t stop another employee from talking, or an individual from selling your ideas to your competition. If you are going to have business partners, you want these agreements in place to protect the information they will learn about your business while owning a percentage of it, as well as to prevent them from forming their own business after the dissolution of the partnership and competing against you. When you have a contract with a supplier or vendor that gives them knowledge of your trade secrets, you often want a nondisclosure agreement to prevent this information from being given to your competitors.
In connection with non-compete agreements, consider whether other businesses in your industry require them. Suppose that you are a beauty salon starting up in Chicago, Illinois that specializes in pedicures. If all of the other salons in Chicago require their employees to sign non-compete agreements that prevent them from going to work for another salon for one year, even if you don’t require the agreement, you might find it hard to hire employees. This is because your competitors will be a lot more attractive if you don’t ask them to sign a non-compete agreement, because then they will have the opportunity to work somewhere else in one year, and you might constantly be hiring new employees.
Employers in certain industries always require non-compete agreements, such as ones involved in finance and medical fields. There is a well-documented history of physicians or hedge fund managers stealing clients or patients from their previous employers or partners. Doctor groups are particularly aggressive in requiring these agreements, due to concerns over medical "poaching." However, take note that roadblocks against non-compete agreements are rare. Even if your business is similar to these types of businesses, you must consider whether your competitors require these agreements. If so, the rules could change for your business.
Tailoring the Agreements to Fit Your Purposes
A cookie cutter approach to non-disclosure and non-compete agreements is usually not the best choice. Different companies have different needs, and different industry practices and standards. Our examples are merely samples. Since these agreements tend to be heavily negotiated, you should rely on a qualified attorney to draft an agreement tailored to your specific needs . A corporate attorney experienced in drafting and litigating these types of agreements will also ensure that your agreement complies with the law. A poorly drafted agreement may be completely unenforceable, even if you ultimately prevail at trial. Many lawyers prepare a one-size-fits-all nondisclosure or non-compete agreement, but this approach may not be satisfactory if substantial changes are needed.