Non-Disclosure Agreements for the Protection of Business
To maintain a competitive advantage in the market, businesses ought to keep innovating, working on new projects, products, and services to best curb the pressure against their competition. This is applicable in a plethora of areas of business, from technology to finance. A non-disclosure agreement (NDA) is a legal document that serves to keep a lid on this aforementioned sensitive information. Within a larger legal document or contract, they made be referred to as confidentiality clauses, confidentiality statements, or confidentiality agreements (CA). Legally speaking, it is a legal contract amongst at least two contracting parties that seeks to detail the confidential knowledge and/or information that the parties wish to share only between themselves, and restrict from any access by any third-party/parties. In most commercial applications, this “information” is usually referred to as intellectual property, whereas the term may refer to other sensitive information in the cases of bank-client confidentiality, attorney-client privilege, priest-penitent privilege, and doctor-patient confidentiality. However, it is important to note that in all of the prior examples excluding commercial applications, the guarantee of non-disclosure is usually not embodied in the form of a written agreement between the parties.
This article will seek the analyze the commercial application of NDAs only, looking at how they may be used for protection of businesses against, and address concerns such as, but not limited to, trade secrets, data-privacy, branding, consumer protection, copyrights, confidentiality, and patents, on ends of both the employer and employee.
An NDA, ideally, should serve three important functions:
- Protecting the vital information: The party/parties that sign an NDA consolidates a legal promise to not divulge any information that is defined as “confidential” under the agreement to unauthorized parties. Any breach of this agreement may be prosecuted as a breach of contract.
- Assisting inventors to keep their patent rights: A well-drafted NDA should serve the best interests of innovators of new products and intellectual property, especially if the intellectual property is disclosed publicly.
- Distinguishing clearly between confidential and non-confidential information: A good NDA should clearly state in black and white, so that parties cannot claim ignorance, or the absence of knowledge, in the case of any divulsion of confidential information.
Also, an NDA must clearly incorporate the following elements within its documentation:
- The parties that can access the information: In a non-disclosure agreement, all the contracting parties and their identities must be clearly outlined. Information sharing should take place on a need to know basis, and any individual that wishes to gain access to the confidential information should become a party to the NDA.
- The length and duration of the NDA must be defined: NDAs may last for a definite period of time, or in the cases of information such as personal details, the NDA may be valid indefinitely.
- The purpose of the NDA must be clearly stated: This is the most important aspect of NDA formation. The NDA must clearly answer questions such as “what” and “why” pertaining to the confidential information and the purpose for its confidentiality. This is of paramount importance, as parties would not be willing to sign an agreement that may hinder the business.
NDAs and Protection of Trade Secrets
Mostly, NDAs are of two types: mutual and non-mutual. A non-mutual agreement, or a one-sided agreement, is usually employed when only one party/side would be sharing confidential information with their counterpart, thus only requiring one signee to the agreement. Whereas, mutual agreements entail scenarios wherein two or more parties share confidential information of their own amongst themselves.
A recent trend in the United States (US) case law, that has raised the possibility of including an expiry date in a non-mutual NDA, has greatly increased the risk of inadvertent loss of trade secret protection. The NDA would restrict the covenantor’s (the party that agrees not to disclose any confidential information, for example, an employee in an employer-employee relationship) right to disclose or utilize any information defined as “confidential” by the covenantee (the party to whom the promise was made). Such “confidential information” may include trade secrets in a commercial environment. A “trade secret” may be simply defined as any confidential information that is of exceptional value to a business operation, and is usually subject to great efforts by members of the business to protect its secrecy.
However, a “restraint of trade” may occur in the operation of some NDAs. A “restraint of trade”, simply put, occurs if and when the covenantor’s ability to carry out trade with third parties to the NDA is restricted. The existence of expiry date in an NDA would constitute to a restraint of trade, and lead to the creation of a scenario where a business owner may be unable to carry out any business operation, as it may risk the divulsion of some trade secrets. In such cases, the NDA may be deemed void. The use of expiry dates in NDAs may be able to limit the scope of the trade restraint in some cases. There have been many cases which have analyzed the question of enforceability of NDAs with regards to restraint of trade clauses present in them. Thus far, United States (US) case law is the most comprehensive on this subject.
Under the Uniform Trades Act (UTSA) 1985, the Uniform Law Commission (ULC) of the United States of America (USA) defines trade secrets as the following:
“information, including a formula, pattern, compilation, program, device, method, technique or process that:
- derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”
This definition of trade secrets will serve useful in comprehending the case law that follows. These case laws have dealt with the issue of trade secrets being disclosed under NDAs upon expiration after a specific time period, and the consequences of expiration of the obligation by the covenantee to protect the trade secret(s) after a certain time period.
In DB Riley, Inc. v. AB Engineering Corp., at the US District Court for the District of Massachusetts, (case ref. no. 977 F. Supp. 84 (D. Mass. 1997)), decided on 18th September 1997, the matter pertained to the plaintiff’s claim that the defendant had unfairly acquired the plaintiff’s trade secret information, and in spite of contractual agreements that disallowed disclosure by any means, that had existed between them prior to the suit, the defendant utilized the trade secrets to gain a “competitive advantage”. Despite this finding, the court ruled in favour of the defendant, stating that it was the plaintiff’s fault for not being able to take reasonable measures to preserve confidentiality. Also, as the plaintiff’s confidentiality agreement was only valid over a limited period of time (in this case, for a period of 10 years only), the plaintiff could not claim “eternal vigilance” over the business’s trade secrets. Thus, the court did not award any preliminary injunction to the plaintiff over the lack of merit in his claim, owing to the expiration clause in the confidentiality agreement. This case clearly outlines how definite (by time) NDAs can affect business practices, and highlights the importance of businesses exercising their power to contract eternal/indefinite agreements.
A similar case, Silicon Image, Inc. v. Analogix Semiconductor, Inc., (case ref. no. 642 F. Supp. 2d 957(2008)) which was decided at the US District Court for the Northern District of California on 21st November 2008, pertained to a plaintiff’s claim that the defendant had wrongfully misappropriated the plaintiff’s trade secrets, and thus the plaintiff had sought to stop the defendant from selling copies of its work.
Analogous to the prior case law referred, the court here also ruled that the information in question would only be qualified as a trade secret had the plaintiff taken reasonable steps to ensure its confidentiality, which, the court said, need not have included unduly expensive measures, but simple measures, such as, but not limited to, advising employees on the materiality of the trade secret, and limiting access to the same by the employment of a “need-to-know” basis. Since the duration of the agreement was only for 2 years, the defendant was free to implement the aforementioned practices upon expiration of that time period. Thus, the court ruled that the plaintiff did not possess a high probability of success of its misappropriation claim.
In both cases, the terms of confidentiality, which were time-limited, resulted in a loss of trade secret protection. Whilst the appropriate solution in such cases could be to implement perpetual terms of confidentiality, such agreements are deemed to be “unreasonable restraints on trade” in many US states and other jurisdictions across the globe, as it does not guarantee any concrete protection of the confidential information over such large periods of time. This dilemma exists to a great degree in other jurisdictions as well.
Given the precedent that has been set by the aforementioned examples in case law, the way forward for businesses is to establish clear lines that distinguish between “regular” confidential information, and trade secrets specifically, in NDAs. The current implementation of a single system to broadly classify all information as confidential may deem beneficial, but its applicability would be expanded if businesses choose to include a separate section which exclusively carves out “trade secrets” from the rest of the information. Use of language along the lines of “whether or not a trade secret” would complement the definition of “confidential information” in confidentiality contracts.
Another practice that businesses may employ would be setting distinct time durations for both confidential information and trade secrets respectively. This may allow for indefinite protection of trade secrets whilst ensuring definite protection for all other confidential information, allowing businesses to remain in compliance of confidentiality laws whilst simultaneously not rendering the NDAs to be void by placing “unreasonable restraints on trade”.
Apart from the time and duration of the agreement, there are a few additional provisions that should be included in NDAs to help businesses better protect themselves. Some of them include the following:
- Injunction: Business owners ought to ensure that NDAs include a clause that grants them the right to injunctive relief to seek legal aid against the covenantees in the event of a breach of the agreement.
- No rights in the receiving party: It may prove useful for business owners to include a clause that does not grant the receiving party (in most commercial applications, the employee), the right to enter into any further agreements or deals, just merely on the fact that they have signed an agreement to preserve confidentiality of some information.
- Employee Solicitation: In the event that the party receiving the confidential agreement may have access to the business owner’s employees, it would better serve the business owner’s interests to include a clause in the NDA that restricts that party from soliciting, hiring, or engaging in business-related communication with the business owner’s employees for the duration of confidentiality agreement. In some cases, the business owner may only desire that this clause apply to his/her employees that have come into contact, or are cognizant of, special confidential information, or trade secrets.
- The jurisdiction in the event of a dispute: In most cases, where the business owner is the disclosing party, it would best serve the business owner that he/she detail exactly which jurisdiction a dispute would be resolved in (in the agreement), in the event of a breach or dispute. Furthermore, this would alleviate any logistical hindrances for dispute resolution.
Protection of Employees under NDAs
In many scenarios, NDAs may be used unjustly and unethically to silence employees that may suffer the harassment of various forms from their employers.
A recent, high profile case that highlights this issue, is the case of ABC v Telegraph Media Group Ltd  EWCA Civ 2329, decided on the 23rd of October 2018 by the Civil Division at the Court of Appeal in England & Wales (CoA). This was an appeal case that was filed by a business executive (who was later identified to be Sir Philip Green, a billionaire businessman who is the chairman of the Arcadia Group, an apparel retail company), against the decision of the High Court of England & Wales (HC), which had refused to grant an interim injunction which restrained the respondent (in this case, the daily newspaper The Telegraph) from publishing information that was previously disclosed by an alleged breach of confidence.
The breach of confidence was alleged to have happened when 5 employees of the business executive, had accused the business executive of sexually harassing them. It is also important to note that these complainants had been signatories to NDAs, which entailed their harassment complaints, and had received substantial payments from the company prior to anything going on the public record. The High Court judge rejected the business executive’s application for an injunction of this information, ruling that the confidentiality of the information was outweighed by public interest in the newspaper.
Upon appeal at the CoA, the appeal was granted by the judge, citing that the publishing of confidential information by The Telegraph was indeed a breach of confidence and that the respondent was obviously aware of this. Whilst the CoA did appreciate the gravity of the matter of misconduct in the workplace and its interest in public debate, he said that ruling otherwise would undermine the importance of NDAs, which had a legitimate role in the settlement of this dispute. Moreover, there was no evidence that the NDAs were not signed consensually by five employees, or by the means of any threats or unreasonable force, and that prior to signing the NDAs, the employees were free to go public with their allegations.
In conclusion, such cases blur the lines between ethical behaviour and implementing the law correctly. An employer’s best interest should always align with those of his/her employees. However, the use of NDAs to exploit employees and silence them turns the moral compass against NDAs, turning them sources of legal protection to sources of institutionalized harassment. The use in NDAs in the correct context, both economically and morally, would serve as the ideal use of this legal tool.