In a competitive marketplace, nondisclosure agreements can be appealing — but they are easy to use incorrectly. Employers may want NDAs in place to defend their client lists and secret recipes, but if they use over-reaching language or underutilize the agreements, the documents can be difficult to defend in court.
Who uses NDAs?
Mark Spund, attorney and chair of the employment practice group at Davidoff Hutcher & Citron LLP, explained that NDAs are usually used to "safeguard proprietary information, such as financial records, marketing plans, and customer lists — anything that would give competitors an advantage if the information were revealed."
NDAs are, on the whole, accepted by the courts, but they may be challenged if they're too broad or if they prevent employees from gaining employment with another company, Meredith Campbell, attorney and chair of the employment and labor practice group at Shulman Rogers, told HR Dive. Businesses have "an obligation to protect their own information and even the information of their clients and vendors," she said. "If the agreement doesn't fall under a broader restrictive covenant, like non-competes or non-solicits, where there is a lot of pushback, the agreement is typically valid."
Employees also should see some value to signing the agreement, Campbell said; "We're happy to train and expose you to our business practices, but we have a duty to clients and other employees to protect their jobs and make sure you don't unfairly share information outside our work environment."
From startups to legacy conglomerates, all types of companies find value in NDAs, Peg Buchenroth, SVP of Human Resources at Addison Group, told HR Dive in an email. But many companies may also forget to include their consultants as a group that may need to sign an NDA. "Many companies that engage outside consulting services for a special strategic project will require an NDA prior to providing any confidential information to the consultant(s) assigned to the project," Buchenroth said.
Jacqueline Johnson, co-chair of Littler's Unfair Competition and Trade Secrets Practice Group, offered an extensive (non-inclusive) list of the types of information that can be covered under NDAs. They can come in a variety of formats and protect:
- Customer and client lists, including contact information and preferences;
- Fees, costs, and pricing structures;
- Business and operations plans and methods;
- Trade secrets;
- Innovations, ranging from ideas to inventions, and from research to and new developments;
- Distribution and sales methods, systems and strategies;
- Marketing and advertising information and strategies;
- Manufacturing know-how;
- Distributor, vendor, supplier and contractor information;
- Computer software, applications and programs; and,
- Confidential information obtained from third parties under an expectation of privacy.
How are they best used?
To be truly enforceable, the agreement must be narrowly tailored to a specific interest, Campbell said; "Protect only what you need to protect." For entry-level employees, employers may use an agreement that's very basic and easy for a new hire to understand. "I'm never a fan of telling someone they have to sign before they leave the room, so it's important to let employees read through any contract carefully," she added.
A more detailed agreement for mid- to executive-level employees who are exposed to more information may be appropriate; those agreements may include limited non-compete clauses. "It can be an administrative hassle," Campbell said, "and it may be easier to create one simple agreement that covers everything you need that's narrow enough to be enforceable, but it depends on the needs of the business."
Another solid benefit to NDAs is that they can give employers a way to "clearly articulate" the information it considers confidential and provide instructions on how to handle that type of information, Johnson said.
"With the significant growth of intellectual property among companies in the current technology era," Buchenroth said, "an NDA can serve as a legal framework to protect an employer's intellectual property."
Spund also noted that interns, temporary workers and independent contractors could easily end up working for a competitor, so it's important to have a signed NDA in place for non-employees, as well.
Some pitfalls to watch for
NDAs are frequently included in severance packages where misconduct had occurred, although states are increasingly limiting the ability of companies to conceal the disclosure of sexual harassment or discrimination, Spund said. "When NDAs are used to hide bad behavior and the company fails to resolve the problem, the company could find itself in more trouble down the road. Think of the Weinstein Company, now in bankruptcy after years of sexual harassment allegations that were not properly addressed," he said.
As a result of that case, under a law enacted in New York state in 2018, settlements of sexual harassment claims cannot include a non-disclosure clause unless the accuser wants to include the clause.
Johnson warned that businesses should take care that contract language is not so broad as to potentially chill an employee's legally protected rights, such as to engage in protected conduct under the National Labor Relations Act (NLRA) by discussing terms and conditions of employment or whistleblowing. And some fields may be particularly complex in this regard.
"For someone working in a creative field where it's common to share a portfolio of their creative work," Buchenroth said, "an NDA might limit what can be shared in a portfolio if the individual's contribution to some type of previous creative work is deemed confidential by their previous employer."
What to do when there is a breach
If there is a breach of the agreement, Campbell noted that it's rarely worthwhile to sue. Often, sending a letter reminding the employee of the terms of the agreement (they sometimes don't remember what they signed) is sufficient to stop the behavior.
But if a cease and desist letter isn't successful and damages are being incurred, inaction can be even more damaging, Campbell said. "It sends a message that you're not going to enforce your agreements, which can be a signal to others." The vast majority of these situations however are resolved through a cease and desist demand or a negotiated solution, she added. Some former employees might disclose information covered by a broad NDA without even realizing it, too, Spund said.
If there is a breach and it ends up in the courts, Campbell said, the value of the information covered by the NDA will be examined. If companies have had all their employees sign an agreement, she said, it reinforces that value and how seriously an employer took the effort to safeguard the information. With company-wide use of NDAs, a business is more likely to prevail in litigation.