Nondisclosure Agreements: Friend or Foe?

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Editor’s Note: This article is intended for information purposes only. Because state and municipal laws vary greatly, as do the circumstances of individual cases, readers are advised to contact an attorney for specific legal advice. © Scott C. Tips 2020

In the wake of the recent #MeToo movement and with mainstream-media attention, nondisclosure agreements (NDAs) rank high in the legislative, if not voter, consciousness. Certain States, such as New Jersey, California, Tennessee and Vermont, have already outlawed them for sexual-harassment claims (1). Sixteen others are considering legislation to prohibit them, all on the grounds that these State legislators think it will help women if their stories of sexual harassment are told rather than hidden (2).

Yet, it is important to keep in mind that these agreements are nothing more than legally binding contracts between two or more parties in which a person or business promises to keep specific information secret and not to disclose it to third parties. Typically, non-disclosure agreements are presented and signed prior to a business disclosing any of its trade secrets to another person (usually an employee) or business for such purposes as product or idea development, marketing, business evaluation, or even receiving a loan. However, over the years, the use of NDAs has expanded to cover many different situations, the most criticized of which are related to sexual-harassment settlements.

The Pressure on NDAs Continues
Most recently, under public pressure, Michael Bloomberg, at the time a Democratic candidate for the presidency, had released three of his female employees from the constraints of their NDAs signed with his companies (3). To be clear, no one to my knowledge is stating that Mayor Bloomberg sexually harassed these particular women (although some 40 harassment and discrimination claims are currently pending against him and Bloomberg LP); but some are claiming that his NDAs are overly strict and overbroad, and as a result could cover up workplace abuses (4).

Still, some legal commentators argue that when it comes to sexual-harassment settlements, the prohibition against NDAs actually hamstrings the victims’ options, forcing them to either go to trial to possibly get satisfaction or else forgo a claim at all (5). Many times, they argue, the plaintiff would prefer to settle for money and also put a traumatizing experience behind them as quickly as possible. Forbidding NDAs in such cases removes a tool that plaintiffs have in their arsenal to extract justice. If a defendant knows that he or she will be tarred forever with the stench of a sexual-harassment claim, then they will feel compelled to fight it out in court rather than settle. These battles then become all-or-nothing fights, for which many plaintiffs have little stomach.

NDAs Are Still Valuable Tools
Regardless of the current attack on NDAs in the sexual-harassment legal arena, NDAs are still entirely appropriate and often essential contractual tools for protecting your business against competitors. Some companies, such as Coca-Cola, have kept their formulas and trade secrets secure for over 100 years through the use of NDAs and excellent judgment, so do not let the current media fad for trashing NDAs deter you from guarding your trade secrets, including all-important customer lists and formulas.

Sample NDAs can be plucked off the internet as easily as taking candy from a baby, but that doesn’t mean that you should do what is easy, in either case. With the recent legislative changes for NDAs and the potential complexities that could arise from special situations, you might be best off consulting with a knowledgeable attorney in your local jurisdiction. When doing so, here are a number of key points for you both to consider for your NDA:

1. Is the NDA unilateral or mutual? Ask yourself the question: Is confidential information to be exchanged by both parties? If it is, then remember that whatever obligations you demand of the other party will almost certainly be demanded of you as well. So, think about whether you want to be bound by the same provisions you are seeking from the other party.

2. Watch your definition of “Confidential Information.” Courts, no matter what jurisdiction, will be less likely to enforce NDAs with overbroad and generic definitions of what your “confidential information” is, so be as precise as possible, limit the definition to what is truly confidential, and do not use boilerplate language.

3. Mark all documents provided to the other party. To avoid any confusion, mark all confidential documents provided to the other person or business as “Confidential” or as a “Trade Secret.” Keep in mind that some courts afford greater and lengthier protection to trade secrets than they do to merely “confidential” information. Keep separate file copies of what you have provided; or include in the NDA a list of such confidential documents or trade secrets in a separate paragraph or appendix attached to the agreement.

4. Watch out for inadvertent or premature disclosure of “Confidential Information.” If you don’t adequately protect your confidential information or even prematurely disclose it to the other party, it would be an easy step for the court to take to declare your confidential information as “non-confidential,” thereby invalidating any NDA drafted and signed to protect that information.

5. Name the correct parties and signatories. This might seem obvious and yet simple errors are often made where the wrong, or different, business entity (on either side) is named and/or a person with insufficient authority signs the NDA. Some courts are not so draconian as to invalidate an NDA if the wrong party is named, if the intended party is closely enough named and identified, but why take a chance? Be careful here and for the signer include an “authority to sign” paragraph warranting that the signer does indeed have proper authority to sign for the business.

6. Watch out for any “right to assign.” Often, agreements, including NDAs, will contain provisions allowing assignment of the rights and obligations under the agreement by either party. Given the sensitive nature of the information you are protecting with your NDA, you might want to limit any assignment to one pre-approved by you or your company and even specify certain indispensable terms and conditions under such a potential assignment.

7. Carefully set the duration of the nondisclosure obligation. Courts are not generally fond of lifetime nondisclosure obligations, which should correlate with the actual nature of the
information being disclosed to the other party. Is the information a trade secret (in which case the obligation could last even for a lifetime)? Or, is it merely time-sensitive “confidential” information that will be of no value in a few years? Remember, too, that protecting confidential information can be expensive and you might not want to be burdened with lengthy vigilance.

8. Pick your jurisdiction for enforcement carefully. Your selection of an appropriate jurisdiction is extremely important. You do not want to have to enforce an NDA 6,000 miles away, nor would you want to have to enforce an NDA in a jurisdiction hostile to NDAs. Good counsel here is critical and the selection of the proper forum for enforcement of any agreement is not to be made hastily or left solely to the other party.

There are many more provisions and pitfalls to consider when drafting an NDA. However, the above list will give you a good idea of what to consider—and watch out for—when
entering into any NDA.

The Uniform Trade Secrets Act
Whether you get a signed NDA from an employee or a business associate, it is comforting to know that every State has laws that prohibit trade-secret theft, which you can use to sue in order to stop wrongful disclosures and often recover monetary damages. Although it is good advice to have a signed NDA in place, these State laws are a fallback position for you if your trade secrets are wrongfully disclosed.

In 48 States and the District of Columbia, these trade-secret laws are modeled on the Uniform Trade Secrets Act (UTSA), a model law created in order to harmonize the law on this subject. Even in New York and Massachusetts, which are the two States that have not adopted the UTSA, the State trade-secrecy laws are substantially like the UTSA. Just remember, even without a signed NDA, you still have a chance at legal recourse under State law.

Don’t Forget the DTSA
With Federal legislators either unaware of the UTSA and the States’ statutory protection for trade secrets or else simply having extra time on their hands, the U.S. Congress proposed and passed a law authorizing trade-secret claimants to file civil lawsuits in Federal court. Titled the “Defend Trade Secrets Act” (DTSA), this legislation was signed into law on May 11, 2016, so it is relatively new. Any company or individual with a trade secret that is “related to a product or service used in, or intended for use in, interstate or foreign commerce” (emphasis added) can use the DTSA to sue an alleged trade-secret thief.

The DTSA and those UTSA-based State laws are similar in many respects. Their definitions of trade secrets and misappropriation are the same, as are the three-year statute of limitations, and their remedies for theft include injunctive relief and compensatory damages. But the DTSA allows seizing stolen trade secrets without giving any prior notice to a defendant. This DTSA remedy seems unconstitutional to this author and differs greatly from the notice requirements mandated under State law before any seizures can occur.

On the other hand, if a trade-secret seizure occurs, DTSA mandates that a hearing must occur within seven days of the seizure order. And at the hearing, it is the trade-secret plaintiff who must bear the burden of proving entitlement to the trade secret. So, DTSA does have some protections for those individuals or companies accused of trade-secret theft.

Also, a DTSA defendant can recover his or her attorneys’ fees from the trade-secret plaintiff if the claim was made against them in bad faith. Furthermore, DTSA limits the injunctive relief that plaintiffs may obtain against former employees, protecting the ex-employee’s new employment position.

One important change that should be made to NDAs because of the DTSA is the inclusion in those agreements of express wording as found in the following paragraph:

“Notice of Immunity from Liability. An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (i) files any document containing the trade secret under seal; and (ii) does not disclose the trade secret, except pursuant to court order.”

Now, if you do not include this wording in your signed NDA, you are not precluded from filing a lawsuit in Federal court under the DTSA. However, failure to do so means that the DTSA plaintiff cannot recover exemplary (double) damages and attorneys’ fees from the employee or independent contractor. Therefore, it would be wise to include such a paragraph in any NDA with employees and independent contractors.

Final Thoughts
Despite the ongoing assault upon NDAs in certain employment situations, NDAs are still an employer’s good friend when it comes to helping protect confidential information and trade secrets. Use them where important interests are truly at stake. But, remember that every State could have minor statutory differences as to how NDAs may be worded, used, and
enforced, so do check your own State’s trade-secret statute and consult with legal counsel for the best plan to keep your competitive edge using enforceable contracts. WF

Note: The views and opinions expressed here are those of the author(s) and contributor(s) and do not necessarily reflect those of the publisher and editors of WholeFoods Magazine.

 

References:
1. See, e.g., California Senate Bill No. 820, published Oct 1, 2018, at https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180SB820. This law went into effect on Jan 1, 2019, but does allow for confidentiality of the settlement amount.
2. Colleen Quinn & Kate Miceli, “Silenced Voices No More – Non-Disclosure Agreements, Sexual Harassment and New Virginia Law,” Richmond Times-Dispatch, Aug 16, 2019, at https://www.richmond.com/sponsored/locke-quinn/silenced-voices-no-more-non-disclosure-agreements-sexual-harassment-and/article_cdd5575e-c03c-11e9-b4d5-f74f148aac01.html.
3. Benjamin Swasey & Juana Summers, “Bloomberg: 3 Women Who Made ‘Complaints About Comments’ Can Seek NDA Releases,” NPR, Feb 21, 2020, at https://www.npr.org/2020/02/21/808280695/bloomberg-women-who-made-complaints-about-comments-can-now-seek-nda-releases.
4. Ken Klippenstein, “EXCLUSIVE: Leaked Bloomberg Campaign NDA Protects Abusive Bosses,” The Nation, Feb 19, 2020, at https://www.thenation.com/article/politics/bloomberg-nondisclosure-harassment/.
5. Debra Katz & Lisa Banks, “The call to ban NDAs is well-intentioned. But it puts the burden on victims,” The Washington Post, Dec 10, 2019, at https://www.washingtonpost.com/opinions/banning-confidentiality-agreements-wont-solve-sexual-harassment/2019/12/10/13edbeba-1b74-11ea-8d58-5ac3600967a1_story.html.

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