What’s What With Confidentiality and Non-Competition Agreements?
By Alison Parker
Reviewed by Jennifer Williams
At times, when entering into a business relationship with another party, a contract may require you to disclose certain information you wish to keep secret. A Confidentiality Agreement, also known as a Non-Disclosure Agreement, is a way for you to protect yourself. These binding agreements explicitly lay out terms that ensure you preserve all of your valuable ideas, data, business models, and so forth, from unauthorized third parties when doing business. Depending on the situation, one or both parties may divulge confidential information. Generally speaking, the following should be clearly laid out in your agreement:
1. Confidential Terms
The agreement should explicitly define what information is to be kept confidential. But, like any provision in a contract, the definition of confidential information is subject to negotiation. If it is your information you wish to have kept confidential, then you will want the broadest possible definition. And vice versa, if you are a party on the receiving end of another’s confidential information, you will want the narrowest possible definition. Generally, confidential information is proprietary information or the “trade secrets” of the company or person. What constitutes a trade secret varies from state to state, but a trade secret as defined under New York law is “a formula, process, device, or compilation which one uses in his business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”
In addition to defining what information is confidential, the agreement should lay out what purposes the receiving party may use the confidential information for, as well as lay out what measures the receiving party should take to keep the confidential information secure.
2. Time Period for Relationship and Disclosure
The agreement should prescribe the time period that the confidential information will be divulged, and the time period that this information is to be kept confidential. For example, consider a situation where the relationship in which the confidential information is divulged is contracted to last for one year, and all information is contracted to be kept confidential for five years after the relationship ends. Accordingly, you cannot divulge any information obtained during the one-year relationship until five years after the relationship ends. Likewise, if something was divulged before or after that one-year period, that information is not subject to the provisions of the agreement.
3. Remedies in the Event of a Breach
It is of paramount importance to the disclosing party that the confidential information disclosed is kept confidential. For instance, trade secrets derive their legal protection from the fact that they are kept secret. Because the information is so valuable, there is a high potential for damage to the disclosing party if it is divulged. In these types of agreements, it is imperative to lay out available remedies. Surely in the event of an unauthorized disclosure there is a claim for a breach of contract. But the disclosing party should contract for the availability of an injunction and monetary damages in the event of such a breach.
Generally, these agreements will provide that a breach does not occur if the information defined as confidential information is obtained in certain ways, such as if the receiving party had prior knowledge of the information, if the information was publicly available, or if the receiving party gained knowledge of the information from another source.
The above is a basic outline of terms that should be in your agreement. If you are an employee whose agreement is with your employer, oftentimes you will also receive a Non-Compete agreement in addition to a confidentiality agreement from your employer.
1. What is a Non-Compete?
As mentioned above, non-compete agreements are usually between an employer and an employee. They are intended to restrict where the employee is able to work after their employment with the contracting employer ends. For example, a non-compete may provide that you cannot work for a competitor company or companies in the same industry for two years after you cease employment with your employer. Employers typically insist a non-compete be entered into with an employee because the employer doesn’t want its employee to leave and take a job with one of its competitors where the employee could exploit valuable information learned while working for the employer to the benefit of its competitor.
2. Can my employer really do that?
The enforceability of a non-compete depends on which state you live in. Courts in some states view non-compete agreements as an impermissible restriction on employee mobility–and in this economy, that’s the last thing anyone needs standing between them and a potential paycheck. For example, non-competes are generally found to be illegal in California. This is due, in part, to the prevalence of the entertainment industry and software companies in the state. But other states view non-competes as enforceable and will uphold these agreements to a certain extent. For example, New York courts will only uphold a non-compete if the court determines that the restrictions are “reasonable.”
But what if you signed a non-compete in one state, and moved to another state where you secured employment with a competitor? Most contracts have a provision dictating which laws a court will apply when construing the legal effect of your agreement, also known as a “choice of law” provision. Usually, the choice of law will be the law of the state where you are employed. The court will determine the enforceability of your agreement based on the law in the choice of law provision.
All of the above is intended to be a general guide to understanding confidentiality and non-competition agreements. None of the above is intended to be taken as legal advice.