There is no bigger potential liability to a business owner than an employee. However, when it is time to hire one, your first steps should be defining the relationship through a well-drafted employment agreement. One essential element to that document should be a nondisclosure agreement (NDA).
For many clients, particularly those in the tech sector, the foremost concerns are the fear of competition and the protection of intellectual property and proprietary information. It was a client who wanted me to draft a noncompete agreement that spurred this article. She was immensely worried that her employees would work for her, learn from her, then steal her systems and customer lists and leave. This is a common worry for a lot of business owners.
I had the unfortunate task of explaining that the noncompete is dying a slow death. In most states the noncompete must be narrowly tailored and “reasonable.” Each state has its own standard, but public policy favoring mobility of employment has been pushing the noncompete out of favor for decades. Here in California the non-compete is all but dead. There is one exception for business owners selling their business or a partner selling off his portion of the partnership. Unfortunately, that was not the case for my client. I had to advise her that a noncompete would be unenforceable and offer alternatives.
Where the confidentiality of information is imperative, an employer’s best defense is a strong NDA. In operation, there is a substantial overlap between NDAs and noncompetes. NDAs protect your company’s trade secrets and other proprietary information. A trade secret as any information—including a formula, pattern, method, or process—that derives independent economic value from not being generally known. However, they are only protected if a company, in this case the employer, uses reasonable efforts to maintain their secrecy. This means an NDA is necessary.
Trade secrets can really be anything—a sales plan, a manufacturing process, a customer list for example. If they are misappropriated, you can then take legal action against the offenders. The NDA is fairly simple document whereby the parties agree to protect the confidentiality of specified secret information. This information could be disclosed during the life of an employment or in a business transaction.
Your NDA should specifically designate which information, systems or processes are to be protected. You should also define what is excluded, or what information is not secret. This could be information that is already public knowledge, or anything you think you don’t need to protect. The NDA should also have a time limit. Self-imposed boundaries are more likely to pass a judge’s smell test as to “reasonableness” than broad statements, and thus are more likely to be enforced.
A nondisclosure agreement will typically mandate that the employee keep the information to themselves for limited use. The employee would be liable to the employer for any breach of the confidential relationship, including trying to get others to release the information or having others acquire the information by improper means.
As you can see, there are a few moving parts to an NDA. As an attorney myself, I strongly advise you consult your own attorney when you need one drafted. Could you use a stock NDA you found with an online search? Sure. My client asked this very same question. Using an online legal document could work out fine. However, if it is poorly drafted or you leave out some piece of information you want kept secret, it may come back to haunt you down the line. Like most legal documents needed to conduct your business, your NDA should be at custom, unique, and tightly tailored to suit your needs. Spending a few hundred today could save you millions down the line. As always, hiring an attorney is a cost/benefit analysis. The choice is yours. Just don’t say I didn’t warn you.
Thanks for reading. Come back again soon.
Frank Dennaoui is co-founder and partner at Surf Side Law. You can find more about Frank here on our Contributors page.
Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. The author and his firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this letter.
Copyright Frank Dennaoui 2015.