Protecting Your Trade Secrets: Non-disclosure Agreements and Covenants-Not-to-Compete

The biggest risk to a company’s trade secrets is having to disclose it to employees and third parties who require the information to complete their tasks. There is the risk that an employee or third party may intentionally or inadvertently disclose trade secrets, or that a former employee may use a company’s trade secrets to launch a rival firm. The risk can be especially high for new start-ups, since start-ups are smaller operations that generally require every owner and employee to have full access to all of the company’s proprietary information in order to do their jobs (because everyone is often doing everything!).

In order to protect their trade secrets, companies of all sizes and ages use nondisclosure agreements (NDAs) and noncompete agreements (NCAs) with persons and entities they reveal their trade secrets to. A NDA prevents a party from revealing or using confidential information covered by the agreement. A NCA prevents former partners and employees from working in a certain field of business related to the business of the employer within a certain distance of the employer for a certain period of time.

NDAs and NCAs are an important tool for any business, even startups. However, they also have the effect of limiting employees’ ability to work elsewhere after leaving the company, or preventing businesses from working with individuals and entities that have novel ideas. As a result, courts have taken to limiting the effect of such agreements in enforcing them.

One of the major obstacles to the enforcement of NDAs and NCAs is consideration — NDAs and NCAs are contracts, and require consideration in order to be enforceable. A company can require a prospective employee to sign a NDA as a condition to employment, with the offer of employment serving as consideration; however, companies seeking to implement a nondisclosure policy generally cannot have existing employees sign agreements without some sort of consideration, otherwise they may be held unenforceable by a court.

An obstacle in regards to NDAs and third parties is convincing those parties to sign an NDA at the beginning of a relationship, before the third party may even know what the full extent of the matter of the relationship is going to be. The situation is a catch-22: the third party may not want to sign a NDA and potentially limit itself from working on an identical or related field or idea in the future, while the business doesn’t want to reveal its secrets to the third party without the protection of the NDA! Even negotiating a NDA can be difficult, as the third party does not know the full scope or matter it is agreeing not to disclose about, while the business cannot or will not reveal the scope or matter of its secrets until the NDA is signed.

The other major concern in drafting NDAs and NCAs is properly limiting the scope of such agreements. Courts’ policies favor the free exchange of ideas and the ability of persons and entities to freely seek work, freedoms that are hampered by NDAs and NCAs. The extent of the restrictions permitted in NDAs and NCAs varies from state to state; some states, such as California, greatly favor the free flow of information and freedom of persons to work in their chosen industries, and as such permit only a very narrow range of limitations in NDAs and NCAs. NDAs that generally protect “trade secrets” without further describing the types of information to be protect, or simply describing every conceivable category, may be held by a court to be too broad to be enforced; conversely, failing to include particular types of information may lead to them not being protected by the NDA. Similarly, the prohibitions in NCAs must be properly limited as to position type, industry scope, geographic region, and time. Courts will consider whether the prohibitions in a NCA are the minimum necessary to protect the interests of the business and whether they unnecessarily impede the job mobility of the employee, with greater weight given to the interests of the employee; NCAs that cover more than is necessary to protect the business or are unduly burdensome on the employee are not likely to be upheld.

Businesses must take care in drafting a properly limited agreement that is likely to be enforced. Although there is a temptation to “shoot for the moon” to try to protect everything possible, courts vary by jurisdiction on whether to limit the effective scope overly-broad NDAs and NCAs, or void those agreements altogether. Therefore, a business that drafts too broad an agreement risks losing all protection.

Finally, businesses must also consider the motivation for requiring NDAs and NCAs. Because courts favor free mobility of information and workers, businesses that seek NDAs and NCAs simply to stifle competition may not have their agreements enforced; instead, the motivation must be the business’s desire to protect trade secrets of measurable economic value to the business.

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