California Confidentiality and Non-Disclosure Agreements
|Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: March 2009
What Is A Confidentiality Agreement (a.k.a. Non-Disclosure Agreement, NDA)?
In today's society a non-disclosure agreement (a.k.a. confidentiality agreement or NDA) has become ubiquitous and essential to maintaining a competitive edge. A confidentiality agreement is a contract whereby the parties involved promise not to divulge secret, confidential, proprietary. or protected trade secret information. A confidentiality agreement is often presented to a manufacturer who is needed to create a "proto-type," a prospective or potential business partner, investor, or buyer prior to disclosing non-public information, or an employee who will have access to a company's proprietary information. For example, a nondisclosure agreement (NDA) is appropriate for prohibiting others from disclosing a new design, idea, or unpatented concept, private financial records disclosed for a due diligence review, or other confidential trade secrets. The purpose of the NDA is to create a confidential relationship between one person who has certain confidential information and another to whom the information must be disclosed to further some potential business interest. Should one of the parties to an nondisclosure agreement misappropriate the confidential information, or threaten to misappropriate the confidential information, without authorization (e.g., selling secrets to a competitor or using trade secrets against the former employer), the owner of that information can ask a court to stop the violator from making any further disclosures (injunction) and in some cases for an award monetary damages.
Situations Where a Confidentiality Agreement, or Nondisclosure Agreement, Should Be Used:
- Protect a non-patented invention or idea that requires presentment to a potential investor, business partner, or manufacturer to develop a prototype;
- Presentation of sensitive financial, and other, business records and information to a prospective purchaser or investor in your business;
- Presentation of a new product not yet available to the public to a prospective customer, buyer or licensee;
- Presentation of sensitive business information to an independent contractor, or outside business, for the purpose of having them provide a service; or
- Disclosure, on an as needed basis, of sensitive business information required for an employee to effectively perform his or her duties.
Just as there are Multiple Situations that may Require a Nondisclosure Agreement, so are there Different Types of Confidentiality Agreements.
As a business attorney for over 10 years, I have seen my fair share of useless, unenforceable nondisclosure agreements and confidentiality agreements. Generally this seems to occur when individuals select some form out of a book, or now off the internet, and rely on it as if one size fits all. Well it doesn't for a multitude of reasons.
First, there are unilateral confidentiality agreements, mutual confidentiality agreements, and multilateral confidentiality agreements. A unilateral nondisclosure agreement should be used when only one party will be disclosing sensitive information for review to another individual. A mutual nondisclosure agreement should be used when both parties will be disclosing confidential information to each other. A multilateral NDA should be used where three of more parties will be entering into a business relationship and each disclosing and receiving sensitive confidential information.
Second, the type of information to be disclosed, to whom it will be disclosed, how the information will be disclosed, the intended use of the disclosed information, for how long the confidential information will be available, and what protections the receiving party must take all are specific elements that need to be properly addressed in a well drafted nondisclosure agreement.
Important Elements in Every Nondisclosure Agreement.
A nondisclosure agreement can protect any type of trade secret, or any information not generally known that provides a business with a competitive advantage. However, the use of a generic NDA is generally of no use as a court will likely find it to be either overly broad or vague, and in turn unenforceable. A form NDA often will provide the owner of the confidential information with a false sense of security.
Every non-disclosure agreement should:
- Carefully and specifically define the nature of the confidential information to be disclosed (don't include everything but the kitchen sink) and whether such information will or must be labeled confidential;
- Set forth the ownership rights to the information disclosed;
- Describe the purpose behind the disclosure of the confidential information;
- Enumerate the information which is not to be considered confidential, such as information already in the public domain;
- Specify the obligations of the receiving party, such as how they must protect the confidential information, limit its use or disclosure, and return or destroy the information provided;
- Set forth the time period during which the confidential information can be examined, must be returned, and the duration of the agreement;
- Provide remedies in the event of a breach, or threatened breach, of the confidential agreement; and
- Provide a host of miscellaneous standard contract provisions.
When preparing a confidentiality agreement, or NDA, it is vital to specifically set forth the nature of the confidential information to be disclosed. When defending an individual accused of misappropriating confidential information, the defense will surely raise one or more of the following arguments:
- The information claimed to be confidential had no value to the competitor
- The information claimed to be confidential was already in the public domain and in use by others
- The company made no real effort to keep the alleged confidential information secret
- The company's definition of what was confidential included everything under the sun and is this void for vagueness.
Got questions about a non-disclosure agreement? Need a Non-Disclosure Agreement Prepared? Need a Non-Disclosure Agreement Reviewed? Not sure if the form agreement you have picked up somewhere is valid? It's probably not. Call 818-849-5206 for a consultation with Melissa Marsh.
An employer is asking me to sign a NDA before accepting a job, what should I do?
Unlike non-competition agreements which are rarely enforceable, non-disclosure agreements that are properly drafted are typically enforceable. It is therefore important for any employee presented with a non-disclosure agreement to read it carefully. If the employee has any doubts or concerns, the employee should invest $99 to $300 to have the non-disclosure, or confidentiality, agreement reviewed and explained by an attorney. Know your rights and contact us today!
An employer does have a right to protect his company's trade secrets, however, the scope of that protection is limited. While an employer has the right to demand its employees sign a NDA when those employees have access to valuable company data (e.g. product formulas, private customer lists, financial reports, etc.), the employer should not ask an employee to sign a confidentiality agreement if the purpose is to protect information that would be considered common industry knowledge, or a customer list that is available off the internet, or through some other source.
What is an employee holdover provision?
Some large businesses often ask their employees to sign an employee confidentiality agreement, or proprietary right agreement, that require the employee to disclose all inventions authored, conceived or reduced to practice for up to one year after the termination of the employee’s employment. Some of these agreements also state that such inventions will be presumed to be owned by the former employer, and that this presumption may be overcome only if the employee can demonstrate that the invention qualifies for protection under California Labor Code § 2870. To satisfy this burden, the employee must prove that the invention (1) was developed entirely on his/her own time without using the employer’s equipment, supplies, facilities, or trade secret information; and (2) did not relate at the time of conception or reduction to practice to the employer’s business or actual or demonstrably anticipated research or development, or result from any work performed by the employee for the employer. See California Labor Code § 2870(a).
The California courts, however, typically rule that these provisions when they extend beyond the date employment terminated are void as an "unreasonable restraint on trade, except to the extent that they relate to ideas and concepts which were based upon [trade] secrets or confidential information" of the former employer. Armorlite Lens Co. v. Campbell, 340 F.Supp. 273, 275 (S.D. Cal. 1972). Therefore, despite the fact that many employee confidential information agreements purport to require disclosure and assignment of inventions developed after the termination of employment, such agreements will only be enforced to the extent it can be established that the employee’s invention is based upon or relates to the trade secrets or confidential information of his or her former employer.
Incentives and Non-Disclosure Agreements.
Many employers will offer current and former employees incentives in exchange for signing a NDA. This practice is both legal and common in the business world and is perfectly acceptable by the courts. For example, an employee that is leaving may be asked to sign a NDA in exchange for extra severance pay. Also, an employer may request a NDA when hiring a new employee. In this case, the act of receiving the job is considered incentive enough. However, if your current employer asks you to sign a NDA without compensation, then the non-disclosure agreement may be unenforceable.
Got questions about a non-disclosure agreement? Need a Non-Disclosure Agreement Prepared? Need a Non-Disclosure Agreement Reviewed? Not sure if the form agreement you have picked up somewhere is valid? It's probably not. For a consultation with Melissa Marsh, call 818-849-5206 or Send Us An Email.
Our employment law practice consists of: (1) assisting employees with their wage claims and (2) counseling employers who seek to comply with new state and federal employment laws, providing human resource training, and providing essential contracts and employee policies to prevent employee lawsuits. To schedule a consultation with California employment lawyer, Melissa C. Marsh, Call 818-849-5206 or Send Us An Email.
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