By Eric D. Morton
Almost all businesses use non-disclosure agreements (NDAs) to protect their trade secrets and sensitive information. An NDA is an agreement by the person receiving sensitive information that this information is confidential and not to be disclosed or used. NDAs also provide a written basis for a lawsuit if a person receiving information from a business tries to use that information improperly. Unfortunately, most companies use NDAs that are not enforceable. They are flawed because they do not say enough or they sometimes say too much.
There are basically two instances when companies use NDAs. The first is when revealing sensitive information to third parties such as potential investors, partners in joint ventures and other transactions. The second is with employees. All NDAs must have certain elements. NDAs for employees have special considerations.
Most companies use generic NDAs that they find on the Internet. These generic NDAs have long paragraphs about information from the Disclosing Party is confidential and other such terms. The problem with these generic NDAs is that they lack certain essential elements.
NDAs must specify what is confidential. Most generic NDAs do not state what information is confidential. This is a fatal flaw. The whole point of an NDA is that the parties agree that certain information cannot be disclosed to third parties or used by the party receiving the information. However, if the Disclosing Party does not state what types of information are confidential, then the parties do not have a valid, enforceable contract. There is no meeting of the minds (as we attorney like to say). The courts agree and refuse to enforce generic NDAs. The courts reason that the parties have not agreed as to what information is covered by the NDA.
- We urge our clients to specifically list the types of information that is covered by the NDA. This does not mean that a secret formula, for instance, must be stated in the NDA. If the NDA states that the NDA covers the Disclosing Company’s formulas, then that is sufficient.
Governing Law/Venue. Most companies do not specify which state’s laws will govern the NDA. This is a mistake. The law governing a contract like an NDA can be important as is venue of any action arising from the contract. Furthermore, Congress enacted a Federal Trade Secret law a few years ago and that might be a good fit.
Employees. Employers take special considerations in drafting NDAs or confidentiality agreements (as such agreements are usually called for employees) . Inventions of the employees should be specifically addressed. The agreement should address carve outs for existing inventions. If the NDA is to be enforced under Federal law, then the NDA must state that an NDA is not applicable to a whistleblower. If that exception is not stated, then the NDA is void.
California, employers must use great care in NDAs and confidentiality agreements. Those agreements must not be overbroad. Such agreements often state that everything that the employee learned or created while employed is confidential and can’t be later used by the employee. Those terms are overbroad. In California, agreements with overbroad terms are void under California’s anti-noncompete laws. The entire agreement is void not just the offending terms.
Companies must use care in drafting NDAs and confidentiality agreements. The inability to enforce one can be devastating. A well crafted and clear NDA can also show that a company is serious about protecting its information which prevent a lot of problems.
Eric D. Morton is the principal attorney of Clear Sky Law Group, P.C. He can be reached at 760-722-6582, 510-556-0367, and emorton@clearskylaw.com.