Part A: Confidentiality Agreement
What is a "Confidentiality Agreement"? Generally, it is a contract between two parties not to disclose to others certain information which the parties have designated as "confidential". The following are situations where confidentiality clauses or agreements are used:
- Within employment agreements,
- Within independent contractor (or consulting) agreements (Note: here is a link to our stand-alone confidentiality / non-compete agreement for employees and independent contractors),
- As an initial step between two parties who contemplating a potential business transactions,
- As part of a Letter of Intent (also called an "offer sheet") for purchase of assets,
and
- As part of the termination of employment of a business executive most typically upon the change of ownership.
Elements to a Confidentiality Agreement. A confidentiality agreement typically will contain the following elements: (a) definition of "confidential information", (b) description of duty not to disclose "confidential information", (c) time limit on the duty not to disclose, and (d) remedies to the offended party for breach of the non-disclosure duty.
Definition of "Confidential Information". A standard definition for "confidential information" found within non-disclosure contracts is as follows:
"Confidential Information" shall mean any information, including, but not limited to, trade secrets, business processes, manufacturing processes, business plans, inventions, techniques, data of any kind, drawings, customer lists, financial statements, sales data, proprietary business information of any sort, research or development projects or results, tests, and / or any non-public information which concerns the business, operations, ideas or plans of a party to this Agreement conveyed to the other party by any format or means including, but not limited to, written, typed, magnetic, or orally transmitted. The term "Confidential Information" does not include the following types of information:
- Information available to the public through no wrongful act of the receiving party;
- Information which has been published; or
- Information which has been independently developed by the receiving party.
Please note the listed exceptions to the definition of "confidential information" stated above which are found in most confidentiality contracts.
Another issue under this heading is whether documents or other information supplied by one party to the other be specially designated as "confidential information" when transmitted? For example, should the contract require documents upon which the claim of confidentiality exists to be stamped with the words "confidential information" in bold letters to ensure there is no mistake by the receiving party as to what is covered by the contract? Another approach is to assume that all information given by one party to the other during negotiations is confidential unless designated otherwise. This alternative approach draws the net wider in defining "confidential information".
The duty not to disclose or use "Confidential Information". The biggest issue here is determining the reach of the duty not to disclose. For instance, are only signatories to the agreement allowed to see confidential information? May a parties' lawyers also view? Accountants? If a party is a business organization, may employees of the business receive confidential information? Generally, if the confidentiality agreement relates to a prospective business transaction, advisors such as lawyers or accountants will be allowed to view confidential information as their input is necessary to structure a deal. If the confidentiality agreement relates to an employee or independent contractor, the individual signing the document as the employee or independent contractor is generally barred from disclosing the information to any other individual (including advisors) without the express consent of the other party to the contract.
In addition to restricting disclosure of confidential information, many drafters also choose to restrict the use to which the confidential information may be put to. For instance, you may wish to restrict your employee from not only disclosing confidential information to outside parties but, also, from using confidential information for any matter but employer business. This would be especially important in the case of a confidentiality agreement between competitors signed prior to discussions of a potential transaction. If the deal does not happen, you would not only desire that the competitor be prevented from disclosing the information to others but, also, from using the information in its own business operations against you. In such a situation, the confidentiality agreement will typically restrict use of the information to the use of evaluating the potential business transaction and require return of the confidential information upon demand of the disclosing party.
Remedies for breach of a Confidentiality Agreement? When it comes to drafting of a confidentiality agreement, the most important remedy to keep in mind is injunctive relief (i.e., obtaining a court order to stop a party from continuing to break a confidentiality promise. In order to obtain injunctive relief, it is necessary to show that the moving party shall suffer "irreperable harm" if the promise of non-disclosure continues to be broken. That can often be a difficult hurdle as any harm curable by the payment of money damages is viewed by the courts as one not being "irreparable". The answer is write into the contract a provision that both parties agree that any breach of the promise of confidentiality shall result "irreparable harm" thus removing the need of submitting this proof in court prior to obtaining an injunction.
In our American system, both parties typically pay their own attorney fees regardless of the result. However, the parties may contractually agree that one who breaks a promise of confidentiality must the other party's attorney and other costs related to enforcing its right under the contract. This is a recognized exception to the so-called "American Rule" on the issue of attorney fees. If you will be the party disclosing information upon reliance of a confidentiality agreement, it is very prudent to seek an attorneys fees provision in the contract.
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Part B: Noncompetition Agreement
What are they? A "non-compete" agreement is usually between an employer and employee (although it can also involve independent contractors) and contains the promise by one party not to engage in (or become employed by another business entity that engages in) the current business, or a potential future business, of the other party for a specified length of time.
Limitations. To be enforceable, the courts require that the agreement be limited geographically and by time duration. The limitations should bear some relation to the business needs of the employer or other party seeking protection under the non-compete agreement. For example, let us say that I am owner of a public accounting firm in St. Louis County, Missouri and that 95% of my clients are located within St. Louis County, Missouri. If I attempted to hold my employees to a non-compete agreement that prevented them from practicing public accounting within the states of Missouri, Kansas, Iowa, Illinois, Tennessee, and Arkansas for the period of time that the employee is employed by me plus 2 years thereafter, it is highly likely the courts would refuse to enforce this agreement as being over broad geographically relative to the business interests that I am attempting to protect. There are no hard and fast rules here. The agreement should be balanced and place limitations that give reasonable protection to the employers based upon its needs but also taking into account the employee's situation. An illustration of this point is the 1999 case of Earthweb Inc. v. Schlack wherein a New York court held that a non-compete agreement lasting one year after employment terminated was too long when measured against the needs of the employee who was an information technology professional. The court found that a one-year hiatus from the work force in the IT world is a relative eternity as technology progresses so quickly in this field. See Princeton Business Journal article on the topic. Every state has a slightly different standard relative to the acceptable duration of a non-compete agreement and, therefore, you would need to consult a business law attorney in your state to get a precise answer on the question of how long is safely enforceable. Nonetheless, as a general rule (that may not work in every case as epitomized by the Earthweb case), a non-compete of one year or less after termination is regarded as safely enforceable. The exception is California where noncompetes (with a few exceptions) are void.
Defining Employer's Business. Just as with the geographic and time limitations written into a non-compete agreement, properly defining the employer's business is important to the agreement's enforceability. Some agreements merely state that employee is not to actively engage in, become employed by, or consult for a business which competes with employer. That leaves a potential debate as to what exactly is the business of employer. If the term is easily definable, we suggest that defining the employer's business in the contract is best. While specifically defining the business of employer in the contract, the drafter can still leave wiggle room that the business of employer can be more expansive than those items listed. The following is an example: "The business of Employer includes, but is not limited to, the operation of a chain of discount department stores in the midwest United States and ancillary business activities such as a credit card division for patron use within the stores. Employer is continually looking to expand its business and, therefore, this agreement shall extend to any business activity actively conducted or contemplated by Employer for the duration of Employee's employment by Employer."
Noncompete Agreements Void In California. California Business and Professions Code Section 16600 provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Link. The enumerated, narrow exceptions are: (a) sale of a business, (b) partnership dissolution, and (c) disassociation of a partner. Link. Additional information on California Noncompetes.
Noncompete Agreements Limited In Georgia. Under Georgia law, noncompetition agreements ancillary to employment that prohibit employees from accepting unsolicited business from former clients after separation from service are unenforceable. Palmer & Cay, Inc. v. Marsh & McLennan Companies, 404 F.3d 1297 (11th Cir. 2005). Link. From the employer's perspective, the most disturbing element of the Palmer & Cay case is that the 11th Circuit further held that the declaratory judgment finding the noncompete invalid barred the employer from trying to enforce the agreement anywhere in the United States. This opens up forum shopping options for employees in noncompetition cases.
No "blue lining". Several states, Missouri and Georgia being two, hold that courts may not "blue pencil" or amend defective elements of noncompetition agreements ancillary to employment. See Palmer & Cay, Inc. v. Marsh & McLennan Companies Link. In these states, an employer must be very careful in drafting a noncompete agreement. When bringing an enforcement action against the employee, it's all or nothing. Either every material provision of the noncompete is held valid or the agreement completely fails.
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