Home Management Will Your Confidentiality
Agreements Hold Up in Court?
Will Your Confidentiality Agreements Hold Up in Court?
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Will Your Confidentiality
Agreements Hold Up in Court?

0

There is a growing value of intangible property to businesses and the problem of employees taking that property is always a main concern. To protect themselves and such intangible material from infringement by ex-employees, businesses commonly use confidentiality agreements and non-disclosure agreements. A business can be valued by that business’s intellectual property, especially small and medium sized businesses. Therefore, including a narrowly drawn confidentiality agreement in employment contracts and independent contractor contracts is critical. Simply using a form you find online is not going to be enough.

There are a number of laws impacting confidentiality agreements when employees quit or are fired. The California Business and Professions Code §16600 directly affects intellectual property and confidentiality agreements attempting to protect such property. It states “…every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” It does not just state that non-competes are void, the language is much broader than that. Therefore, a confidentiality or non-disclosure agreement attempting to limit one’s ability to work in their profession once leaving their current job due to exposure to intellectual property which is of high value to the business, is void. §16600 basically voids non-competition agreements in California and courts have strongly upheld this statute.

For example, a typical confidentiality agreement will state:

“An employee may not ever use any procedures, operating procedures, methods of operation, manuals, trade secrets, systems, customer lists, pricing policies, technological know-how, techniques, ideas, processes, programs or other things of value developed by the employee while employed.”

Literally taken, the agreement severely restrains the ability to engage in their profession. The problem with such language is that it will seriously restrict the ability of the employee to work. Clauses in a contract that are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition are void as a matter of law.

California’s Uniform Trade Secrets Act (“UTSA”) provides the means for suing for the theft of trade secrets – this statute is an extremely compelling law. Under the UTSA, an attempt to enforce a confidentiality agreement as to specific information will fail unless the information can be proven to be a trade secret. UTSA specifically intended to preempt all claims for alleged misuse of confidential information and to displace the collection of varying common law theories upon which such claims had previously been based.

Claims commonly filed include claims for breach of confidence, interference with contractual duties, and statutory unfair competition that were based on the same nucleus of facts as a misappropriation claim.

So why not sue under UTSA? The UTSA has a definition of a trade secret that can be hard to meet, particularly if a business has not safeguarded its information so that it can be treated as a trade secret. Trade secrets are unique and not known to the general public, are valuable to the business and the company has made reasonable efforts to safeguard the information.

For copyrightable material, confidentiality agreements will often have restrictions against taking documents, manuals or forms when an employee leaves the business. The employer will want to sue an employee for taking copyright protected written information or other works but the U.S. Copyright Act preempts all state law actions for enforcing such rights. Section 301 of the Federal Copyright Act provides:

“All legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright…in works of authorship that are fixed in a tangible medium of expression….whether published or unpublished, are governed exclusively by this title.”

The misappropriation of documents or other copyright protected materials can be part of a state court action if the state cause of action is qualitatively different from copyright infringement. The test is the right asserted under state law is equivalent to the exclusive rights contained in 17 U.S.C. §106; the form and title of the cause of action is not important, what is important are the rights asserted.

Suing for copyright infringement can be difficult: you must have copyright registration with the U.S. Copyright Office in order to bring an infringement suit. If you have registration before infringement, the infringing party is assumed to be on notice and you can collect statutory damages and attorneys fees and injunctive relief. Post-registration infringement requires actual damages and will usually result in injunctive relief.

When it comes to counseling business clients on confidentiality or non-disclosure agreements, you should aim to have a practical effect on the business and businesses must be proactive. Do not use or accept generic confidentiality agreements or those found online. These agreements must be tailored to the particular company and specific employee, must not be too broad and should be as specific as possible as to what is considered confidential. Ensure to identify and protect trade secrets, identify per the statutory definition and label as trade secrets. Reasonable efforts should be taken to restrict access, use passwords, individual ownership of email accounts, etc. Register all copyrights and make it known to employees that these steps have all been taken.

 

How To Earn CLE Credit on this Topic

For additional information on this topic, Attorney Credits offers a course titled “Confidentiality Agreements: A Covenant Not to Compete in Sheep’s Clothing?.”

The course is available for CLE credit in the following states: Alaska (AK) | Arizona (AZ) | California (CA) | Connecticut (CT) | District of Columbia (DC) | Illinois (IL) | Maryland (MD) | Massachusetts (MA) | Michigan (MI) | New Jersey (NJ) | New York (NY) | Pennsylvania (PA) | South Dakota (SD)

James Nguyen
James Nguyen

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