Question

A company’s nondisclosure agreement states as follow: “Employee may not disclose the company’s trade secrets, consisting of its software and financial data.” Discuss whether such a nondisclosure agreement might be enforceable.

Answer 1

It is a fact that Non-Disclosure Agreements or NDAs have become a standard feature of most employment contracts.

An NDA stating that the employee may not disclose the company's trade secrets, consisting of its software and financial data, might be enforceable provided it can be proven that the software is exclusive to the company in question and does not overlap in any manner with similar software being developed by competitors. However, as courts tend to take a lax view of what is common knowledge in the industry and what is confidential information, it is likelier that such an NDA can be enforced and opens the employee to legal risk beyond the purview of the trade secret law. However, to enforce such an NDA, the occurrence of the breach should be clearly linked to specific individuals, and it should be proven that the information was indeed misused to benefit a competitor.

A court would normally look at the below aspects before deciding if such an NDA can be enforced:

• The terms of the NDA should be specific and should not come across as generic, demanding silence from the employees or restricting them from leaving their employer and working for a competitor
• The NDA should have been entered into at the time of hiring of the employee and not during the tenure of employment
• The information specified by the NDA is proven to be confidential or valuable
• Normal efforts have been taken to protect the information in question

At the same time it is worth noting that there are a few significant exceptions to the legal enforceability of NDAs. Firstly, it cannot restrict an employee from cooperating with investigations by official agencies. Secondly, an NDA cannot bar an employee from officially reporting any proceedings that are illegal.

As per Title VII of the Civil Rights Act, an agreement that restricts employees from assisting the Equal Employment Opportunity Commission in an investigation of any charges is invalid. Similarly, the Defend Trade Secrets Act (DTSA) protects whistle blowers even if they actually reveal a trade secret.

However, more needs to be done to clearly demarcate what can be legally enforced by an NDA beyond what is already covered by existing trade secrets laws.