Ensuring Security with NDAs in a Post Non-Compete World

This entry explains how combining a non-disclosure agreement (NDA) with a strong information protection policy is now the best way to prevent former employees from sharing competition-sensitive information.  And, while others have pointed to NDAs as an alternative, they fail to identify the critical importance information protection policies play in this strategy.

Most current employees will one day be former employees. And when they depart, many of them will have intimate knowledge of their former employer’s clients, strategies, pricing, systems, and know-how.

To mitigate this obvious risk, organizations have long used non-competition agreements to create a window of time, usually one year, during which the former employees are prohibited from working for any direct competitors. The hope is, of course, that this blackout period will force them to find work in another industry.

Unfortunately, over the past decade, more than a dozen states have limited the use of non-competes to all but the highest paid employees, claiming that the agreements unfairly restrict jobseekers and stifle competition.

Adding fuel to this trend, in April, the Federal Trade Commission delivered on a promise made last year to ban non-competes nationwide effective September 4, again for all employees outside the C-suite, again saying such agreements were prejudicial and anti-competitive.

And, maybe only to extinguish any hope that non-competes might still be viable, the Workforce Mobility Act of 2023, proposing a federal ban on non-competes, was recently reintroduced, surviving two readings in the Senate, before being advanced to committee.

The demise of non-competes has big implications for medium- and small-sized businesses. Service technicians, sales reps, route drivers, operations and marketing managers, etc., all of whom will no longer be restricted from going to work for competitors, are routinely privy to their employer’s most highly sensitive trade information. And, while proponents of the prohibition decry the unfairness of competitive restrictions, they seem perfectly okay with the fact that the prohibition could very likely lead to aggressive recruitment of key employees by competitors.

Fortunately, all is not lost.

STEP ONE: SWITCH TO NON-DISCLOSURE AGREEMENTS

While people sometimes conflate the two, non-competition agreements are one thing, and NDAs are very much another.

Where the non-compete prevents an employee from working for a competitor, an NDA prohibits them from sharing confidential information with any unauthorized third party.  The NDA also prohibits employees from disclosing clients’ and other employees’ personal information, making it particularly timely in the face of emerging regulations.

To be fair, in an environment where non-competes are enforced, not having a separate and distinct NDA is understandable since, under such agreements, employees cannot work for the competition. However, in an environment where non-competes are no longer relevant, having an enforceable, properly constructed NDA becomes imperative.

When using NDAs in an employer-employee relationship, there are a few best practices to ensure they are viable. First of all, it should be limited to legitimate business interests, such as trade secrets or proprietary information protection and avoid language that appears to prohibit the reporting of discrimination or to restrict discussions related to publicly known information. Secondly, it should not seek to curtail employees from discussing wages, working conditions, or other employment terms. Lastly, it should not attempt to limit employees’ future employment opportunities.

While NDAs won’t keep a key employee from defecting (or being lured) to an archrival, they 1) make the defecting employee more circumspect about what information they share and, equally important, 2) make the new employer a bit more nervous about seeking or using any proprietary information gleaned from the former employee.

If there is evidence of the NDA being violated and if it is backed up by  a properly written information protection policy, the aggrieved employer has an actionable remedy, including injunctive relief, not only against the employee but against the competitor using the IP. In fact, knowing an NDA is in place should even make an opportunistic competitor think twice about poaching the talent in the first place.

STEP TWO: INFORMATION PROTECTION POLICIES

Putting NDAs in place to fill the vacuum left by disappearing non-competes works best if the organization using them has aligned their information protection policy.

One of the most underappreciated benefits of an information protection policy is that it allows an organization to define its intellectual property (IP).

Is a list of clients considered IP? It is if the organization’s information protection policy treats it as such. Same with its sales training and sales accountability metrics system. In fact, any information that is unique to the organization, that is the result of an organization’s investment, and for which the organization affords a commensurate degree of security, is legally defendable IP. It is very common for organizations to underappreciate the amount of defendable IP they have or, rather, that they could have with proper identification and treatment.

BOTH ARE NEEDED

It would be wrong to say that NDAs and information protection policies have no standalone value. Organizations lacking an information protection policy utilize NDAs all the time. And information protection policies are obviously useful whether or not an organization uses NDAs.

In the context of them replacing now defunct non-competes, however, one without the other would undermine the strategy.

The truth is that NDAs and information protection policies should have been a strategy even in a world where non-competes were allowed. Now that they are not, it is become that much more important.

NDAs AND EXISTING EMPLOYEES

While it is easy to require new hires to sign an NDA, it is a little more complicated to make such a request of current employees. That said, the challenges to initiating the NDA with an existing employee are knowable and manageable.

To do that, readers should first consult with legal counsel to ensure that both the request and the NDA itself comply with local laws and regulations.

Generally speaking, as long as the NDA is not overly broad or restrictive and the employee is not railroaded and is offered some compensation, such a request is likely to survive legal challenges. An economic consideration for signing a NDA could take the form of a signing bonus, a pay increase, or an employment contract extension.

Should deploying NDAs with existing employees prove too complicated, it is important to remember that 1) the rationale for requiring the NDA of new hires remains intact, and 2) every organization still has the right to pursue civil and statutory legal protection of its IP, regardless of the existence of an NDA, as long as it has identified and protected that IP itself. Clearly, this means that the information protection policy is that much more important. The policy itself (and aligned practices) is how the organization establishes its IP rights in the first place, and it is, therefore, the prerequisite for any future defense of IP rights.

Note: The suggested hypothetical scenario of an information protection policy existing in the absence of NDAs is offered only to address their respective standalone value. NDAs and the circumstances surrounding their use would, of course, be addressed in any properly constructed information protection policy.