Confidentiality Agreements Explained
Confidentiality agreements, or NDAs, are powerful tools used by both employers and individuals to ensure sensitive information is not disclosed. They are exceedingly common in corporate employment contexts but confidentiality agreements can be used in almost any business or interpersonal context where there is a risk of one party disclosing information that could have a negative impact on a business or an individual. Generally, the objective of a confidentiality agreement is to prevent the person who signs it from misusing or revealing your protected information for the benefit for themselves or a third party. In most cases this is to prevent competition against you or the business from the person who signed the confidentiality agreement.
Common scenarios where confidentiality agreements are used include employment situations to protect employer information from being used by employees with competitor harbors. For example, an employee who was working for a software development company ABC may have signed a confidentiality agreement in his or her employment that says they will keep all proprietary information that they learned in his or her capacity as an employee confidential. If an employee then leaves ABC to work at Department Store XYZ and about to disclose ABC’s software product with the product development team at XYZ , ABC could sue the former employee for damages for breaching the confidentiality agreement.
Another common scenario where a confidentiality agreement is used is for manufacturing joint ventures to protect shared intellectual property. For example, suppose a company has a patent on making polymer materials and another company approaches them looking for a partnership. The new company wants to know how ABC makes its polymer goods so that they can produce the polymer using the same techniques as ABC. However, company ABC wants to know for certain that the new company is not going to disclose to the outside world how ABC makes those polymer goods once they have learned the technique. Without the confidentiality agreement ABC would be potentially giving XYZ a tremendous competitive advantage without any way of protecting itself. In the examples above there is nothing inherently suspect about the information exchanged; however, if stolen or used inappropriately, however general the information may seem, they could easily be used to hurt the respective companies.
Legality of Confidentiality Agreement Violation
The legal consequences of mistakenly breaking a confidentiality agreement can be severe, because they can expose you to a number of financial and legal risks. The violations of a confidentiality agreement usually fall under civil law jurisdiction, with the possible exception of civil breaches that could be construed as criminal ones. The civil law penalties you could face for violation generally include: In addition to civil law sanctions for violating a confidentiality agreement, you could also have to face punitive criminal charges. Punitive criminal charges could be pursued if you are accused of corporate espionage or stealing secrets for a foreign power, although you would have to be charged with a crime before a court could pursue punitive damages. The question of whether the association that you are bound to as a party to the confidentiality agreement has the right to sue you directly or whether the individual whose trade secrets or private information were released can sue you directly for damages also depends on the nature of the loss or damage caused by the violation. As a rule, the party that suffered wrongdoing is the one who bears the right to sue for damages, although in some jurisdictions rights of first refusal may be vested in an entity such as an association. If you are liable for civil damages and then convicted of a crime, there is also the possibility that you may have to pay them twice, or be made to pay larger civil damages because of any potential punitive criminal ones already assessed on you.
Penalties for Violating a Confidentiality Agreement
Financial penalties are another common feature of confidentiality agreements. Damage awards can be enormous. They can easily amount to the money the parties have lost as a result of its breach, punitive damages or even a measure of detriment that is way beyond any damages.
How are these penalties determined? If the confidentiality agreement specifies them, the dollar amount set out in the contract is the penalty. If the confidentiality agreement does not specify them, then they will be determined by the nature of the relationship of the parties to the contract (e.g., employee-employer, joint venture, partner, etc.) and the actual damages incurred by each party due to the breach.
Example:
Company X and Company Y enter into a confidentiality agreement, whereby Company X agrees to reveal Company Y’s confidential trade secrets about its production process for nanoparticles. The trade secrets are old, but not widely known and consist of each phase of the production process, as well as what materials are used in each; the temperature and pressure at which each phase of production occurs; and how long each phase takes. Based on the information gleaned from Company X, Company Z, Company Y’s competitor, begins using Company Y’s nanoparticle production trade secrets, and increases its manufacturing margin from 25% to 42% per unit. Company Y’s manufacturing margin is 10%. Company Z’s increase in efficiency costs Company Y a total of $11 million per year. If the confidentiality agreement were to stipulate that the penalty for violating it would be the total profit gained by Company Z (let’s assume it is $11 million), and Company X spills the beans, Company Y could collect $11 million from Company X. If, however, Company X doesn’t have the assets, Company Y could attach its lawsuit to any assets Company X does have.
Effect on Business Relationships
When a confidential settlement agreement has been breached, the employer becomes understandably frustrated by the situation. However, the concern is not one sided as the employee, also, has serious concerns about the ramifications that the breach of the confidentiality agreement has on future employment opportunities. In the majority of agreements, the same confidentiality commitments also apply to the non-disparagement obligations.
A breach of these provisions can lead to the employee being less likely to be hired by the same industry employers. Most likely in this situation, the employer of record will feel "burned" by the employee and will be determined that the same enthusiasm and concern that it first felt was negated by the employee’s inability to follow the rules. In many of my cases, where the noncompetition and/or non-solicitation violations of the settlement agreement were proven, the employer told me that it made it its business to advise all their contacts in the industry of the "horrible" actions of the former employee.
This is usually prominent in conservative industries or industries where there is pride in belonging. An example of this would be for attorneys in the New York and New Jersey area who joined to the American Immigration Lawyers Association (AILA). It would not be unusual that an attorney who breaches a confidentiality agreement regarding immigration matters will be referred to as untrustworthy by the established law firms who know there have been problems with the attorney in the past. The reputation of the attorney would be a permanent and irreversible impediment to employment in substantial law firms.
The issue is not only limited to positions, however, it applies to vendor relationships, partnerships and any similar work related interaction.
Breach of Confidentiality Defenses
You may, as the alleged breaching party, have a number of potential defenses. The first and foremost of such defenses are the general defenses that apply in breach of contract cases. One such potential defense is that you did not breach the confidentiality agreement at all. This would be the case if a confidentiality agreement so does not actually prohibit the behavior of which your employer or other entity accuses you. If, for example, the agreement applies only to information regarding a product that you were never assigned to develop in the company, and you disclose information about a new version of a different product, you might be able to defeat a claim that you breached the agreement.
Other general defenses can include considerations such as unconscionability or some other consideration of fairness that renders the holding of the contract or , in this case, the holding of the agreement, unconscionable. Such a consideration, or a similar consideration such as an argument that the contract violates public policy, may render the contract void or voidable in some way, meaning that it would never have been legally binding in the first place.
Additional defenses may be available to you depending on the terms of your confidentiality agreement and the circumstances of your actions. Such defenses may include arguments that the agreement was terminated via another action or use of another action that placed the agreement in some way outside of the range of acceptable confining actions, or an argument that the agreement was never accepted or executed.
Avoiding Breach of Confidentiality
Ensuring compliance with a corporate confidentiality agreement comes down to two things: diligence and clarity. Often the best way to prevent a breach is to make sure that employees understand the terms of the agreement, how it applies to them both while employed by the company and after they leave.
Thorough and ongoing training on the issue of confidentiality is critical. There are innumerable personal, technological and system threats to the sanctity of company confidential data and intellectual property. Some of the most significant involve employees. In many organizations, employee turnover is high and those that leave often take everything they have learned with them. Policies should address what happens when a valuable employee departs and transition pathways for confidential and proprietary information from one employee to another. Policies and procedures should address data system security and privacy protections such as limiting access to sensitive information to essential team members only, data encryption when transmitted and in storage, protected communications such as private e-mail and other password-protected communications, and mitigation measures for employees who leave or are laid-off or terminated such as remote access reassignment of passwords and administrative rights. Sometimes it may be necessary to hire an outside data security firm to monitor and audit compliance. A good confidentiality agreement will also address the process and financial obligations of the employee and the employer in connection with termination, such as recovery of the return of confidential information, transition of such information and where and how it can be stored. Workers must also be provided with guidelines on what they can and cannot do with the confidential information they handle and use in the course of their duties. Finally, and perhaps most importantly, is the issue of confidentiality culture, an organization’s approach to maintaining information security. Everyone in the company should be aware of the nature and value of confidential information. They should find ways to actively protect such information and be rewarded for actively doing so.
Breach of Confidentiality Examples
What does breach of confidentiality look like? Here are a few examples of different types of confidentiality agreements and the consequences for breaches, as seen in the real world: The Employment Agreement. The usual scenario occurs when an employer discovers that an employee, during the pendency of his employment and after the employment terminates, has disclosed confidential information to third parties, often competing businesses. In Amigos v. Brady, the employee worked for Amigos in Mexico, doing electrical and mechanical work and servicing products manufactured by the company. Amigos sent the employee for training in the United States so that he would be able to provide better after-sales support. Amigos provided the employee with a notebook, which he was instructed to use exclusively for Amigos’ business. The employee worked for Amigos for two years. He was then hired by a competitor of Amigos in Mexico. The company that employed him in Mexico copied the original notebook, marked it as if he were the author, and in the course of three months, made 38 copies of the notebook for distribution in Mexico. Amigos brought suit against the competitor in the United States, and the court found Amigos had shown a "reasonable likelihood of prevailing" on its unfair competition claim. Amigos v. Brady, No. 07 4082 (E.D. Penn.), incorporated by reference the plaintiff’s brief and exhibits in support of the motion for a preliminary injunction and the magistrate judge’s report and recommendation. The Sale of a Business. An interesting example of the protection of trade and confidential information may be seen from a decision in Texas, whether or not governed by a written agreement. The facts arise from a dispute involving the alleged theft of store customers in a "bank branch store" by the former Chief Operating Officer , John Flowers, and other employees. Flowers and a subset of employees sued Bank of America, alleging that despite an agreement reached in mediation, Bank of America had not paid Flowers $425,000 as long term incentive compensation earned during his tenure with the bank. Bank of America counterclaimed and asserted a cross-claim for breach of the restrictive covenants in the employment agreement signed by Flowers. The case was tried to the bench, and after assessing its damages, failed to award Bank of America any money for Flowers’ breach of his confidentiality agreement with B of A. Bank of America v Flowers (Case No. 15-3617-C, District Court, 101st Judicial District, Dallas County, Texas, June 12, 2015). The Operation of a Law Firm Covering Five States. We are all familiar with the exposure to liability that law firms face. But what happens when a staff member at a firm covered by a confidentiality agreement used by every employee of the firm discloses the information on his own or others’ computers, and the firm terminates the employment of the offending staff member? The problem will not always go away even when the employee leaves the employer. Rather, the firm finds itself involved in litigation to enforce its non-disclosure agreement with the offending employee. In that matter, the situation was compounded by the disclosure of the identity of a confidential informant, and after a series of appearances in court including an Arkansas district court, the United States Court of Appeals for the Eighth Circuit, at the time of the writing, found that the issue was not resolved and remanded for further proceedings. Williams v. Springfield, 735 F.3d 549 (8th Cir. 2013), app. after rem, No. 4:09CV00395 (E.D. Ark. March 5, 2015).