What is a Confidentiality Agreement?
Confidentiality agreements are typically used to restrict one or both of the parties from the disclosure of confidential information. Companies commonly have their employees sign a confidentiality agreement which highlights the confidential information that is proprietary to the company and also conveys how the confidential information must be handled. The confidentiality agreement will also state what will happen if the employee discloses the confidential information. This type of agreement can also be used in many other situations where one party will be using proprietary information that belongs to the other party , and hence the need arises to restrict the use and disclosure of the confidential information. Most often this type of agreement is used when companies meet with other companies and share their confidential information during a business deal.
Non-Solicitation Agreement Explained
Such an agreement will not necessarily improve a relationship with an existing customer, but rather it will absolutely prevent the poaching of the customer by a competitor after the relationship has been created. In order to be enforceable, a non-solicitation agreement must be of reasonable scope and duration which varies based upon the industry and services offered. The employee’s agreement to follow the non-solicitation provisions may be an important factor in obtaining a refusal of a customer or potential customer to deal with an employer’s former employee. A non-solicitation agreement typically does not refer to competition but rather to solicitation of customers and clients. The difference is purposeful since covenants not to compete or so-called non-compete agreements are stricter and harder to enforce than non-solicitation agreements.
Essentials of the Agreements
Confidentiality and non-solicitation agreements commonly contain the following key elements:
o Confidential information. A definition of confidential information is a key provision in a look software agreement (or any confidentiality or non-disclosure agreement). A precise definition is important, as it sets forth exactly what information the employee is agreeing not to disclose or use after termination of employment. For example, a confidential information provision might state that confidential information includes, but is not limited to, trade secrets, customer and employee lists, product pricing information, and supplier and vendor information.
o Non-competition provision. A non-competition provision also restricts an employee, but only with respect to a defined list of (usually) competitors. The provision states that the employee agrees not to work for "any entity engaged in business which competes with" employer for customer sales during the term of the agreement, including any republication of this website.
Employment agreements must be specific and personal to the company and the employee. A generic non-compete or non-solicitation agreement may prove ineffective, as not compelling enough to restrain competition.
Employers’ and Employees’ Interests
Confidentiality agreements benefit employers by protecting trade secrets and also maintaining the competitive edge that a potential employee represents. At the same time, these agreements allow employees the opportunity to seek employment with a company that is in the same field as their last employer. A well drafted and enforceable non-solicitation agreement will deter competitors to the extent it protects an employer’s legitimate business interests without restricting the employee’s ability to earn a living in his or her chosen field of employment.
Legality and Enforceability
The enforceability of confidentiality and non-solicitation agreements is heavily dependent on the specific language used and the intent of the agreement’s parties. Additionally, many states now have statutes which limit the enforceability of these agreements, particularly in the employment context. Although each agreement must be evaluated on its own merits and in accordance with the law of the state in which it will be enforced , generally speaking one can substantially improve the chances that a confidentiality and non-solicitation agreement will be enforced by:
Addressing the agreement during the hiring process
Including detailed provisions with the utmost specificity
Incorporating ongoing education of employees about the agreement
Expressly barring individuals from using confidential information with other companies that they may go to work for
Clarifying which customers are deemed to be company customers
Equipping the company with a good definition of which employees are considered to be company employees
Ensuring that the requirements of notice and opportunity to cure are included in each agreement
Carefully considering arbitration provisions.
Effective Drafting
A well-written confidentiality or non-solicitation agreement is a company’s best defense against theft and misappropriation of trade secrets and customer/client business. These agreements not only establish the legal framework for the protection these specific terms provide, but also may facilitate resolutions of disputes if they arise.
A confidentiality/non-solicitation agreement should identify the protected information, distinguish between public and proprietary information, and outline the obligations related to that information (i.e., limitations on access, use, disclosure and copying).
Common provisions unique to the IT services/industry include (but are not limited to):
A non-solicitation agreement should be no broader than reasonably necessary to protect the legitimate business interests of a company, regardless of the employee’s position (e.g., customer contacts, technical leads, tech support). It should not be a blanket ban on working for competitors.
To make the agreement more enforceable, a non-solicitation agreement should, where possible, contain a provision that:
In addition, the faster a company recognizes the risks associated with the unauthorized use/disclosure of trade secrets and/or the solicitation of its customers/client and/or employees, the more effective and/or swift it can be in preventing it (i.e., through injunctive relief).
Dispute Resolution
Resolving Disputes: With the rise in enforcement actions over the past few years, some employees and some competitors may seek to challenge the enforcement of a Restrictive Covenants Agreement. Employees may contend that the Restrictive Covenants Agreement is overbroad, or that inadequate or no consideration was given in exchange for the Restrictive Covenants Agreement. There are several avenues in which to challenge an agreement. To begin, employees challenging enforcement can bring suit returned to the county in which the employee resides and find a place in which to file in the state court.
Potential success for an employee in litigation to set aside a Restrictive Covenants Agreement depends on the facts of each case. However, when a Restrictive Covenants Agreement has been deemed reasonable by a Court, a successor employer to whom the former employer has sold part or all of its business, may be able to enforce the Restrictive Covenants Agreement to prevent the employee from leaving their employment and commencing employment with a competitor. When a competitor has knowledge of the former employer’s intention to enforce the Restrictive Covenants Agreement, they may be refusing to enter into a contract with an employee who is subject to one of these agreements. Alternatively, CEO tenured employees may not need an employment letter which cause a competitor to intentionally interfere with the Restrictive Covenants Agreement.
Employers may also seek an injunction to restrain unfair competition or solicitation of clients and/or employees during the pendency of litigation. Injunctions can be brought but should be sought with care, in that, improperly or unreasonably overbroad injunctions may lose any injunctive relief granted in court. Temporary restraining orders may be issued to compel preservation of evidence or temporary restraining orders may also be issued to restrict a defendant’s use of confidential information, customers, and trade secrets. However, stating the defendant, for example, will be enjoined for two years is not very helpful. It is better to craft a temporary restraining order that actually prohibits the use of the confidential information, such as, the defendant will not be permitted to use the confidential information to solicit or attract any actual or potential customer.
However, a court will typically extend the restrictions in a Temporary Injunction Order to the Plaintiff’s customers, suppliers, distributors, and agents, who are injured by the defendants’ wrongful acts. Hence, if the defendant is subject to an injunction, he will no longer be able to convince the customers, suppliers, distributors, and agents to work with him.
Overseas Perspective of Confidentiality and Non-Solicitation
Over the past few years, the enforceability of non-solicitation and confidentiality provisions has emerged as an important area of law in common law jurisdictions. The law is developing quickly as the issue is constantly before courts, oftentimes in the context of injunctive relief. In Australia, non-compete covenants are generally invalid. Instead, the Australian courts impose two post-employment restrictions: confidentiality (by protecting trade secrets) and non-competition (by regulating and controlling the disclosure and misuse of confidential information). Australia draws a distinction between confidential information which is capable of protection through equitable means, and information which is not confidential (typically factual information). As a result, the prohibition of the solicitation of customers is recognized in Australia in the context of protecting confidential information.
In England, the law of confidentiality is not limited to employment relationships. Courts in England take a very interventionist approach in relation to post-employment clauses or restraints. Such restraints should be reasonable, both in terms of the geographical and temporal scope, and they should be proportionate to the employer’s legitimate interest. The English courts generally find them void if they contain an indefinite term and are not limited to the employee’s clients. Non-solicitation of customers, however, is easier to resolve and therefore more likely to be enforced.
In Canada, non-solicitation and non-compete covenants are found to be valid and enforceable. The approach , however, is in flux, as different provinces have adopted different approaches. In Ontario, a post-employment restriction will only be considered to be unenforceable if it would operate as a restraint in the broader sense, i.e. if it is a "total restraint" on the employee’s ability to carry on their trade or business. Courts in Alberta and British Columbia on the other hand favor a less stringent test and determine whether a post-employment restriction is unenforceable by assessing the covenant in its context as it relates to the entire contract, the parties, and the specific features of the industry in which the parties operate.
In the United States, the law regarding post-employment restraints varies from state to state. It generally originates from the common law and is further developed by the individual legislatures, most notably in Massachusetts, New York and California. Post-employment restrictions in the employment context are generally enforceable if (i) the restriction is reasonable in restricting the employee’s ability to compete against the employer, (ii) the agreement protects a legitimate business interest, (iii) the contract is supported by consideration (the presence of a legitimate business interest), and (iv) the employer can demonstrate irreparable harm should it not be enforced. Non-solicitation obligations are generally also valid if they are reasonable in time and place and if the employer demonstrates a legitimate interest in such a prohibition. Conditions (iii) and (iv) are not required in all states.