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When Do Confidentiality Agreements Make Sense?

by Jennifer Shaw and Julia Melnicoe Insel | The Daily Recorder | March 6, 2024

Employers often want employees to sign a confidentiality agreement (sometimes called a “non-disclosure” agreement) to protect trade secrets, proprietary information, and other competitively sensitive business information.  But, confidentiality agreements are not a magic bullet for protecting tricks of the trade.  Below, we discuss what these types of agreements realistically can accomplish, and where they create risk.

What Does a Confidentiality Agreement Protect?

                Trade secrets already are protected by the federal Defend Trade Secrets Act and the California Uniform Trade Secrets Act. So, what is the value of a confidentiality agreement, if these laws already exist?

                First, to claim trade secret protections in court, employers must show that they were actively protecting the information as secret, and that the information has economic value from being kept secret.  A confidentiality agreement that describes what information the employer considers to be trade secrets is strong evidence the employer took steps to protect the information and considered it valuable.  However, the agreement will not be effective if an employer does not take other steps to keep its information secret, such as strictly limiting access.

                In addition, a confidentiality agreement can be used to protect proprietary information as a matter of contract, even if that information does not quite rise to the level of trade secret.  For example, a confidentiality agreement might be used to protect early-stage business ideas that do not yet have calculable economic value.

What Type of Information Should Be Included?

A confidentiality agreement should be limited to information an employer keeps secret and believes has actual or potential economic value to its present or future business.  Employers should identify this information with enough specificity to ensure employees understand what data the employer seeks to keep secret.  Being deliberately overbroad (such as including vague terms like “financial information”) can backfire because employees who misuse the information will claim they did not understand the scope of the protection.

                Over-inclusive provisions also may be unlawful.  In 2020, a California Court of Appeal in Brown v. TGS Management Co refused to enforce a confidentiality agreement that declared almost all information the employee learned during employment as secret.  The Court held the agreement was so broad that it would prevent the employee from drawing upon ordinary job experience in subsequent employment.  Because this prohibition effectively would prevent the employee from working in the same industry for another employer, the Court held that the agreement operated as an unlawful non-compete agreement.

Does a Confidentiality Agreement Protect Intellectual Property?

                Intellectual property (“IP”) can partially be protected by a confidentiality agreement to the extent the IP is secret business information.  But, a basic confidentiality agreement does not address trickier IP issues, like ownership of certain ideas or inventions.   

                Courts have interpreted California Labor Code Section 2860 as granting an employer the ownership of work created in the scope of employment. But, ownership isn’t always so straightforward; e.g., when an employee develops something on their own time that nevertheless directly relates to the employer’s business.  In these situations, a simple confidentiality agreement is not sufficient to prevent the employee from claiming the invention as their own, and the employer will need to consider an assignment of inventions provision.

When Does it Make Sense to Use a Confidentiality Agreement?

                Not every employer needs a confidentiality agreement. As mentioned above, true trade secrets already are protected by law. Enforcing a contractual confidentiality agreement through litigation is expensive and time-consuming. So, if the value of the confidential information protected by the agreement does not justify the cost of litigation, an agreement may not be useful.

                Of course, confidentiality agreements may have deterrent value, too.  For example, an agreement can demonstrate an employer’s serious commitment to protecting its proprietary or sensitive business information, and make employees think twice about downloading employer files.  That said, a heavy-handed agreement threatening a lawsuit for misuse of information may be off-putting for entry-level employees who will not have significant access to valuable information, or where the employer does not engage in the type of research and development that warrants such a legalistic approach.  In these situations, a simpler confidentiality policy may suffice.

When Are Confidentiality Agreements Not Appropriate?

                A confidentiality agreement generally should not be used to protect information or interests that do not belong to the employer.  For example, although employers are obligated to protect the privacy of certain records belonging to employees or customers (e.g., medical records), these records do not have economic value to the employer as a result of being secret.  Moreover, the employee or customer has the right to exercise or waive any such privacy rights, not the employer.

                Employers also must be careful that a confidentiality agreement does not interfere with employee rights to discuss certain types of information.  For example, California Government Code Section 12964.5 makes it unlawful for an employer to require an employee to sign, as a condition of employment, any document that has the purpose or effect of preventing the employee from disclosing any facts about unlawful conduct in the workplace, such as allegations of harassment.  And, under the federal National Labor Relations Act, employees have the right to discuss wages and working conditions with others.  So, a confidentiality agreement that includes “salaries” as a protected category of information, for example, is likely to violate the law.

What’s the Bottom Line?

Many employers adequately can protect their valuable business information through a combination of security measures, policies, and existing trade secret laws.  But for employers whose business is based on new development, research, or secretive competition for market share, an enforceable agreement might be useful.  Employers should consult with their employment law counsel to weigh the pros and cons of their particular business.