Over the last decade or so, there have been remarkable developments in the law’s approach to employee noncompetition agreements (NCAs). After years of little movement, many states have recently restricted noncompetes (for example, by barring them entirely for lower-compensated workers), while a few jurisdictions (including Massachusetts, D.C., and Minnesota) have taken more dramatic steps to rein in their use. And further change may be in the offing, including the Uniform Law Commission’s (ULC) proposed Uniform Restrictive Employment Agreement Act, the Federal Trade Commission’s proposed rulemaking that would largely bar NCAs, and the National Labor Relations Board’s challenge to using noncompetes for covered workers.
But not everyone realizes that these changes may reach contract terms beyond those formally phrased in terms of restricting a worker’s post-employment competition. Indeed, both the ULC and the FTC actions would reach contracts framed as barring disclosure of confidential information when such an agreement has effects similar to those of a noncompete.
It is this possibility that drives Camilla A. Hrdy and Christopher B. Seaman’s article, Beyond Trade Secrecy: Confidentiality Agreements That Act Like Noncompetes. While others have recognized that limitations on disclosure can have effects similar to NCAs, the authors are the first to provide a comprehensive treatment of the question, one enriched by an empirical study that is the first to explore how confidentiality clauses are deployed in the real world.
As indicated by the title, the main concern of the Article is agreements that reach beyond “trade secrets” to protect a broader category of “confidential information.. That means that the narrow definition of trade secrets is inapplicable. Worse, while an employee’s general knowledge, skill, training and experience are excluded from trade secret protection, a confidentiality agreement may seek to restrict not only disclosure of such information but even its use when acquired during the course of the employee’s job. That means that such an agreement may parallel an NCA in terms of employee mobility and constraints on innovation and, indeed, may be worse because it is not subject to the temporal and spatial limits that control formal NCAs.
Although Hrdy and Seaman prefer the term “confidentiality” to “nondisclosure” agreements (NDAs) in order to capture the common bar of employee use, nondisclosure is frequently the label affixed to these contracts, and the authors’ central point is that NDAs may have similar or worse effects than NCAs.
This is problematic because confidentiality agreements, at least historically, were usually treated as presumptively valid and the “common wisdom” is that they were not subject to those pesky public policy constraints applicable to noncompetes. Thus, a former employee may be enjoined from using protected information even if the effect of such a possibility is to restrict employee mobility comparably to an NCA but without the law’s preconditions in that context.
In the course of surveying various judicial and statutory approaches to the problem, one of the main contributions of the Article is identifying current authority requiring greater scrutiny of confidentiality agreements that amount to “de facto noncompetes.” Even short of that, some courts, according to Hrdy and Seaman, apply a “more nuanced” analysis of the anticompetitive effects of such agreement. But even these decisions do not doctrinally treat subject agreements as noncompetes so that failures to impose temporal or geographic limitation are not fatal. Instead, “[c]ourts tend to assess the degree to which the confidentiality agreement reaches beyond trade secrecy and whether the agreement—regardless of what it is called—has the effect of a noncompete.”
Another contribution is the authors’ empirical study of some 450 confidentiality agreements that have become public, typically in the litigation context. Although the Article recognizes the selection bias associated with this data gathering strategy, they have done a scholarly service in shining a light on how such agreements operate in at least some of the real world. The authors conclude that employers typically use broad confidentiality agreements as a backstop for trade secret protection, and that, facially at least, such agreements are more restrictive than NCAs: “And, contrary to noncompetes, “they almost never have geographic or temporal limitations, and they are usually written to last forever.”
The normative takeaway from Hrdy and Seaman’s article is a default rule of unenforceability for confidentiality agreements that go beyond trade secrecy but subject to the employer’s showing that such agreements “are reasonably related to the goal of protecting legitimately confidential information and are not acting as de facto noncompetes.” They claim that the result will not be to outlaw confidentiality contracts but rather to “weed out poorly drafted confidentiality agreements that have the effect of perpetual noncompetes.” Among the requirements for validity would be employer proof that the confidentiality agreement does not restrict employees from using their general knowledge, skill, and experience. While neither a specific duration nor specific geographic reach would be needed for validity, the information protected by the agreement must still be secret when the employee seeks to use or disclose it and the agreement must not reach information that is “public or generally known to persons in the employer’s industry” or which the employee already possessed prior to the employment relationship, or obtained lawfully from third party sources or was required by law to be enforced.
The authors’ proposal would substantially reduce the legitimate scope of confidentiality agreements, but Hrdy and Seaman are not uniformly hostile to them. They recognize a need for protection of confidential information, even beyond information that would qualify as a trade secret. Further, they do not believe that employees should be free to use such information merely because it could be (but wasn’t) acquired legitimately.
There’s more than a little in the article to chew on, and we can expect challenges to the authors’ analysis as going both too far and not far enough. This is a Jot, so any detailed criticism would be out of place but I do note that the notion of a “de facto noncompete” could use some fleshing out. While it is by no means clear that the more sweeping current challenges to NCAs will be successful, Hrdy and Seaman are to be praised for their effort to ensure that any reconsideration deals not only with formal NCAs but also functional ones.
