Beware the Overbroad Confidentiality Agreement

Just about every business under the sun has worries about its confidential information ending up in the hands of a competitor. Similarly, just about every business worries about the employees who possess knowledge of that confidential information taking it and placing it in the hands of a competitor. That’s why confidentiality agreements (sometimes called non-disclosure agreements or NDAs) and non-competition agreements exist.

Paradoxically, though, generally speaking from a business owner’s standpoint, the stronger the agreement seems, the weaker it actually is. Put another way, the more it protects the employer, the less likely it is to be enforced by a court. Further, the law has several requirements (or limitations, depending on your perspective) as to what can be contained in these agreements, particularly a non-compete. The genesis of these requirements is that it is against public policy to prevent people from working a job and earning a living.

But consider this recent case in California. In Brown v. TSG Management Co., LLC., an appeals court ruled that the confidentiality agreement entered into between the company and the employee was so restrictive, it was tantamount to being a non-compete agreement. Moreover, as a non-complete, it was unlawful because it had the effect of preventing the employee from working in the industry.

The employee’s argument was predicated upon the notion that the definition of “confidential information” was so broad that it effectively banned him from working in his profession of securities trading. Because of that, he argued, it violated public policy. The Court agreed, holding that the employer was claiming as confidential “all information that is ‘usable in’ or that ‘relates to’ the securities industry.” The Court also held that the employer was attempting to classify as confidential the information the employee knew (or was in possession of) prior to his employment.

Confidentiality agreements (and NDAs) and non-compete agreements have their place in business. But, like everything, their roles cannot be abused. Such agreements must be balanced and well-reasoned for both the employer and employee.

To read more about this decision, click here.