Is Your Employee NDA Weak?

08 June 2017 Dashboard Insights Blog
Authors: Gregory W. McClune

We live in a world of “leaking” information and the automotive industry is not immune. Automotive companies go to great lengths to protect their confidential information (including innovations).  But do they have the legal means to prevent disclosure of information by employees?

Drafting and enforcing NDAs requires considerable thought, care and continual maintenance. It is an area rife with risks and traps; and employers who believe they can “gag” their employees, by simply requiring them to sign a broadly worded agreement with heavy penalties, may be in for a rude shock.

The problems are many. First, this is an area that is primarily enforced by state law, and the states are far from uniform in viewing the enforceability of NDAs. Thus, a non-disclosure provision enforceable in one state may be struck down in another.  Automotive companies often operate in multiple states and so they will have to ensure it is compliant with the laws of all those jurisdictions.

Most jurisdictions will decline to enforce an overbroad definition of “confidential information.” To that end,  an Illinois court refused to enforce an NDA that sought to protect against the disclosure of information concerning “any methods and manners by which Employer leases, rents, sells, finances, or deals with its products and its customers.” (Trailer Leasing Co. v. Associates Commercial Corp., 1996 WL 392135, at *1 (N.D.Ill. July 10, 1996)).

Similarly, an employer’s attempt to seal an employee’s lips forever will find little sympathy in the courts. A Virginia court invalidated an NDA on two grounds. It found that the employer had attempted to preclude an employee from disclosing any information concerning the business of the employer to any person. Thus, the prohibition was “not narrowly tailored to protect the legitimate business interests” of the employer.  The court explained that the provision was so overbroad that, as written, it prohibited the employee from telling a neighbor anything about the employer – including information that was not proprietary in nature or worthy of confidence – for the rest of her life.   (Lasership, Inc. v. Belinda Watson and Midnite Air Corp., d/b/a Midnite Express, 79 Va. Cir. 205 (1979)).

Some state courts (e.g., Georgia, New York, and Illinois) may “blue pencil” a defective agreement; that is, excise the offending provisions and allow the remainder of the agreement to be enforced.  But even if an employer finds itself in one of those jurisdictions, there is no guarantee the judge will undertake that exercise as he/she may find the offending portion key to the whole agreement and, therefore, strike the entire NDA.

Recently a court in North Carolina invalidated an NDA on a different basis that, if followed by other courts, could have far-reaching consequences. The court invalidated the entire NDA because there was no additional “consideration” (i.e. the employee gave up his/her rights but received no additional compensation or other item of value). (Roundpoint Mortgage Co. v. Florez, 2016 NCBC 17 (Feb. 18, 2016)).

There are yet other traps for the unwary. This year a federal appeals court struck down a “confidentiality agreement” that sought to preclude an employee from sharing “private employee information (such as salaries, disciplinary action, etc.)“ because the restriction unlawfully impinged on the employees’ rights, under Section 7 of the National Labor Relations Act, to discuss such matters. (Banner Health System v. N.L.R.B., 2017 WL 1101104 (D.C. Cir. 2017)).

Finally, even if an employer crafts a compliant NDA it will lose its power to enforce the NDA if it is lax in the treatment of confidential information. A written agreement does not supplant the need for sound business practices which safeguard such secrets and prevent disclosure.  Moreover, an employer will enhance its chance of enforcing an NDA by periodically reinforcing the need for confidentiality, conducting regular training on the proper handling of confidential information, etc.

Staying on top of developments in this area and carefully tailoring NDAs will help to maintain the secrecy of what is often an automotive companies’ very lifeblood: confidential information.

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