What is a Non-Disclosure Agreement?
A non-disclosure agreement ("NDA"), also known as a confidentiality agreement, is a contract between at least two parties that requires one or both parties to keep certain information confidential. Agreements of this kind are typically long and tedious documents containing clauses that detail what information must be kept confidential, to whom the confidential information may be disclosed, the duration of the confidentiality obligation, and what remedies may be available if the recipient of the confidential information discloses the information when not authorized to do so .
NDAs are often used when highly sensitive information, such as trade secrets, needs to be shared amongst employees, potential investors in the business, or potential product partners, such as suppliers or customers. This allows a business to share its trade secrets (e.g., formulas, manufacturing methods, customer lists or profiles, software code, and customer or supplier lists) without fear that a recipient of the NDA may later disclose or utilize any of the confidential information received for a purpose not contemplated by the agreement.
Enforceability of NDAs Under California Law
Employers in California need to be particularly attentive to the statutory and common law requirements associated with the enforcement of NDAs if they desire to use them for protecting the confidentiality of their proprietary information.
At the outset, California courts typically honor contractual duties (including non-disclosure agreements) as long as those obligations are reasonable and do not contravene the Labor Code or public policy. However, under California Civil Code section 1668, contracts that would "exempt anyone from responsibility for his own fraud, or from responsibility for injury to the person or rights of another" are void. California courts have long held that "no one can give an absolute release for future misconduct, or for damage which he may cause…." in California. Edwards v. Arthur Anderson LLP, 44 Cal.4th 937, 946, 187 P.3d 1069, 121 Cal. Rptr. 2d 855 (2008) (internal citation and quotation marks omitted). Even voluntarily entered agreements releasing a party from liability for gross negligence or intentional acts are considered "contrary to public policy and thus unenforceable." Id. Still, if provisions are added to an NDA after injurious wrongdoing has taken place, those provisions may then be deemed enforceable. See id. at 949. Any agreement excusing a party from liability "must either fall within Civil Code section 1668 or must be applicable only to past wrongs." Id. Therefore, while an employer may be able to limit its liability for an employee’s inadvertent breach of a confidentiality provision, it cannot shield itself for wrongful or negligent behavior.
Are NDAs Enforceable in California?
Generally speaking, yes. Non-disclosure agreement ("NDAs") are enforceable in California. As in most states, California law generally permits parties to enter into any agreement as long as it is lawful. In other words, the restraint must be reasonable. Or, to put it another way – it depends. There are a number of factors courts will look at when determining whether an agreement is enforceable.
PROTECTABLE INTEREST
First, for an agreement to be enforceable, the employer must have a protectable interest. Under California law, employers are not permitted to prevent former employees from earning a livelihood after terminating their employment. Cal. Bus. and Prof. Code § 16601. This is because California is a "employee at will" state, meaning either party can terminate the employment relationship at any time. As an exception to this rule, an employer can protect its proprietary information, which includes confidential and trade secret information. If a business has proprietary information it seeks to protect, it must do so in order for an NDA to be enforceable. This is done by specifically identifying the proprietary information with sufficient clarity so that the employee will understand what information qualifies as confidential at the time of signing.
RESTRAINT
Second, the restraint must serve the employer’s interest. An employer does not possess an interest in preventing an employee from taking a job that competes with over its trade secrets. In other words, employers cannot restrain former employees from doing what they legally can do. To be enforceable, an NDA must not impose greater restraint than necessary to protect the employer’s legal interest. Prelim. Inj. Order (Not Precedential), Sanchez v. Advanced Micro Devices, Inc., No. CV 13-4829 CAS MANX, 2014 WL 10476436 (C.D. Cal. Mar. 4, 2014). Courts analyze the equities of the situation. This often includes considering and balancing the hardship the restraint would place on the employee as well as on the employer, but not limited to that.
EVIL
And finally, the restraint must not be injurious to the public. Employers who enter into NDAs to prevent competing with a former employee will find these types of NDAs more likely to be unenforceable in California than an NDA designed to protect legitimate trade secrets.
Common Limitations on California NDAs
The parties’ consideration agreement cannot serve to waive or limit other rights:
Even if an NDA is enforceable in a limited context, the NDA cannot "waive or limit" the employee’s other rights. (Cal. Civ. Code § 1668.) A California NDA cannot limit the employee’s ability to report potential violations of the law to government authorities, for instance. However, 1668 is likely a narrow statute that would not apply to the NDA in its entirety, but only to the portion waiving the employee’s ability to disclose information to the government (if any).
Under the recent Filarsky v. Delia case, the waiver of other employee rights may be limited to waiver of the right to bring suit. Filarsky v. Delia, 566 U.S. 377 (2012). California has a well-established policy disfavoring exculpatory agreements, meaning that contracts must not essentially free an employer of liability for its own conduct or actions. Under Filarsky v. Delia, this disfavor of exculpatory agreements applies to governmental entities.
Thus, for certain government employees, even if the NDA were considered a "consideration agreement," the NDA would not be enforceable to the extent that it would "release[] … claims for the negligence or intentional misconduct of a government employer." Despite what appears to be a limited application of this rule, it is important to keep in mind.
Challenges to Non-Disclosure Agreements
In California, common reasons NDAs are challenged include: the NDA is overbroad, vague or ambiguous; it does not fit into a legitimate trade secret or legitimate proprietary information (see above for definitions of "trade secrets" and "proprietary information"); overbroad language and definition of the period of time which the NDA applies; lacks specificity regarding the nature of the confidentiality obligation; fails to identify information subject to the NDA; and/or the NDA attempts to provide no geographic boundaries on its scope.
Similar to trade secrets, the NDA must have a duration in order to be enforced, but that duration should be reasonable under the circumstances. One common problem with NDAs is that employers try to have the NDA survive the employment for an indefinite period of time , or some period of time that is not reasonable under the circumstances. The general rule of law is that the period of time set forth under the NDA must be reasonable under the circumstances. Additionally, as a general requirement, the NDA should provide a period of time, at which time the restriction either terminates or is revisited by the parties. An example of a period of time under an NDA would be "for a period of 3 years following termination of employment." And the reasonableness must be based upon the circumstances as a whole, given the industry and type of information protected. For example, if the restrictive effect of the NDA outlives its utility, then the NDA is usually unenforceable.
How to Write an Enforceable NDA in California
Not surprisingly, there are certain types of provisions and language that, if used in a non-disclosure agreement, will help ensure that the NDA is enforceable in California. First, and perhaps most interestingly, California courts have indicated that employees will be deemed to have accepted a non-disclosure agreement where the agreement simply states that the employee agrees to hold confidential "all non-public" information. In Salton/Seafood, Inc. v. S.S. Hogue, the court held that an employee was bound by an NDA, notwithstanding his failure to sign it, because he continued to work for the employer after signing an employment agreement which expressly stated that the employee would maintain the confidentiality of all non-public information. The mere fact that the agreement stated "non-public" information, rather than "confidential" information, did not prevent the employer from using it to restrict disclosure by the employee. In that case, there was no such thing as a "non-public" NDA. Accordingly, California courts have suggested that courts will be receptive to all non-disclosure provisions that do not restrict the employee from using information that is already generally known or available.
Second, California courts have frowned upon the use of clauses in NDAs that restrict an employee from disclosing "any" confidential information. Instead, California courts have suggested that NDAs should be limited to restricting the disclosure of "trade secrets," "confidential company information," or "non-public customer information." Further, NDAs that restrict the disclosure of information that is "competitively sensitive" or "technically sensitive" may be enforced. Further, a limitation that prevents the disclosure of information that would harm, or would give competitors an advantage, if disclosed is not likely to run afoul of any law. A limitation that protects customer goodwill earned through time and expense on the part of an employer are also likely to be enforceable.
Third, NDAs should not prevent employees from working for third parties or publishing articles about their trade secrets. Both of these limitations would likely be void under California Law as restraints on the employee’s ability to earn a living, which are prohibited under B&P Code Section 16600.
Fourth, California courts have suggested that more expansive non-disclosure restrictions may be appropriate if they are only for a fixed period of time, or if they are collected at a later date – the theory being that the courts are less concerned with the enforceability of NDAs that only apply at certain times, or that only apply to certain employees once they leave the employer. Courts have indicated that these types of post-employment NDAs can be enforced as long as they are limited in nature in terms of time and duration.
Finally, non-disclosure restrictions that apply to independent contractors, officers, and directors are also valid under California law.
Work with an Attorney to Draft an NDA
Whether you’re on the receiving end of an NDA or are about to pitch one to a potential business partner, both situations present legal implications only a lawyer can sort out properly. As previously stated , California’s courts have developed extensive precedents on the enforceability of NDAs in a wide range of situations over the past few decades. Determining whether your NDA is enforceable under California law means navigating tricky issues like the level of confidentiality required, the geographic scope of the NDA and (for employees) your existing employment agreement. Having a legal expert craft and review your NDA is the best way to ensure you have the strongest NDA possible.