Beware - Increased Scrutiny on NDAs

By: Matthew T. Anderson

Last month, a Maine law went into effect banning the use of non-disclosure agreements (NDAs) that have the effect of silencing employee complaints of workplace misconduct. It is merely the latest in a growing list of states increasingly questioning and limiting employers’ ability to use and enforce broad NDAs against their employees. NDAs are so popular that employers routinely require them for all of their employees. These agreements started as ways to protect information like trade secrets, intellectual property, and confidential information. But employers have been expanding and broadening NDAs to the point where workers are unsure if they can complain about workplace misconduct without violating these agreements.

Sixteen states have enacted laws or issued regulations governing the use of NDAs, most of which were spawned out of the “Me Too” movement. In these states, NDAs may not be used to prohibit an employee from disclosing sexual misconduct, harassment, or assault in the workplace. Some states, however, have taken the prohibitions further. In addition to Maine’s new law, a recent Oregon law gives employees a private right of action if the employer’s NDA overreaches the permissible scope under state law, like prohibiting the discussion of discrimination. Illinois prohibits the enforcement of an NDA when the alleged disclosure violation is an act of whistleblowing.

Under federal law, the National Labor Relations Act (NLRA) limits what restrictions can be contained in an NDA, regardless of whether the workplace is unionized. Section 7 of the NLRA, for example, makes it illegal to prohibit employees from discussing with each other their working conditions or pay.

Regardless of whether state or federal laws apply, if there is litigation centered on enforcement of an NDA, the court is almost certainly going to question whether the information at issue was truly confidential. This includes asking whether it was reasonable for the information to be or remain confidential or whether the information is or was publicly available. In addition, courts will consider what efforts the employer took to keep that information protected from public disclosure. Courts in Illinois and California have thrown out NDAs they found to be broader than necessary to protect the employer’s business interests. For example, in a recent California case, the NDA required the employee to keep all information used or usable in or relating to the employer’s business (the securities industry) confidential. The California Court of Appeals found this definition so broad that it meant all information relating to any aspect of the securities industry as a whole. This, the court found, made it impossible for the employee to work in his chosen field; preventing someone from working in their chosen profession is barred by statute in California. In addition, some courts, such as in Virginia, require that there be some sort of temporal limitation on the contractual non-disclosure prohibition, unless it is otherwise deemed a trade secret.

The best approach for employers to have and use NDAs is to deploy these agreements strategically. For each employee, ask whether an agreement really is needed and whether the law provides another remedy for the type of information the disclosure of which the employer is seeking to prevent. For example, with respect to an employee who has access to confidential sales lists, marketing strategies, or trade secrets, an employer would certainly need an NDA. But, with respect to an employee who does not regularly interact with information that truly must remain confidential, an employer either does not need an NDA, or, perhaps, any NDA with that employee could be limited to a specific category of confidential information to which such employee would be exposed in his or her position. If that employee were to take this information, there would still be a legal remedy for the theft. Employers should also consider what information should be confidential. If, for example, you are advertising who your customers are on your company website, it is not reasonable to claim all customer lists are confidential.

In short, employers who use NDAs should be targeted and precise with the confidentiality terms. Indeed, in some states, where courts will not blue pencil an overbroad provision or sever it out of the contract, an overly broad NDA may be declared invalid in its entirety. The goal of the agreement should be to protect valuable business information, not to prevent employees from disclosing general details about the workplace.