Overview: One type of employment contract is the nondisclosure agreement. Employers should use nondisclosure agreements to prevent employees (or prospective employees) from taking an employer's confidential nonpublic information to a competitor or sharing the information with another individual who uses it to the employer's disadvantage. An employer's confidential information could include trade secrets and other proprietary information, such as research and development, designs, ideas, techniques, methods and processes, customer lists, and other nonpublic information.
Nondisclosure agreements may be particularly critical to new businesses or existing organizations that have created a new product or service. By being proactive and requiring employees to sign a nondisclosure agreement, employers will be in a better position to recover against a former employee who steals an employer's confidential information or trade secrets for his or her benefit.
Even with an employee's signature on a nondisclosure agreement, theft of an employer's proprietary information may still occur - and is not uncommon. Therefore, employers should take measures to maintain the confidentiality of such information by restricting unauthorized access to this information, creating security codes on the computer system and by requiring nonemployees, such as customers, to sign a nondisclosure agreement.
Employers must make also clear to new employees that they cannot use confidential or proprietary information he or she acquired during his or her former employment through an express representation that he or she is not subject to a nondisclosure or confidentiality agreement. Otherwise, if an employee improperly uses such confidential information and the new employer knew or should have known that the employee was using such information for the new employer's benefit; both the employee and new employer can be subject to a legal action by the former employer/competitor.
Trends: The Defend Trade Secrets Act (DTSA) standardizes and strengthens employers' legal remedies and protections by allowing an employer to file a private cause of action in federal court for trade secret misappropriation. The DTSA also provides immunity to whistleblowers who reveal a business's trade secrets to the government as part of any violations they report and requires an employer to advise employees of this immunity in confidentiality contracts or agreements and/or policies. If an employer fails to provide notice it may not be awarded exemplary (punitive) damages or attorney fees in an action against an employee to whom notice was not provided.
Author: Melissa A. Silver, JD, Legal Editor
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Guidance for HR on the use of nondisclosure agreements to protect confidential information.