NET(net), Inc.


The non’s have it! by jigordon
November 24, 2008, 9:32 pm
Filed under: confidentiality, enforceability

Within the span of the last decade or so, I’ve seen a lot of confusion and misunderstanding about a bunch of non’s.  Non-Disclosures, Non-Solicitation, and Non-Compete’s, just to non (sorry) a few.  In this day and age of contracts for everything, people are often asked to sign one of the Non’s as part of a preliminary discussion about a particular topic.  So, let’s take a few moments to discuss each of the Non’s to see what the fuss is all about.

[Side note:  The Non’s discussed below can be considered “individual” contracts.  They can be signed independently of ANY other term or condition (such as a software license or services agreement).  But signing an individual agreement for one of the Non’s does not necessarily mean that you have the contractual terms and coverage for actually closing the full deal.  Make sure that you don’t unwittingly provide work/software/services before a full SLA, SOW or WO is completed in addition to the agreement(s) below!]

Non-Disclosure (aka: Confidentiality Agreement or Confidential Disclosure Agreement)

The most common Non takes aim at the restriction of one’s ability to talk about a particular subject.  Used to protect what at least one side to the conversation thinks is secret, a NDA or CDA is used to reinforce the verbal promise to keep something quiet.  Generally speaking, if they’re not combined with other Non’s, they are 100% legal and enforceable in almost every jurisdiction. [This isn’t legal advice, though, so if you have a specific question about a specific NDA/CDA, find a lawyer in your area and ask them to read it and provide you with solid legal advice.]  The reason behind the general legality is that the conditions of the formation of a contract have been met and there isn’t some sort of reason to not generally enforce the terms.  If I promise to keep something secret and you tell me the secret thing, I should be held to the restriction to not tell someone else.

These documents typically cover the “what if” in the event that I don’t live up to my obligation to keep the secret.  Usually including some form of indemnification (if what I’m being told could affect a third party), the common remedy for breach of a NDA/CDA is the payment of damages required to put the cat back in the bag.  But be careful if there IS indemnification and if you’re going to be provided something REALLY secret (like Protected Health Information (PHI), social security numbers, etc).  Make sure that you understand what you’re getting (and speak up if you don’t want that kind of information) and what the potential ramifcations are for disclosure.

Be careful also about NDA’s that have no term limit.  Not only should the window for disclosing the secret have a term, but the length of time of which you must keep the secret should also have a term.  In other words, the NDA might only be valid for 2 years, in which you get a dozen bits of information.  After the 2 years, any new information provided would no longer be covered by the dead NDA.  But the previously-disclosed dozen bits of information have to be kept confidential for a DIFFERENT length of time, usually between 5 and 7 years (because from a business perspective, that’s about how long a real secret is valuable).  The only exception to this would be real Trade Secrets, as they’re defined in your state’s laws, which would be kept confidential so long as they are considered Trade Secrets.

Non-Solicitation (aka Non-Hire)

Sometimes confused with a Non-Hire clause/agreement, the Non-Solicitation is probably the easiest and least disruptive of the Nons.  Solicitation is the act of enticing someone to come work for you.  As a small business owner, you would be concerned about your large clients soliciting your services employees, for example, who were onsite at the client locations and providing excellent service (the large clients sometimes realize that they can get a cheaper service if they hire the workers directly).  So a Non-Solicitation clause in a contract is a promise to not entice the other party’s people away.

This doesn’t mean you won’t hire their people, which is where the confusion of the Non-Hire provision comes in.  There’s a big difference between soliciting and hiring.  Generally speaking, I never promise the more restrictive no-hire, as I simply don’t have that kind of control over my HR folks.  But I can promise that we won’t be talking with onsite service people about how great it is to work here.  However, if the service people think they’d like to work for us, I can’t stop them from applying to generally-posted positions from our website, for example.

Do watch out for an overly-broad damages clause, though.  In the event that you DO solicit, there’s a chance that you’re going to owe the other side a significant amount of money (some clauses like to say that the solicitor will pay the other the cost of the hiree’s first-year salary!).

Non-Compete

The most stringent of the Non’s (and the most controversial), is the Non-Compete.  A non-compete agreement or clause in a broader agreement usually says that the employee agrees not to work in the particular field of employment, or in a particular geographic region, for a specific period of time, in the event that they leave the employ of the current employer.  In other words, it’s a promise to not work against the current employer if the employee thinks the grass might be greener somewhere else.

The problem with non-compete’s is pretty obvious.  You’re agreeing, to get a job with a new employer, to not go work somewhere else if you leave this new employer.  You’re really at your most vulnerable (in terms of negotiation positioning) because you want the new job, and, above all, you’re giving up your ability to work in your chosen field if the new job just doesn’t work out.  Wow.

For this reason and others, courts are starting to take a REALLY hard look at non-competes.  In the last decade, non-competes went from very loose to very restrictive.  In those states that allow them, they have to be extremely limited in scope (what you do and where you do it) as well as duration (how long you can’t compete).  In California (as of the moment of this article), they’ve been all but rejected as against public policy and are now unenforceable, even if signed.

My general rule of thumb is to NEVER sign a non-compete unless you’re SIGNIFICANTLY financially compensated up front (ie: they give you a starting bonus about the size of the salary required to cover you for the time you can’t work).


Advertisements

4 Comments so far
Leave a comment

Jeffrey, can I ask a question about NDA’s? One thing that’s always bugged me is how to put a price on violations. My simpleminded approach is to simply put a price in: a fixed fee to be paid in case of violation, in addition to any actual damages to be recovered. I rarely see this kind of clause in NDA’s though. Do you have any idea why this approach isn’t used more often?

Comment by Arnoud Engelfriet

Arnoud:

Thanks for the question!

The simple truth is that I don’t want to put a dollar cap on the damages, so I don’t include a figure. Within the US, damages for violations of NDAs can be extensive – a breach of confidentiality is treated in the same way that indemnification is treated. In other words, the violator pays for direct, indirect and consequential damages – which are usually WAY more than anyone can ever guess at.

Using a hypothetical, think of a situation where the confidential information being passed between the parties includes an individual’s name, social security number, bank account information or anything else that you (as an individual on this list) wouldn’t want to be public knowledge. Now assume that, as a result of some form of accident, the list gets released – all of your data is now public.

What are the damages? Directs are minimal – I won’t actually suffer from the actual disclosure of the list. But indirects and consequentials could be enormous, as the cost of changing my bank accounts, social security numbers, etcetera (not to mention my costs if someone misappropriates that data for their own malicious intent).

Now multiply that times the number of people on the list.

So, while I sometimes use the phrase in a very tongue-in-cheek manner, I have been known to tell my opponent that if they breach my confidentiality, I plan on owning their company as a result. In other words, I plan to recover EVERY SINGLE PENNY that I end up being liable for to the people whose information got leaked.

I don’t want to cap the damages in the contract because I have no real way of measuring the final impact upon the people on the list. And… this is just one example. Now try thinking of a situation where I’m Microsoft and I’m giving you access to pre-release software… and you publish it to a public bulletin board. The lost sales alone could be worth billions of dollars.

Does that make sense?

Comment by Jeff

Thanks a lot, Jeffrey! Makes perfect sense.

I didn’t mean to suggest to cap the damages though. I would put in “you’ll pay me 10k first regardless of what I actually suffered, and then we’ll talk actual damages”. That way, I get to recover 10k for small violations, and for the big ones I can recover whatever I can prove. Or do you think that that penalty would be construed as a cap?

Comment by Arnoud Engelfriet

Ahhh… I see what you’re saying now.

Actually, the problem with naming an initial figure in the US is that it can be seen as liquidated damages, which courts are seemingly reluctant to enforce. In fact, some suggest that the courts go so far as to specifically strike liquidated damages clauses.

The rationale is that contractual damages should only be warranted to put the players back to a position equal to where they would’ve been had the contract never been created. Liquidated damages have the effect of usually “enriching” the recipient beyond that of what is required to put them back to that original starting point. This is thus considered “undue enrichment” and is heavily frowned upon.

So it’s not going to be seen as a cap – it’s just going to be stricken from the contract entirely if the other side challenges the provision in the contract. Thus, a competent opposing side’s counsel is going to realize that the damages won’t be allowed in court, they’ll simply refuse to pay, knowing that I’d never want to sue to try to enforce the language because it wouldn’t actually go my way. I don’t want my language altered by the court and I don’t want to knowingly include language that I can’t really enforce. So I only include that which I believe is reasonably going to be enforceable. 🙂

Comment by Jeff




Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s



%d bloggers like this: