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The Nondisclosure Agreement: Time to Revamp?

Nov. 19, 2020, 9:00 AM

The nondisclosure agreement is as American as apple pie. Lawyers can recite Nondisclosure Agreement (NDA) terms in their sleep, and nobody would, until recently, have done anything of substance without one.

We now seem to be in NDA free fall. Ex-administration officials write tell-all books; former business partners openly talk about their experiences; and family members air dirty laundry. All of them signed nondisclosure agreements.

Traditionally, NDAs reflected a relatively balanced exchange. One party wanted to keep information confidential; the other party agreed to accept monetary or other risk for divulging such confidential information, with consideration provided for each party’s commitment.

But the NDA equation has become lopsided. NDAs protect intellectual property from disclosure but secrecy—whether obtained through an NDA or simple coercion—can and often does enable bad actors to avoid consequences. Under what circumstances should an NDA or other effort to silence a party be legally enforceable?

Standard NDA terms—defining categories of information subject to protection for a specified number of years—may appear benign, but when drafted too broadly, they can cause irreparable financial and emotional harm to those who sign them. They may even violate laws or be unconstitutional.

Employment

More than one-third of U.S. workers are bound by NDAs, according to the Harvard Business Review. These agreements may encompass more than the traditional bounds of trade secret law, effectively preventing employees from working in the same field after leaving a company.

Growing antipathy toward restraints on trade have moved courts to disqualify NDA provisions that act as non-competes. If the scope of confidential information is too broad or the restrictive time period too long, courts may narrow or throw them out altogether. During Covid-19, when so many have lost work, such provisions will be read even more critically.

Settlements

Confidentiality in sexual harassment settlements gives perpetrators power over their victims by silencing them. The #MeToo movement finally pulled the veil up on agreements under which victims traded silence for monetary recompense.

As a result of #MeToo, legislatures in more than a dozen states including California, New York and New Jersey limited or banned confidentiality agreements involving sexual discrimination and harassment.

Companies also modified their NDAs in response to #MeToo, but other forms of discrimination have remained unaddressed in most NDA policies. Racial discrimination is the 2020 cause of the moment and high-level employees at major employers are now speaking up, despite NDAs. We should expect confidentiality in settlements involving race, age, religion, and other forms discrimination to also come under scrutiny and fall by the wayside.

Investments

It had been common wisdom to require NDAs before talking with prospective investors, but as less money flowed into foundering startups that wisdom appeared not so wise. According to the University of Michigan, investors balk at signing NDAs, seeing them as a negative signal. They can be pitched by as many as 5,000 companies per year and an NDA for every pitch creates a logistical nightmare.

Entrepreneurs must grasp the difference between high-level concepts and trade secrets kept under lock and key. There is an implicit understanding now that investors will keep their mouths shut. Legal recourse still exists for misappropriation of ideas, with state laws providing redress under implied contract theory.

Even without NDAs, creators can still send emails to document what occurred and outline ramifications of unauthorized disclosure.

Government

Nondisclosures entered the executive branch during the Eisenhower administration and have been a fixture of administrations ever since, but the NDAs required by President Trump of White House employees are unlike anything seen before.

In keeping with the president’s view of the country as a business— and his history of NDAs for both business and personal affairs—these NDAs indefinitely prohibit staff from disclosing confidential or nonpublic information to any person outside the White House without Trump’s consent.

The U.S. Department of Justice is now seeking to enforce an NDA against a former unpaid aide to Melania Trump who authored a tell-all book. The NDA terms are likely unconstitutional, says Cornell Law School’s First Amendment Clinic, infringing on the First Amendment rights of government employees and the press. According to the clinic’s report, Trump’s NDAs even included a jaw-dropping $10 million penalty for breach, though this penalty provision did not appear in the NDAs signed by White House employees.

NDAs must be narrowly tailored and serve a compelling government interest. The government has “no substantial interest” in hiding information embarrassing to the president.

The Next Generation of NDAs

It’s time to throw the NDA baby out and draw a new bath. Confidentiality agreements will always have a place in the legal toolkit, and a well-drafted NDA will always capture the parties’ understanding and expectations about the exchange of information at a defined point in time.

The next generation of NDAs could be a far cry from what we’re used to. Employers should protect trade secrets through NDAs, but a one-size-fits-all NDA could weaken and ultimately vitiate protections. NDAs must be narrowly tailored to cover critical assets without unreasonably hamstringing workers.

Confidentiality in settlement agreements serve a valuable purpose, affording shelter for many victims who want to remain private and allowing the transfer of money without exposing parties to public scrutiny. NDAs eliminate any record of what a particular wrongful act may be worth for purposes of settlement.

The universe of subjects covered by NDAs is shrinking, and greater care is being taken to draft agreements narrowly and thoughtfully. NDAs will always serve a useful and important purpose in our competitive, contentious, proprietary society.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owner.

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Gerald Sauer, a founding partner at Sauer & Wagner LLP in Los Angeles, is a veteran civil trial attorney who specializes in business, employment and intellectual property law.

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