This is Part III of a three-part blog series on how "restrictive covenants" in contracts affect an employee's rights, or an independent contractor's rights, during their employment and post-termination. The three most common restrictive covenants are non-compete clauses, non-solicitation clauses, and confidentiality clauses. They are often found in employment contracts, consulting agreements and various other business contracts. In Part I, I addressed the enforceability of "non-compete" clauses. In Part II, I addressed the enforceability of "non-solicitation" clauses.
IN THIS ARTICLE, I will shed light on the enforceability of "confidentiality" clauses (a.k.a. "non-disclosure" agreements). A confidentiality clause typically prohibits a person from disclosing or using the confidential information of the employer or the company that hired the independent contractor or consultant.
On the spectrum of scrutiny accorded these three restrictive covenants, courts give the least amount of scrutiny to confidentiality clauses; i.e. courts are more likely to enforce confidentiality clauses than the other two types. Non-compete clauses receive the greatest scrutiny and are subject to the strictest tests since courts are reluctant to stifle competition (see my previous post for an explanation).
Unlike the other two types of restrictive covenants, in practice the courts do not make much of a distinction between an 'employer-employee' context, which for purposes of restrictive covenants includes a 'contract for services' between an independent contractor and a client company ("employment context"), and a "commercial context", such as a sale of a business, or a large transaction where the two parties have similar bargaining power, expertise and access to legal and financial advice.
In some respects, there is a broader duty in the employment context. As opposed to a commercial context where a duty of confidentiality arises only by virtue of a contract that includes such a clause, in an employment context there is a duty of confidentiality pursuant to any contractual obligation, and there is a common law duty, such that even when there is no contractual duty, the courts expect employees, both during and after employment, to protect the legitimate proprietary interests of the employer. Legitimate proprietary interests include the company's trade secrets and other valuable, non-public information that the company rigorously protects from disclosure. However, a duty to refrain from using or divulging this type of information does not prevent an employee from using the skills and general knowledge acquired during their employment to compete with their prior employer, or in subsequent employment; as long as it is not proprietary information of the employer.
"Confidential information" typically is information that is:
This is not an exhaustive list. Courts consider all relevant circumstances as a whole.
As with the other restrictive covenants, to be enforceable a non-disclosure clause in the employment context still must be "reasonable" as between the parties and clear as to what disclosure is prohibited. However, the courts are more flexible and open to argument in favor of enforceability when determining what is "reasonable". Courts will look behind the wording to ensure that a 'confidentiality clause' is not also a non-solicitation clause or a non-competition clause in disguise.
Where there is a breach of a confidentiality clause that meets the requirements for it to be enforceable, damages may be awarded, or in some cases an injunction preventing the offending party from engaging in a certain activity may be issued by the court.
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