Compliance Blog

It’s Time To Review Non-Disclosure Agreements

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Especially if you’re hiring a competitor’s employee

Non-Disclosure Agreement NDA

These days, it is rare for employees to stay with a single employer throughout the course of their careers.  In some highly competitive sectors –  such as technology and healthcare –  employers are  aggressively recruiting their competitors’ top performers.  In this climate, the Non-Disclosure Agreement (NDA) is more important than ever.

Simply put, an NDA requires employees to keep their employer’s trade secrets and sensitive information confidential during employment and for a specific period of time after they no longer work for the organization.   

Trade secrets and confidential information can be any information that is: (a) not known to the public generally; and (b) subject to reasonable efforts to maintain secrecy.   Examples include business methods and strategies, financial data, sales and marketing plans, expansion plans, vendor and customer lists and research and development.    

In the fast-changing world of technology, protecting trade secrets is a major concern for employers. This issue made headlines in January 2017 after a lawsuit was filed on behalf of Anthony Pompliano, alleging he was fired from Snapchat, the messaging app and social network, in 2015 after only three weeks on the job because he would not divulge confidential information about Facebook, his former employer.

Pompliano claims Snapchat knew of his NDA with Facebook during the hiring and onboarding process. Nonetheless, he alleges that Snapchat hired him mainly to obtain information on Facebook’s growth initiatives, and then terminated him when he would not violate his NDA and “refused to participate in a scheme to deceive the public and artificially inflate Snapchat’s valuation in anticipation of its initial public offering (IPO).”  Snap, Inc., owner of Snapchat, has rejected the allegations and on February 2 filed to register for its IPO.

While the  lawsuit is in its infancy – and legal enforcement of NDAs and non-compete agreements varies from state to state –  this case raises some important issues about recruiting and hiring competitors’ employees.

First, organizations should never hire candidates for the express purpose of obtaining a competitor’s confidential information.  Even if the employee is willing to breach the NDA, the former employer has legal rights that can be launched directly against the new employer.

For example, a former employer with a well-crafted NDA may be able to file for a court order  prohibiting its former employee from divulging trade secrets. Almost certainly, the new employer will be named as a defendant under a civil conspiracy action or unfair business or trade practices. Even if the lawsuit against the new employer is not successful, it will undoubtedly be expensive to defend.  Moreover, during the course of the suit the new employer may need to reveal plans and strategies it would rather keep secret.  The ramifications of these sorts of battles can be devastating.  

An additional concern is the severe brand damage that can occur when the employee accuses his new employer of crossing NDA lines.  Whether Snapchat actually asked Pompliano to disclose Facebook’s trade secrets or not, there is now a public filing accusing the organization of doing just that.  

So how can employers avoid such pitfalls? Here are some helpful tips and practices:

  • Do not recruit competitors’ employees for the purpose of obtaining trade secrets and other other confidential information. Besides being unethical, it may violate your state’s laws and regulations.
  • Ensure that your Code of Conduct policy and employee handbook discuss the importance of keeping  proprietary information confidential – this includes trade secrets of former employers.
  • Regularly train employees and managers on your confidentiality policy and procedures and the consequences for violations.
  • Require that employees who are exposed to confidential business information sign an NDA and understand how it will be enforced.
  • Before making a job offer to candidates find out if they signed an NDA or non-compete agreement with their current employer. If so, have your organization’s legal counsel review it.

Traliant Insight

The start of a new year is a good time to review and update your employer-employee agreements to reflect new requirements, laws and regulations. Ultimately, the more seriously organizations take their own NDAs, the less likely they will be to violate someone else’s or be accused of doing so.

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