There are several reasons why a business might decide to employ a non-disclosure or a non-compete agreement (collectively known as "restrictive covenants"):
- The business is engaged in work that grants its employees access to sensitive information which, if publicized, would get said business sued by its clients. Such work can range from managing e-mail exchange servers to working at a PR agency where the job is to know and hide the clients' skeletons.
- The business relies on certain proprietary information, such as client lists, to deliver its product and publication of such information would give its competitors an unfair edge.
In either case, it is in the business' best interests to make sure that its sensitive information does not make its way into the wrong hands.
A non-disclosure or non-compete agreement is basically a contract between the employer and its employee where, for some valuable consideration (like a job and salary), the employee promises not to divulge any sensitive information learned during the course of employment or the employee promises not to go work for competitors for some period of time after the employment terminates.
As with all contracts, restrictive covenants require an exchange of consideration to be enforceable. The law defines consideration as a "bargained-for exchange between the parties," in other words, something each side wants and promises to give to the other side. This is why restrictive covenants should be signed at the beginning of the employment relationship: There is no consideration when the employer promises the employee something he is already giving him (a job and salary). So NDAs signed mid-employment should be bought for something extra, like a bonus or a promotion, to be enforceable.
Enforcement of Non-Disclosure / Non-Compete Agreements
As with all breach of contract situations, the first step to enforcing a breached restrictive covenant is to send the breaching party a "Demand Letter." The letter should contain the following:
- Reminder of an existing non-disclosure / non-compete agreement along with a summary of its terms.
- Explanation of how the employee / ex-employee breached such terms.
- Demand that the employee comply with the terms of the agreement within a certain number of days (10 is the standard number).
- Warning that failure to comply will be met with pursuit of all available legal remedies.
While the Demand Letters are usually ignored by the breaching party, they are necessary because most lawsuits based on breach of contract require a showing that the breaching party was warned of the breach and given an opportunity to comply. Which takes us to...
It is too late to stop a person from disclosing information once he has already disclosed it, so non-disclosure agreements are generally enforced by means of monetary relief. The Court will force the breaching party to pay the plaintiff a sum of money which plaintiff has proved to represent the total damages it suffered due to the breaching party's conduct. Thus, the practical function of a non-disclosure agreement is to give employees notice that, should they breach the agreement, they will get sued and they will lose money -- it is a deterrence mechanism.
Non-compete agreements are trickier because plaintiff, here, wants to force the breaching party to stop doing something it is already doing (competing). In this case, legal enforcement takes the form of an injunction ruling by the Court which commands the breaching party to stop what it is doing or face contempt. Civil contempt generally takes the form of steep fines and fees.
NY Does Not Like Non-Compete Agreements
New York courts take a very strict view of non-compete agreements because New York has a strong policy against preventing people from plying their trade and earning a living. New York courts generally require the following before they will enforce a non-compete agreement:
- The restraint must be reasonable such that it "is no greater than is required for the protection of the legitimate interest" of the party seeking enforcement.
- Legitimate interests are limited to "the protection against misappropriation of the employer's trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary".
- A restrictive covenant against competition must also be reasonably limited temporally and geographically.
What this basically means is that the geographical scope and time of the non-compete should be reasonably limited, and that the purpose of the non-compete is to protect the employers "legitimate interests." What constitutes "legitimate interests" often becomes the subject of heavy litigation.