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Noncompete Agreements and Nondisclosure Agreements: What you need to know

There are many important things an employer should know before entering into one of the above-stated agreements with an employee. I am going to briefly touch on a few of things that I have seen come up concerning these contracts and a few things that may cause some confusion. Please know that there are many more items that should be thought about before entering into any legally binding agreement and likely several more issues that may arise, this is simply a starting off point for those doing business in the state of Washington.

Noncompete Agreements

A noncompete agreement (“agreement") is an agreement that employers often have employees sign to keep the employee from taking business from them once the employee’s position is terminated. These agreements vary by state and you should look up the laws in the state in which you do business to determine what is right for you. Some states do not uphold noncompete agreements at all, while others uphold them as long as the agreements don’t overstretch or put too many limitations on the ex-employees. Washington is in the latter category, therefore in order for these agreements to be upheld they need to be carefully drafted.

Washington courts enforce “reasonable" noncompete agreements. They use the following three prong test to help determine what is reasonable:

  1. Whether the restraint of the employee is necessary for the protection of a legitimate business interest or the goodwill of the employer;

  2. Whether the restraint imposed upon the employee is any greater than reasonably necessary to secure the employer’s business interest or goodwill; and

  3. Whether the degree of injury to the public is such a loss of service and skill of the employee as to warrant a refusal to enforce the noncompete. See. Racine v. Bender, 141 Wash. 606, 252 P. 115 (Wash. 1927).

The courts look at these agreements closely, because there are equally competing concerns of freedom of employment and access, by the public, to professional services. See. Knight, Vale and Gregory v. McDaniel, 37 Wn.App. 366, 680 P.2d 448 (Wash.App. Div. 2 1984). Therefore, the agreements should not be any greater in scope than necessary. Some of the things that courts look at is how long the agreement is to be in effect for, how big a radius the agreement covers, and how the clients of the professional being limited might fare. An agreement for longer than two years will likely not be upheld and neither will an agreement that hinders someone from doing business within a 500 mile radius. If the agreement is for a specialized type of work such as an accountant the court will look at how many clients that accountant had while employed and if those clients would be harmed in anyway by not letting the accountant continue to do work for them.

Another thing that courts look at to determine if a noncompete agreement should be upheld is if there was adequate consideration at the time of signing the agreement. Consideration is what each side gives up and gets in return for executing the contract and is necessary for any contract to be valid. In the instance of signing a noncompete agreement, consideration is something received by the employee in exchange for signing the agreement. An important item to note is that continued employment is not enough consideration to form a binding contract.

The best time to have an employee sign a noncompete agreement is before they begin work; allowing the employee to begin work does constitute consideration. If nothing else, at a minimum, the employer should tell the employee before hire that they will have to sign a noncompete agreement within their first few days of employment. If this is not possible then further consideration must be given, this consideration may consist of providing training the employee would not have otherwise received, increasing the employees wages, giving a promotion, providing a bonus, or perhaps giving access to protected information. Schneller v. Hayes, 176 Wash. 115, 118, 28 P.2d 273 (1934).

Due to the nature of these agreements and the courts adherence to the three prong test they may be fairly difficult to draft properly. Depending on the type of work involved this may be something you want outside help with. If you do opt to draft one yourself ensure that your agreement is not too broad and that you have the proper consideration to make it a valid contract.

Nondisclosure Agreements

A nondisclosure agreement (“NDA") or confidentiality agreement may be helpful to an employer to protect their work, business plans, financial data, and many other business items they would like kept confidential. An NDA restricts the confidential information from general use and ensures the parties do not disclose certain information to outside parties. Nondisclosure agreements may also be helpful in safeguarding information when meeting with investors whom you think you might be interested in investing in your company, however some investors can be a bit leery with NDA’s, because when deciding whether to invest they may want to share certain information with others to help determine if it is a good investment. This does not mean you should not use one with an investor, it just may need to be drafted a bit different then with employees.

One thing to remember when using a nondisclosure agreement is that you need a good definitive definition of what your confidential information is and how the information being received may be used. If your contract includes your software and/or technology in the definition, but does not include the pricing of such technology then the pricing is not protected. Also, if you provide someone with confidential information without restrictions on what they may use that information for (e.g., a specific business purpose), you may be setting yourself up for a problem.

An NDA protects your information unless that information falls within one of six different categories:

  1. The information is publicly known or becomes publicly known through no fault of the receiving party;

  2. If the information was already known by or in possession of the receiving party;

  3. Any information that is lawfully received from a third party, by the receiving party;

  4. Any information the disclosing party shares with others in a non-confidential setting no longer has to be kept by confidential by the receiving party under the NDA;

  5. The information was independently developed by the receiving party without use of the confidential information; or

  6. The information was ordered to be publicly released by the requirement of a government agency, provided that receiving party shall first have given notice to disclosing party of the disclosure of such information and made a reasonable effort to obtain a protective order.

If the information does get released wrongfully or otherwise, then the confidentiality of that information is gone forever as it is now publicly known. Therefore, you need to ensure that the receiving party has NDA’s with all of their own employees and any outside contractor’s they may use so that all parties who come in contact with the confidential information are bound by the same rules. Generally, the standard is that the receiving party will protect the disclosing party’s information in the same manner that they would protect their own information.

If the party receiving the confidential information breaches the contract and fails to keep the information confidential then the disclosing party may sue for injunctive relief, monetary damages, or both. An important clause to include in the nondisclosure agreement is the ability to sue for injunctive relief. If injunctive relief is granted it will put an immediate stop to any further spreading of the confidential information. This relief is generally granted right away and the case will then continue to determine whether any monetary damages are also necessary.

I have seen many types of NDA’s ranging from one sentence to ten pages long. While not every company is going to need a ten page long NDA, generally one sentence is not going to be sufficient. Avvo's non-disclosure agreement form provides an example of the typical length of this kind of document. If your information is particularly critical or you're not sure about specific terms, it is probably wise to meet with an attorney and get a full understanding of this type of agreement.

Hopefully, this has provided some insight into a couple of common agreements that are used in the business world. Please contact me with any further questions.

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