Why You Should Conclude an NDA with Your Employees and How to Avoid the Most Common Mistakes

31
Mar 2021

Contact: Anja Berić

Because your culture is how your company makes decisions when you’re not there. It’s the set of assumptions your employees use to resolve the problems they face every day. It’s how they behave when no one is looking. If you don’t methodically set your culture, then two-thirds of it will end up being accidental and the rest will be a mistake.

Ben HorowitzWhat You Do is Who You Are: How to Create your Business Culture

Within a company, the exchange of many information occurs daily – from data on current products and services, new ideas, planned projects, to information on finance, and client data. When it comes to keeping the employer’s trade secrets, well-developed employee culture is key to a successful business. Still, it is important to realize in time that in business, nothing is a given, not even loyalty, and trust cannot be given to anyone on a silver platter, not even your employees. Also, in order for trade secrets to be protected, the employer has to treat them in the right manner. This includes a number of procedures and rules within the company, among which the first (and key) step is to conclude an NDA with employees.

Have you ever wondered why the Coca-Cola recipe is considered to be the most, well-kept secret in the world? From the creation of this non-alcoholic beverage until today, its ingredients remain a mystery to the public, which is a clear indication that the most valuable resource of the most successful world corporations is information and knowledge. Of course, what we are talking about here is commercially profitable data which can be the main resource and key to the success of the individual who uses it in the right way.

Still, while chasing business goals, it might slip one’s mind that, most often, that kind of information loses its value once it becomes available to the wider public. Coca-Cola became aware of that fact when in 2006, three employees tried to sell Coca-Cola’s confidential corporate information, directly to its biggest competitor – PepsiCo. Luckily for Coca-Cola, the most valuable information did not get leaked to the public after all. The CEO at the time, after this (almost) catastrophic incident, concluded that the biggest responsibility of a company is to adequately protect its trade secrets, which represent the essence of a successful business.

If even after Coca-Cola’s example, you are reluctant whether concluding an NDA with employees is a must, in the next part of this blog, you will find compelling arguments after which you will surely reconsider.

Benefits of NDA

1. To Prevent a Breach of Trade Secret

Each information that has commercial value and whose destroying or disclosing could damage a company, represents its trade secret. What gives particular information its value is the fact that it is confidential is, thus it is completely understandable that its discloser shall wish to fully protect it, by taking adequate measures, such as drafting a Non-Disclosure Agreement (NDA).

When employees are the ones you protect your trade secret from, the question of adequate measures differs. Namely, the possibility of disclosing trade secrets to a competitor by an employee with whom the employment relationship has ceased represents a huge risk that no employer wants to face. However, nowadays, almost every company finds itself in a tricky situation several times, if we take into consideration the modern market, which from day to day becomes more dynamic due to rapid development of industry and technology, which is a very suitable “field” for transferring ‘forbidden’ information.

The obsolete concept of a full length of service at one employer is rare nowadays, and it represents a relic of the past. Changing employers is more and more common, which is a consequence of great employee mobility, numerous possibilities of employment in various fields, and a noticeable tendency of ambitious individuals who start their own business, which keeps growing every year. Research covering this topic has shown that newer generations (students who have graduated in the past 15 years) in the first 5 years of their professional career change at least 4 different employers, which is not surprising, especially when it comes to the IT industry.

Based on this fact, it is extremely important that as an employer, you are aware of the necessity to take serious measures, in order to secure your valuable trade secrets in time. One of the most effective methods of protection, besides others, is a confidentiality agreement. If you have already drafted an all-encompassing and adequate NDA, you can be sure that you are on the right path – your employees shall, without doubt, think twice before disclosing information that came into their possession while working for your company.

Even if your employee does not think about switching their job, the possibility of ‘leaking’ confidential information is not excluded. It can just as easily happen that, whilst talking to a friend, an employee, unintentionally tells a story about an interesting event from the office, or an anecdote they heard from their colleague. It is clear that the said scenario could end with the employee disclosing your company’s trade secrets to third parties. However, by concluding a trade secret agreement, the awareness about the severity of keeping confidential information raises, which prevents your employees from ‘accidentally’ causing damage to your business.

2. What Constitutes Confidential Information?

One of the crucial elements of confidentiality agreements is to define confidential information. By precisely stating to what information the obligation of keeping confidentiality refers to, you are clearly stating which aspects of the business have to remain within the company, and which, if disclosed to third parties, could lead to sanctioning. However, sometimes, by focusing on the commercial goals and success of their business, employers fail to see the full picture, from the aspect of the employee, and think: is it truly clear to everyone what is considered confidential?

In case your answer to the previous question without thinking is YES, then we dare conclude that you have informed yourself in time, and concluded appropriate confidentiality agreements with your employees, which precisely define what the obligation of confidentiality refers to.

In case you were flabbergasted by this question, then we advise you to take a step back and think through what information shall be deemed confidential in your confidentiality agreement, once you draft this agreement.

When formulating a definition of trade secret, you should pay attention not to overdo or underdo it.

  • Firstly, before drafting a trade secret agreement, you have to prepare a full, detailed list of every piece of information which, because of their importance can (and must) be deemed confidential, and also make sure that none are left out, and without being subject to the agreement.

For example, if a software source code which is the most profitable product of your company, is not included in the definition of confidential information in the NDA which you are signing with your employees, in case an employee discloses your code to a third party, you risk losing any possibility of a court’s protection of your rights on this code.

Why is it Like That?

Namely, while evaluating whether there is a breach of confidentiality, it is obvious that the court shall start from the content of the NDA that you have signed with your employee, and if the court realizes that the disclosed code was not listed in the agreement, it wouldn’t have a reason nor grounds to protect you, since you haven’t protected yourself in time.

  • On the other side, in practice, there is often a principle that ‘everything is confidential’, which, although it might seem like a great mechanism of protection, probably won’t lead to a positive result for the employer in case of a dispute.

In case law of developed legal systems where disputes for breach of confidentiality happen often, there are numerous cases where the court had declined the disclosing party’s request because of an imprecise definition of confidential information. In the well-known case Assured Partners, Inc. v. Schmitt, from 2015, the Appellate Court of the federal state of Illinois declined the employer’s request, who claimed that his former employee had breached provisions on data confidentiality contained in the employment agreement. Namely, the provision which defined confidential information as “the information, observations, and data (including trade secrets) concerning the business affairs of the Company, Employer and their respective Subsidiaries” was deemed too broad by the court, outside reasonable scope, so the court concluded that it is unenforceable, i.e. null and void.

Thus, we advise you to be as detailed and precise as possible when you are defining your company’s confidential information; a longer definition that might seem too complex could save you from troubles in the future when protecting your interests.

3. Intellectual Property Protection

On your list of trade secrets, without exception, you should list intellectual property, whose value nowadays, at the world level is greater than the value of all material goods, according to statistical data. Thus, the intangible treasure of your company has to be protected in a manner that precisely and unequivocally defines that even if it is disclosed to employees, it remains in your possession.
It is important to cover intellectual property protection from two aspects:

1) previously developed patents, works subject to copyright, trademarks and other rights of intellectual property remain in your possession, and are not transferred to employees, no matter whether they are disclosed to employees or given for use during their employment;

2) all intellectual property that the employee creates during their employment is transferred onto you, and from its creation, represents your property, and not the employee’s property. It is crucial to understand the legal treatment of intellectual property made during employment, in order to make your safe interests in time – if you haven’t thought about this topic before, you can read our blog where we answered the most common questions of our clients when it comes to copyright made during employment.

4. Psychological Effect

Although it might seem trivial, the fact that the misuse of the information received could cause serious consequences, greatly affects the way employees handle confidential data which they acquire at the workplace.

If you have successfully ticked the item under number 2, congratulations – you have made your employees aware of which information is valuable for your business. Still, solely the fact that a trade secret exists, does not mean that it will be kept adequately if the employees do not realize what its illegal treatment could cause. In this case, as well, the drafted, all-encompassing NDA comes to the rescue; by predicting what kind of a (negative) result the disclosing of valuable information can lead to, the employee’s awareness is raised regarding the possible sanctions that await in case they do not take their responsibility seriously. The most common example that appears is a contractual penalty, which can cost the careless employee a lot, in case it comes to its realization.

A Separate Agreement VS Provision in the Employment Agreement

ugovor o poverljivosti podataka, ugovor o poverljivosti informacija

Trade secret protection is sometimes regulated by a provision in the employment agreement, instead of drafting a separate confidentiality agreement. Although this solution can seem very practical, since it requires less time, effort, and expenses, the practical experience of our clients has led us to a conclusion that signing a separate trade secret agreement is still more efficient and a long-term solution.

There are several reasons why this is so:

  • a single provision cannot encompass everything – the significance of an all-encompassing confidentiality agreement is huge, and only one mistake in its drafting can lead to serious consequences. In our blog Non-Disclosure Agreements in the IT sector, we have stated what makes an NDA incomplete, and it is clear that it is not possible to draft a single clause that would encompass all important elements. Thus, without a separate, detailed confidentiality agreement, you cannot be sure that all matters which are of importance will be covered.
  • Null and void employment agreement – in case your employment agreement is deemed null and void, there is a great chance that the provision on confidentiality will also be deemed null and void. This means that it won’t have any legal effect, and your confidential information shall be left with no protection. There are mechanisms that could exclude the confidentiality clause from being deemed null and void, however, a separate confidentiality agreement with employees could save you even from a potential worry whether your secrets will be safe, regardless of the employment agreement.
  • Success in case of dispute – the fact that the provision on confidentiality to a certain extent limits your employees, that does not benefit you in case you find yourself in a dispute with one of them. If in your employment agreement, you include a strict NDA provision that the court sees as unfavorable for the employee, for example, as an indirect threat to their constitutional right to work, the chances are you will get the short end of the stick. Separating the question of trade secret protection from the employment relationship regulation raises your security to a higher level, as well as the possibility to succeed in case of a dispute.
  • And once again – the psychological effect – although we have already mentioned this, the importance of a preventive effect of an adequately established confidentiality obligation cannot be stressed enough. The act of signing an additional agreement can surely only have a positive effect on your security, in comparison to a single provision within the employment agreement which the employees, after reading the ‘most important’ articles regarding working hours and salary, will probably skip.

Although trade secret protection by its nature, goes hand in hand with the non-compete clause which is usually an essential part of the employment agreement, our experience tells us that these two provisions still require a different degree of ‘making it official’. Despite the previously mentioned limits that the disclosing of a trade secret imposes upon employees, the non-compete prescribed by the Labor Law can result in a far greater sacrifice of employees, since it directly limits the freedom of employees in regards to choosing an employer after the termination of the employment relationship. In contrast, the responsibility of confidentiality remains the employee’s red alert while communicating to the new employer.

Besides, since the non-compete clause is listed in the Labor Law as optional, that is surely where it belongs. On the other hand, when it comes to information which is of a ‘trade secret’ nature, their adequate treatment surpasses the scope of a single provision, so a single, summarized clause on confidentiality protection, based on our experience and opinion, shouldn’t be within an employment agreement.

Can an Employee Refuse to Sign an NDA?

employee refuses to sign confidentiality agreement,

Despite all the advantages of a separate NDA over a single provision within the employment agreement, a problem that might occur in practice is: what if an employee refuses to sign an NDA with their employer. Although most employees will sign the offered NDA without thinking too much, it is not excluded that you will stumble upon individuals who are not in love with the idea of obligatory confidentiality. If this happens, several questions will be posed:

  • Is disclosing every business secret to all employees truly necessary? One of the common measures of confidentiality protection is to limit the circle of the individual with whom this information is shared. The fewer people know about it, the lesser the risk of confidential information leaking outside the company is. So, you should think about the possibility of giving access to confidential information only to those employees who directly need them in order to perform work tasks, by which the chances of disclosing valuable information are lowered.
  • How willing are you to modify your NDA? If you are aware that certain parts of your NDA can (un)justifiably cause your employees aversion, you should think through whether it is possible to adjust the agreement so that it is clearer to employees, so that they can see its true necessity and accept it. Still, we recommend you be careful with this so that you don’t reduce the level of your trade secret protection and jeopardize your business.
  • Is the employee’s refusal truly justified? On the other hand, if your employee, without any obvious reasons, refuses to sign a confidentiality agreement, this should be a red flag, and raise suspicion regarding their credibility and loyalty. In this case, it is worth asking yourself whether you truly want someone who is not willing to be bound by confidentiality in your team.

Don’t Forget – Be Careful Who You Trust

The risk of leaking company’s trade secrets increases with the number of individuals to whom the secret was disclosed, and the ones in the front row are employees. Thus, the protection of valuable commercial information starts by establishing internal rules within the company. If you adequately secure your ‘treasure’ within the company, the possibility of your whole business being threatened is much lower, and the possibility of a business triumph proportionally grows.

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