Beyond Trade Secrecy: Confidentiality Agreements That Act Like Noncompetes

Abstract

There is a substantial literature on noncompete agreements and their adverse im- pact on employee mobility and innovation. But a far more common restraint in employment con- tracts has been underexplored: confidentiality agreements, sometimes called nondisclosure agree- ments (NDAs). A confidentiality agreement is not a blanket prohibition on competition. Rather, it is simply a promise not to use or disclose specific information. Confidentiality agreements en- compass trade secrets, as defined by state and federal laws, but confidentiality agreements almost always go beyond trade secrecy, encompassing any information the employer imparted to the em- ployee in confidence.

Despite widespread use, confidentiality agreements have received little attention. Many com- mentators view them as innocuous compared to noncompetes. However, confidentiality agree- ments that go beyond trade secrecy are not harmless. Leveraging an original dataset of confiden- tiality agreements in employment relationships disclosed in federal trade secret litigation, this Article argues that many of these agreements have the effect of noncompetes. They protect far more information than trade secret law does—including publicly available or generally known in- formation, and information that trade secret law would classify as unprotectable “general knowledge, skill, and experience.” They prohibit use as well as disclosure of the covered infor- mation. Most provide for injunctions in the event of breach, and nearly half provide for payment of attorney’s fees and costs. And unlike most noncompetes, they almost never have geographic or temporal limitations.

The phenomenon of confidentiality agreements that “act like noncompetes” has not gone un- noticed. For example, the Federal Trade Commission (FTC) recently issued an unprecedented No- tice of Proposed Rulemaking announcing its intention to effectively ban workplace noncompetes nationwide. The FTC also condemned what it calls “de facto non-compete clauses,” including overly broad confidentiality agreements. The FTC’s rulemaking has yet to move forward and is likely to be mired in legal challenges. Fortunately, this Article reveals that courts across the nation have already begun to invalidate confidentiality agreements that operate as de facto noncompetes. Regardless of whether the FTC ultimately succeeds in regulating these agreements, courts have the power and precedent to do so on their own.

Drawing on case law and prior proposals, this Article gives guidance going forward. It does not advocate for a blanket ban on confidentiality agreements. Rather, it contends that courts and other decision makers should treat confidentiality agreements that go beyond trade secrecy under a default rule of unenforceability, similar to how most jurisdictions treat noncompetes. The burden should be on the employer to prove that such agreements are reasonably related to protecting le- gitimately secret information and that they do not function like noncompetes.

Keywords: contract, employment, noncompete, confidentiality, NDA, innovation, trade secret, IP, empirical

JEL Classification: K12, K39, O15, O34, O39