Non-Disclosure Agreements – Employee Solicitation

This week I reviewed three Non-Disclosure Agreements and was surprised when two of the NDAs were silent regarding employee solicitation. Working with clients over the years I have found that in virtually every successful company, it is almost always the employees, along with the technology, that are among the most valuable assets that need protection. Yet in the deals my clients were exploring, these valuable assets were not protected, or at least would not have been protected had my clients not shared the NDA with me before signing. First however, I want to take a step back and discuss why the NDA (also called a Confidentiality Agreement) is used, and identify common NDA scenarios.

Protect Confidential Information

There are many situations where a business will need to share confidential information with employees, another business, potential investors or consultants. Confidential information frequently includes trade secrets, formulas, data, customer pricing and the like. However, when confidential information is shared, it must be also be protected. This means that confidential information is shared in a controlled manner such that the receiving party cannot use the information to its competitive advantage without the consent of the disclosing party. For Example, if a competitor is considering whether it wants to acquire your business or make an investment and in its review of the information you provide your competitor will gain insight into how you produce similar products cheaper. Without any protections in place, what would stop your competitor from using this information for its own competitive advantage? Your sources and methods must be protected. This is accomplished through a carefully drafted Non-Disclosure Agreement.

Common Non-Disclosure Agreement Situations

A Non-Disclosure Agreement is commonly used when:

• Sharing financial information, key vendors and other information to potential equity investors or prospective buyers of your business.
• Allowing employees access to confidential and proprietary information – Click here for a recent example of where a Teva employee violated the terms of her confidentiality agreement.
• Presentations of new products to potential customers.
• Your vendors have access to your sensitive information.
• Your clients may require the other businesses you engage (your subcontractors or professionals retained by you) with be bound by NDAs similar to the one between you and your client.

Employees as a Protected Asset

Turning back to what surprised me, two of the NDAs I reviewed this week failed to treat employees as protected assets. Employees are perhaps one of, if not the, most valuable asset to any organization. “Your company is only as good as your employees”, is not an uncommon sentiment shared by many of the top organizations around the world. Why would you not protect them? How does this come into play you ask? Simply stated, the investor that is considering making a sizable investment into your tech company will want not only to review your work papers, but also discuss them with your key employees. How does this technology work? What are the hidden dangers? What are the challenges? How do you plan to overcome these challenges? What happens if the prospective investor decides that he doesn’t want to invest in your business but makes a job offer to your key employee? This can be disastrous. Thus, an NDA must protect your employees through an appropriate non-solicitation clause.

Other NDA Considerations

There are many other concepts that need to be considered before you sign an NDA as well. For example, the definition of “Confidential Information”, term limits, key contacts, prior knowledge, disclosures to authorities, injunctive relief and document destruction come to mind. These considerations are just as important as protecting your employees through non-solicitation clauses. If you have any questions regarding a NDA that has been placed before you, or want to develop an NDA for future use, or any other aspect of your business, please feel free to contact us at Danziger Shapiro, P.C.
This entry is presented for informational purposes only and is not intended to constitute legal advice.