Nondisclosure Agreements: Trends to Watch
Recent changes in law and trends may affect your use of Nondisclosure Agreements (NDAs). NDAs should be used strategically and reviewed every year to ensure that your form complies with the law and puts your best foot forward to optimize business strategy. Nondisclosure Agreements, also referred to as confidentiality contracts, noncompete agreements, and restrictive covenants, can protect confidential information that, if used inappropriately, would harm your business or bottom line.
One-way NDAs and Mutual NDAs
Employer-employee NDAs are one-way NDAs. With one-way NDAs, you seek to control the employee’s use of shared confidential information and therefore prevent possible harm due to an employee’s use of such information during or after employment. Mutual NDAs are more commonly used between businesses when confidential information is being shared by both parties, and therefore both parties will request the other make assurances on how it will or won’t use such information. The common denominator in both types of NDAs is that one or both parties are restricting the use of confidential information, in order to protect one or both parties from hardship or loss, due to the release of such confidential information. NDAs include legal consequences if the confidential information is used in a way that harms the employer.
Trend Changes in NDA use
In my practice, I have seen notable changes in the past two years in the use of both types of NDAs. These trends may inform some businesses’ strategies as far as use and applicability of the two types of NDAs.
More commonly, what I see in my practice is that one-sided NDAs are falling out of fashion in business-to-business relationships. When the parties to an NDA are both businesses and neither party will receive significantly more benefits stemming from the NDA, mutual NDAs at the outset put both businesses on an equal playing field. The use of mutual NDAs can be a business strategy. I see a better reception from a counterparty to a mutual NDA than if a one-way NDA is sent over.
There is more attorney time spent on negotiating one-way NDAs between businesses, and it likely comes down to trust. If both parties have little to no significant leverage over the other, the better business move is to request a fair and equitable mutual NDA from a counterparty rather than look out only for yourself with a one-way NDA. The mutual NDA thus can pay dividends and cost businesses less in the long run.
Wisconsin Law on NDAs
One-sided NDAs are more frequently used in employer-employee settings. However, one-sided NDAs provided by employers to employees, while critical to protecting your confidential information and avoiding harmful competition, continue to be subject to the vagaries of the public belief about whether they are fair and equitable for employees. Section 103.465 of the Wisconsin Statutes governs NDAs in employment contracts. Under this statute, an NDA is only enforceable if the restrictions imposed are “reasonably necessary” for the protection of the employer. NDAs serve to prevent competition between an employee and their employer during the employment period, and sometimes after the termination of that employment relationship. An NDA may not span all time and space, however. A lawful NDA must be restricted to a specified territory (e.g., a single city or specific mile radius) and limited to a specified time (e.g., six months after termination of the employment relationship).
Restrictions on Use of NDAs in Instances of Sexual Misconduct
Certain NDAs are no longer lawful, regardless of whether an employer deems such provisions are “reasonably necessary.” Congress prohibited nondisclosure and nondisparagement provisions in employment contracts that relate to sexual harassment or sexual assault, with the creation of the Speak Out Act in December 2022. The Speak Out Act aims to prevent using nondisclosure and nondisparagement provisions in employment contracts to silence those who are survivors of illegal sexual misconduct. Additionally, the Speak Out Act ensures that any nondisclosure or nondisparagement clause agreed to prior to the rise of a sexual misconduct dispute is judicially unenforceable if the conduct that allegedly occurred is illegal under State, Federal, or Tribunal law.
Bottom Line
The trends as far as legal and equitable use of NDAs are changing. Discussion with an attorney who practices in the state where your business is located is warranted to make sure the scope of the NDA is appropriate under the applicable state law.
This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.
