NOTABLE UPDATE IN THE LAW: Since this blog was written, the US Federal Trade Commission in 2024 determined non-compete agreements as an unfair trade practice and in violation of federal law. Read the updated blog HERE.
Non-disclosure agreements (NDAs) or clauses, along with non-compete clauses, can be challenging to navigate, whether you are an employer or employee. As a business owner and employer, you may have an interest in protecting your confidential and proprietary information, as well as limiting future competition from employees who have since left your company. As an employee, you may be worried about how NDAs and non-competes limit your ability to find meaningful employment or work. As we outline below, there are important things to consider with NDA/non-compete agreements.
What They Are and When to Use Them
NDAs are contracts where the parties agree not to disclose any information that is covered by the agreement, while also creating a confidential relationship between the parties. The information that is protected under these agreements usually includes confidential and proprietary information or trade secrets that are beneficial to the business and that the employer will not want released.
Non-competes are contracts in which the person signing agrees not to work in competition with your company. An employer can provide a restriction on the type of employment an employee can work in for a limited scope when the employee’s period of employment ends. Having a non-compete can prevent an employee from taking skills and information learned in one business to another business that directly competes with your business. Non-competes may pose issues for employees, though, who could find themselves overly restricted in finding more work in the future.
Having both types of contracts go hand-in-hand in a single agreement can be a good approach, since employees who are required to sign these are likely going to learn proprietary information and develop skills that will make them competitive in the eyes of other employers. Typically, these types of agreements will be reserved for higher-level employees in your company who have developed specialized skills while working for you. For example, if you are in the business of developing mobile applications that utilize a specific and proprietary algorithm, you will likely want your software engineers to sign these agreements in order to protect your business if they ever leave your company.
Enforcing NDAs and Non-Competes
Both NDAs and non-competes are subject to the same rules as contracts, since they are both binding agreements. Therefore, employers should be mindful of enforceability when utilizing these agreements, while employees should read these agreements carefully to make sure they aren’t overly restrictive.
NDAs are generally enforceable as long as they are reasonable. Reasonableness varies between jurisdictions, but courts typically weigh different factors and interests to determine whether or not an NDA is reasonable. NDAs must not be too vague, and must be reasonably limited to protecting a business’s interests; therefore, it should make reference to the protection of a business’s confidential or proprietary information and list specific types of information. If an NDA component is overly broad or burdensome where almost any information is considered confidential, it is likely not to be found reasonable. NDAs also require consideration, which is anything that is promised by one party in exchange for the promise of another. For example, if the NDA is executed at the time of an employee’s hire, the offer of employment itself can serve as consideration.
Non-competes are generally enforceable in Pennsylvania when they meet certain criteria. They must be “reasonable,” but determining reasonableness is sometimes challenging. Courts have required that non-competes must be reasonably limited in time and territorial scope, while also being necessary to protecting a business’s interests. This may vary based on a variety of factors and the type of business you may engage in. A good rule of thumb is that a non-compete may not be enforceable if it is too restrictive and prevents an employee from gaining meaningful employment.
An enforceable non-compete also requires consideration. In Pennsylvania, a non-compete may be enforceable if it is part of an employment agreement in which signing the agreement is a condition of beginning employment. For existing employees, additional consideration is required, as continued employment is not sufficient consideration to make a non-compete enforceable. For example, an employer might offer an employee a $2000 bonus, conditioned upon the employee signing a new agreement with a non-compete clause, or have an employee sign a non-compete when they are given a raise or position change.
Read Carefully When Signing
Because NDAs and non-competes are both considered types of binding contracts, it is important to read the terms of each. If you are an employee, you want to make sure that the language seems enforceable and reasonable as detailed in this Agreement. Employees should also think carefully about how the non-compete may affect their employment if they ever want to leave the company. If you aren’t sure you fully understand an agreement’s language, consider hiring an attorney to review it in order to walk through it, and potentially negotiate its scope. If you’re an employer, it can be important to work with an attorney to make sure your NDA and/or non-compete properly protects your business and meets the requirements to be enforceable.
Conclusion
Whether you are a business owner who is looking to protect its interests or an employee who is looking for new employment, these considerations surrounding NDA/non-compete agreements are important to making sure that the agreement’s parameters are legal, enforceable, and reasonable. Remember, if you still are confused, reach out to an attorney for help!
DISCLAIMER: This blog is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.
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