What Are the Laws Surrounding Non-Compete/Non-Disclosure Agreements?

Posted by Neha De

Are you under the impression that your business isn't in possession of any trade secrets? For most companies, no matter how small they are, that assumption may be incorrect.

Trade secrets, which are an important form of intellectual property, are considered business assets. Manufacturing processes, assets, customer lists or sales plans are all trade secrets, and to run a business, you might have to disclose a trade secret to your employees, suppliers, vendors or other entities at some point.

One of the simplest ways of protecting your trade secrets is by requiring people to sign a non-disclosure agreement (NDA) and/or a non-compete agreement. However, it's important to understand exactly which laws dictate how you can create, manage and enforce these documents.

Legalities of Non-Disclosure Agreements

An NDA is a contract that requires at least one party to protect confidential information and prohibits that party from disclosing it to others. The party disclosing confidential information is called the disclosing party, while the party receiving the information is called the receiving party.

An NDA should include the definition of confidential information, obligations of the receiving party, the time period for which the NDA will be valid and any exclusions.

At a time when businesses operate on an international scale, and if all parties to the NDA are not both in the same country, the NDA should state which law governs the agreement. It should also state which courts can enforce the NDA if there is a dispute.

Legalities of Non-Compete Agreements

A non-compete agreement is a contract between an employer and an employee, wherein the employee agrees not to compete with the employer after the employment relationship ends or during the employment period. The agreement must spell out which types of competition are prohibited.

In the US, the legal status of non-compete agreements is a matter of state jurisdiction. States differ widely in their enforcement and recognition of non-compete agreements. For example, non-compete agreements cannot currently be enforced in North Dakota and Oklahoma. California also does not recognize non-compete agreements. Hawaii banned non-competes for high-tech companies in 2015.

Most state courts have framed non-compete enforceability laws in terms of reasonableness, based on these elements:

  • The restrictions do not extend beyond what is necessary to protect the employer’s interests
  • The restrictions do not place undue hardship on the employee
  • The agreement does not counter public interest

Many state legislatures have updated legislation related to non-compete agreements. Some of these are:

  • Washington. The state’s new House Bill 1450 eliminates non-compete agreements for employees earning less than $100,000 a year and independent contractors earning less than $250,000 a year.
  • Oregon. HB 2992 requires an employer to provide a terminated employee with a signed, written copy of the non-competition agreement within 30 days of his or her termination date. Failure to do so will render the agreement voidable and unenforceable.
  • New Hampshire. S.B. 197 prohibits an employer from requiring an employee who makes 200 percent of the federal minimum wage (currently $14.50) to sign a non-compete agreement restricting the employee from working for another employer for a specified period of time or within a specific geographic area.
  • Maine. LD 733, an act to promote keeping workers in Maine, places limits on non-compete agreements for low-wage employees earning at or below 400 percent of the federal poverty line and bans restrictive employment agreements. For employees earning more than 400 percent of the federal poverty level, non-competes are disfavored and only enforceable, if necessary, to protect the legitimate business interest of the employer.
  • Massachusetts. S.1117, an act relative to clarifying legislative intent regarding the non-competition law, prohibits the enforcement of non-competes against employees terminated without cause.
  • Rhode Island. The Rhode Island Noncompetition Agreement Act prohibits non-competes without regard to geographic location and duration for these employees: non-exempt employees under the Fair Labor Standards Act, undergraduate or graduate students participating in an internship or short-term employment, employees aged 18 or younger, and low-wage workers (those earning 250 percent or less of the federal poverty level).
  • Maryland. The Noncompete and Conflict of Interest Clauses Act recognizes that certain non-compete and conflict-of-interest clauses violate Maryland’s public policy and are therefore null and void.

Do You Need a Lawyer?

Just like any other legal contract, it is strongly recommended that businesses hire lawyers to draft these contracts, rather than using online templates. An attorney can help ensure that an employment agreement is enforceable in the local courts if there is a breach in the contract. Part of this task involves researching what worked in the past and how the current agreement will work with the courts in the future.

Often, enforceability requires specific language and provisions in the contract that judges would deem to be connected to the circumstances of the employment and business interactions. Therefore, working with a qualified attorney is your best bet when drafting these documents.

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