Non Disclosure Agreements (NDA’s) and Non-Complete-Agreements
March 10, 2012
This article by Hunter Jensen, CEO of Barefoot Solutions, was originally published in the April 2008 edition of PHP Architect, a print magazine for PHP Professionals. It is the third article in a five part series on some of the different legal issues surrounding the web development industry.

As a PHP programmer, if you have ever worked on a project that is even remotely interesting, then surely you have come into contact with a Nondisclosure Agreement (NDA). If you have ever been employed in a medium to large sized company, then quite possibly you have been presented with a Noncompete Agreement. It is vitally important to your career that before you sign these documents, you understand the implications they may have on your future endeavors.

In a field that thrives on new ideas and rapid innovation, Nondisclosure and Noncompete Agreements have become major players in the competitive landscape of high tech industries. Companies and entrepreneurs feel compelled to protect their ideas while still having the need to share them with others. To solve this conflict of interest, many will require signed NDAs and/or Noncompetes before disclosing any trade secrets. One such proponent of NDAs is Sabeer Bhatia, the founder of Hotmail. Over the course of two years he collected over 400 NDAs from his friends, family, and employees – basically anyone that knew about his startup. He believes that his secrecy resulted in a significant head start on the competition, and in 1997 he sold Hotmail to Microsoft for $400 million.

This article will not be discussing how to draft NDAs and Noncompetes. You can go your whole career without the need to draft either of these documents. If you do have the need, I suggest you hire an attorney. What it will discuss is how to react when approached with these documents. When is it appropriate to sign an NDA? A Noncompete? What should I look for in each? What are some pitfalls to avoid? At the very least it should give you the confidence to read, understand, and make a decision on whether or not to sign one of these documents. Do not forget, you do not have to be a lawyer to understand legal documents, and nearly all contracts are negotiable.

NDAs – Secrets, Secrets are no fun

A Nondisclosure Agreement – also known as a Confidentiality or Secrecy Agreement – is a contract between at least two parties in which they agree to protect confidential information that is disclosed during the course of business. The two necessary parties are the Discloser and the Recipient. The Discloser is the party who originally possesses the confidential information. They disclose this information to the Recipient, who agrees to protect it in accordance with the terms of the agreement. In the programming world, confidential information can be any number of things including: general business ideas, code, database schemas, documentation, development tools and techniques, business processes and much more.

There are many different circumstances which could involve you being presented with an NDA. I am the owner of a Web development firm that focuses a good portion of our resources on startups. Often I am approached by entrepreneurs who would like me to provide a quote to build a Web application based on what they consider to be an innovative or bleeding edge idea. Understandably, they are uneasy with just disclosing their idea to me and my company. With our resources, we could surely be first and best to market if we were to try and poach their idea. So before they disclose any confidential information, they will send over an NDA for me to sign. This is a perfectly normal part of doing business, and I have signed several dozen NDAs over the last few years. As a programmer doing contract work, some business owners will require a signed NDA before giving you access to their code, schemas, or other technical information. Also, it is very common to sign an employment agreement which includes a nondisclosure clause. In these and other situations, it is quite often appropriate to sign an NDA. What is important is that you carefully examine the document, and make any changes that you need before you sign anything. Remember, with a little knowledge, contracts are both understandable and negotiable.

So what should you look for when examining a Nondisclosure Agreement? The clauses with major implications include the definition of confidential information, the exclusions of confidential information and the disclosure obligations and terms.

Any NDA should carefully define the nature of the confidential information that is being disclosed. This must be done without actually disclosing the information however, so it is generally described categorically. For instance, an agreement may include: PHP code, database schemas, and unique development processes. As the recipient, it is important that the definitions are not too broad, and are limited to what you actually may be receiving. Something like all business related information is too broad and should be avoided.

More important than the definition of confidential information are the exclusions of confidential information. Sometimes the best way to describe something is by describing what it is not. This is a list of situations in which information cannot be considered confidential. Usually the list will include situations where:

This ensures that you do not sign away your right to share your own knowledge to others. The final important clause of an NDA is the disclosure obligations and terms. This section outlines the obligations a Recipient has to protect the confidential information and permissible reasons for disclosure. In my situation, I often need to consult my programmers and graphic designers in order to provide an accurate quote. So if I sign an NDA it is important that I be allowed to communicate. Some common ways of structuring these terms include:

These terms are important to allow disclosure when it is truly necessary, whether for business or protection from legal sanctions.

Finally, a few minor points to make note of in an NDA include the term of the agreement and the right to receive an injunction. Be sure that the term is of a reasonable length; one to five years is common. Also, it is standard that the Discloser has the right to receive an injunction if the terms of the agreement are breached. However, be wary of any other relief options like attorney’s fees. The last thing you need is to pay for someone to sue you.

Noncompete Agreements – The NDA’s Ugly Stepsister

While an NDA is fairly common and can be approached with little trepidation, Noncompete clauses are less common and must be approached much more carefully. A Noncompete Agreement – also known as a Covenant not to Compete – is a contract, generally between an employer and employee, that restricts the employee from working in any related business for a certain length of time after termination of employment. The purpose is to protect the employer from training an employee in all of the trade secrets and practices of a business just to have the employee turn around and work for a direct competitor, or start their own competing business. For instance, suppose an existing search engine hired you as a programmer and gave you access to all of their code and procedures. After a year, you were unhappy with your job and felt you could create a better search engine on your own. Your employer would not want you to be able to start your own competing search engine, using all of the tricks of the trade learned during the course of your employment. As such, they would have required that you sign a Noncompete Agreement before you began your employment.

Unlike the NDA, there are only a few situations where it would be appropriate for a PHP programmer to sign a Noncompete Agreement. The most common circumstances would involve a Noncompete clause in an employment agreement. Even in that situation, the job should be in a specialized industry, not just general programming. Be wary of others sneaking Noncompete clauses into agreements like NDAs, Independent Contractor Agreements, or Employment Contracts. As always, be sure to fully read any document before you sign it. On more than one occasion, I have had an entrepreneur try to include a Noncompete clause into a document titled, “Nondisclosure Agreement” or “Independent Contractor Agreement”. In those specific instances, I do not think there was malicious intent. Instead, I just think the entrepreneurs included the clause out of ignorance. Regardless, I did not and would never sign a Noncompete in that situation.

These clauses are generally fairly straight forward, and as such there is not too much to look out for in the language itself. Most importantly, be sure that the duration of the agreement is reasonable. These vary from area to area and industry to industry, but somewhere between two and five years is a reasonable amount of time. Ten years ago, geography was an important factor in a Noncompete Agreement. Most limited employees from working in a competing business within a certain distance from the employer. For instance, if I sold dolls in Virginia, I would not want my former employee to sell dolls in Virginia. But if he wanted to sell dolls in California, I doubt he would be serious competition, so that would be allowed in my Noncompete clause. Given the current technology however, geography is often not included in Noncompete clauses. If I sell dolls in Virginia, and I have a website, then I sell dolls in California too.

While there is not too much in the language to look out for, there are certainly a lot of other extenuating factors to consider before signing a Noncompete Agreement. First, it is important to note that enforcement of Noncompetes differs greatly from area to area. In the U.S., each state has its own policy and precedents concerning the enforcement of a Noncompete. For instance, Michigan has a history of enforcing Noncompete agreements, while they are generally thrown out in California. Some have argued that the unenforceability of Noncompetes in California is what helped lead to the success of Silicon Valley as a technology startup haven, while other areas remain much less successful. The ability of bright young employees to jump from company to company and share knowledge allowed Silicon Valley to thrive at a much faster pace than would be possible if these employees were mired by Noncompete Agreements.

Another important facet to consider before signing a Noncompete Agreement is how this factors into your overall employment situation. As a potential employee, it is important that you include this in your decision just as you would the salary and benefits. It also could give you leverage during your contract negotiation. Not being able to work elsewhere in the industry could be a major detractor, so perhaps the employer can provide something to help account for this. Further, some employees are approached with a Noncompete after they have signed their initial employment agreement. This is common in the case of startups that bring on their first employees before hiring an attorney. If you are in this situation, it is important to realize that many states require that the employee benefit from signing a Noncompete. For instance, signing the agreement could be coupled with a raise in salary, a bonus, or better benefits. Because you are forfeiting some of your rights, most courts agree that it is only fair to receive something in return. In Wisconsin however, precedent has shown that not being fired is considered a benefit. So, an employer in Wisconsin could tell you to sign a Noncompete or you will lose your job, and be within the law. Once again, this is different from area to area, and it is important to consult a local attorney to review your agreements.

Finally, let us suppose that you sign a Noncompete and eventually choose to leave that job. When applying for a new job, it is important that you disclose to the potential employer that you have previously signed a Noncompete. The employer could be vulnerable to a lawsuit by hiring an employee that is in violation of a Noncompete Agreement. Not disclosing this information would certainly be grounds for firing if the new employer were to find out, or even worse, get sued by your former employer.

The Last Word

Unfortunately, NDAs and Noncompetes are a part of the business we have chosen. We are forced to navigate carefully and sign only when necessary. Armed with a little knowledge, these legal documents are understandable and negotiable. If you have any doubts however, particularly with Noncompete Agreements, be sure to consult an attorney before signing anything.

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