Why You Should Always Have Your Employees Sign A Confidentiality Agreement

As I said in my last post, the three key documents that every employer should provide to their employees (in addition to various new hire documents required by law) is an employee handbook, an arbitration agreement, and a confidentiality agreement, sometimes also referred to as a non-disclosure agreement.

The threat of losing valuable company trade secrets to a departing employee is real, and not a matter of if, but when, it will happen.  Failure to take appropriate measures to thwart against trade secret theft could result in significant loss of profitability and erosion of an established employee and customer base, and it can happen quickly and easily.  It only takes a minute to copy or remove countless files containing confidential and proprietary company information to a thumb drive, or to email or upload files to the cloud.

Just look at recent headlines, as Uber recently fired its star engineer who was brought in to lead the company’s self-driving car efforts after he was accused of stealing trade secrets when he left his job at Google.  But this isn’t just a problem for large tech companies.  It is an issue for companies of all sizes and across industries – microbreweries, furniture stores, hotels – basically, any company that offers a product or service to customers.

Generally speaking, confidential business information that provides a business a competitive edge is eligible for trade secret protection.  Trade secrets can include sales methods, distribution methods, pricing lists, recipes, marketing plans, formulas, software algorithms, and customer lists and other customer information, among others.

Under California law, everything that an employee acquires by virtue of his or her employment (other than their compensation) belongs to the employer.  This clearly includes the employer’s trade secrets.  If an employee steals a company’s proprietary information and the company seeks a court’s intervention, the company must show that it took reasonable steps to protect the information from disclosure.  One of the most important steps an employer can take to meet this requirement is to have written confidentiality agreements with their employees, independent contractors, vendors and business partners.

Companies should have strong language and provisions in their agreements that provide clear definitions of protectable information, provide for the return of company property upon termination, and contain forum and choice of law provisions.  A well-drafted confidentiality agreement also lessens the risk of employee theft and disclosure and may eliminate disputes about the trade secret status of certain information.  When an employee resigns or is terminated, a copy of their signed confidentiality agreement should be provided to them, with a reminder that the agreement’s terms survive the employee’s separation of employment.

Action Items for Employers:

Companies should routinely audit their confidentiality agreements and practices to make sure every employee has an appropriate confidentiality agreement in place.  It is important to have your agreements reviewed by experienced counsel to ensure they are up to date with current state of the law.  An agreement that is too vague or contains invalid terms may render the entire agreement void and unenforceable.

And as I have written about before, if your employees have limited proficiency in English, make sure to provide them a translated agreement in the language they speak, because a court will likely invalidate your English language agreement!