Employee Non-Disclosure Agreements: the Unreasonable Requirements to make them Reasonable

 By: Craig J. Johnson

At a recent Venture Best meeting we were discussing the substance of the set of documents every startup company needs. One such fundamental document to make the list was an Employee Non-Disclosure Agreement (“Employee NDA,” also commonly called a Confidentiality Agreement) wherein your employee agrees to maintain the confidentiality of sensitive information of your business (a non-disclosure agreement can apply to many situations but this article focuses on its use in restricting employees’ ability to disclose information). You probably didn’t need a lawyer to tell you this was an important protection to have in place.

Yet, it might surprise you that this fairly universal and conceptually simple agreement is subject to many formal requirements under Wisconsin law. The formal constraints stem from a Wisconsin statute (Wis. Stat. § 103.465) limiting the enforceability of employee restrictive covenants, including non-disclosure agreements. As interpreted by the Wisconsin courts a valid restrictive covenant must: (1) be necessary for the protection of the employer; (2) provide a reasonable time period; (3) cover only a reasonable territory; (4) not be unreasonable to the employee; and (5) not be unreasonable to the general public.

These constraints make sense as applied to a Non-Compete Agreement. For example, it is reasonable to prevent a grocery store manager from taking a similar job with a competitor located across the street, but less reasonable if that competitor is located 100 miles away. The first situation involves unfair competition whereas the second is merely competition. Wisconsin courts take the position that a mobile workforce is good for the state, as long as that mobility doesn’t cross into unfair competition. The grocery store should come up with incentives to keep its manager, such as a good salary, other than contractually limiting her ability to advance her career.

Wisconsin courts apply the same test to Employee NDAs. These requirements make a whole lot less sense in this context. Should there really be a time limit on not being able to disclose confidential information? It might hurt your business less if an employee can’t tell your competitor everything right away and instead has to wait two years, but it will still hurt and be unfair. Also, how do you create a limited geographic scope on the Employee NDA? It doesn’t make any difference to you if your former employee discloses the information across state lines, over the internet, or in your backyard.

As if these seemingly irrelevant requirements weren’t enough to worry about, the Wisconsin court will also look at your restrictive covenant and: (1) automatically deem it suspect; (2) closely scrutinize it; (3) construe it so that it does not extend beyond a proper scope or further than absolutely necessary; and (4) construe it in favor of the employee. Then, it will make you prove the length of restriction is reasonable rather than make the former employee prove it is unreasonable.

We should point out that your sensitive information is not as hopelessly vulnerable as it may sound. For example, a restrictive covenant in the context of a sale of the business is viewed more leniently. Also, there is some precedent recognizing a geographic scope on an Employee NDA doesn’t make any sense and allowing other terms to substitute for it. Finally, any information that meets the statutory definition of a “trade secret” is automatically protected, regardless of whether you have an agreement or not, until that information is no longer a trade secret. Unfortunately, meeting the standards for a trade secret has its own set of challenges, and you and the court might not agree on whether something qualifies as a trade secret or whether you made efforts to protect it. Therefore, you should always separate and preserve trade secrets in an Employee NDA.

The bottom line: your Employee NDA has to be a carefully drafted document that addresses all of the requirements of Wisconsin law, however seemingly ill-fitting and unpredictable. An ambiguous reference to a geographic scope will demonstrate an appropriate deference to the law, as will defining the categories of information covered and the prohibited recipients of the confidential information. An exercise in form over substance? Yes, but more importantly, also a legally enforceable Employee Non-Disclosure Agreement.

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