A confidentiality, or nondisclosure, agreement is a contract in which one party promises not to disclose another party’s key business information without permission. Businesses use nondisclosure agreements when revealing confidential information to external parties while developing and marketing a product or while obtaining loans or investment capital. Some businesses require employees to sign confidentiality agreements that remain in force after their employment ends. California courts enforce confidentiality agreements under certain circumstances.
California courts will generally enforce a nondisclosure agreement that protects trade secrets. California’s Uniform Trade Secrets Act defines a trade secret as “any confidential information that gives a business a competitive advantage and that the business takes reasonable precautions to keep other from learning about.” In California, a trade secret may be, among other things, “a formula, pattern, compilation, program, device, method, technique, or process.” California courts have recognized that nondisclosure agreements are evidence of a reasonable effort to maintain secrecy.
California courts may enforce an employee nondisclosure agreement that protects confidential information that does not meet the criteria of a trade secret. A confidentiality agreement may protect against a former employer divulging client lists, business strategies, expansion plans and other confidential information to his current employer, depending on the specific terms of the agreement and the nature of the information. A confidentially agreement is unlikely to protect information generally known in the industry, information that the employee knew before the confidentiality agreement was signed or information that the employee learned beyond the scope of his employment.
California courts will not enforce employee confidentiality agreements that rely on the inevitable disclosure doctrine. A California appeals court described this doctrine as a “claim of trade secret misappropriation” based on the theory that a former employee’s “new employment will inevitably lead him to rely on [his former employee’s] trade secrets." The same court also ruled that “a court should not allow a plaintiff to use inevitable disclosure as an after-the-fact noncompete agreement to enjoin an employee from working for the employer of his or her choice." California courts generally refuse to enforce noncompete agreements, which prohibit an employee from working for competitors for a specific period of time. Except for the exclusions listed in California’s Business and Profession Code, California courts will not enforce any contract “by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” Employers must tailor the terms of employee nondisclosure agreements carefully to avoid a California court interpreting it as a noncompete agreement.
To enforce a confidentiality agreement in California, a plaintiff must prove that the contract terms encompass the alleged violation and that enforcement of the agreement will not violate other contracts, rights or California statutes, including Section 16600 of the Business and Professional Code. When negotiating a confidentiality agreement, businesses and employees should carefully define what information is confidential. When revealing confidential information to employees and third-parties who have signed confidentiality agreements, a business should clearly inform these parties that the information is confidential.