Confidentiality Provisions

Confidentiality provisions (also known as non-disclosure agreements or NDAs) are designed to preserve or protect trade secrets and preserve eligibility of patenting. When drafting confidentiality provisions, it is paramount that the drafter carefully and clearly defines what qualifies as “confidential information.” Such agreements can be infinite in duration so long as the confidential information has not been made public.

Another consideration when drafting confidentiality provisions is not to run afoul of federal or state statutes. For instance, for public companies, the SEC requires that a confidentiality agreement not prohibit an employee from sharing confidential information with the SEC. This is designed to protect and promote whistleblowing. See Rule 21F-17.

 

§ 240.21F-17 Staff communications with individuals reporting possible securities law violations.

 

(a)

No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.

(b)

If you are a director, officer, member, agent, or employee of an entity that has counsel, and you have initiated communication with the Commission relating to a possible securities law violation, the staff is authorized to communicate directly with you regarding the possible securities law violation without seeking the consent of the entity’s counsel.

 

It is important to note that the SEC does not have to find that a violation has actually occurred, just that the employer has violated its rules with its confidentiality provision.

The EEOC has a similar concern when it comes to discrimination claims. There has been heightened scrutiny from the U.S. Equal Employment Opportunity Commission over workplace policies and confidentiality agreements that chill employee rights and protections. We should anticipate more guidance from the Biden administration now that Ohr is the new General Counsel. See Unit 17 for more details on including confidentiality provisions in Employee Handbooks.

The NLRB reviews employers’ confidentiality provisions and policies to determine whether employees’ Section 7 rights are being violated. Section 7 of the NLRA provides that employees have the right to form unions and to engage in concerted activity to improve their wages and other terms and conditions of their employment. Section 7 also makes it an unfair labor practice for an employer to “interfere with, restrain, or coerce employees” in the exercise of the rights guaranteed under Section 7. Therefore, the NLRB has sometimes held that the language contained in employer confidentiality policies is unlawful, because it either prohibits or “chills” the exercise of the employees’ right to engage in concerted activity. An employer’s policy that either specifically prohibits employee discussions of terms and conditions of employment, such as wages, hours, or workplace complaints, or that employees would reasonably understand to prohibit such discussions, violates Section 7.

The NLRB typically considers the context in which the language fits within the drafted language, so it is imperative that one is clear and keeps that in mind. Broad prohibitions on disclosing confidential information are permissible if they do not reference information regarding employees or anything that would reasonably be considered a term or condition of employment, because employers have a substantial and legitimate interest in maintaining the privacy of certain business information. See, Lafayette Park Hotel, 326 NLRB 824, 826 (1998) and Memorandum GC 15-04. The GC Memo outlines numerous examples and provides drafting guidance. Take this excerpt from the GC Memo:

 

Finally, even when a confidentiality policy contains overly broad language, the rule will be found lawful if, when viewed in context, employees would not reasonably understand the rule to prohibit Section 7-protected activity. The following confidentiality rule, which we found lawful based on a contextual analysis, well illustrates this principle:

  • Prohibition on disclosure of all “information acquired in the course of one’s work.”

This rule uses expansive language that, when read in isolation, would reasonably be read to define employee wages and benefits as confidential information. However, in that case, the rule was nested among rules relating to conflicts of interest and compliance with SEC regulations and state and federal laws. Thus, we determined that employees would reasonably understand the information described as encompassing customer credit cards, contracts, and trade secrets, and not Section 7- protected activity.

However, see more recent cases, Argos USA LLC d/b/a Argos Ready Mix, LLC, 369 NLRB No. 26 (2020) and BMW Manufacturing which are discussed in Unit 17 where the NLRB uses a specific balancing test in order to make its determinations. To avoid duplication of information, go to Unit 17 to understand what the NLRB looks for when considering confidentiality policies.

Some people think that Section 7 only applies to union employees but that is not the case. Many practitioners do not realize that Section 7 and the EEOC have rules that impact their ability to draft broad confidentiality policies – whether they appear in an employment agreement or in an employee handbook. Also, many businesses are not aware that employees are protected by the NLRA when they discuss their wages with other employees. Here is where you, as an attorney, can provide real value.

The following policies are unlawful:

  • Employees are prohibited from disclosing salaries and contents of employment contracts.
  • Workers shall not disclose any information pertaining to the wages, commissions, performance, or identity of employees of the employer.
  • Employees are prohibited from disclosing to any media source information regarding employment at the employer, the workings and conditions of the employer, or any staff member.

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To the extent possible under law, Samantha Prince has waived all copyright and related or neighboring rights to Entrepreneurship Law: Company Creation, except where otherwise noted.