How Breaking a Nondisclosure Agreement Works

Introduction to How Breaking a Nondisclosure Agreement Works
Attorney Michael Avenatti (R), who represents adult film actress Stormy Daniels, arrives to court in Los Angeles, July 2018. Daniels is suing President Donald Trump and his former personal attorney, Michael Cohen, claiming that she was defamed and campaign finance law violated by brokering a NDA just before the 2016 presidential election. Avenatti maintains that the agreement is invalid because Trump did not sign it. David McNew/Getty Images

After weeks of interviews, you've finally been offered a job at Acme Solutions, one of the hottest software startups in Silicon Valley. The salary is sweet, the benefits are even sweeter and you can't wait to start writing code for your genius CEO. All that's left is to head down to human resources and sign on the dotted line.

More like dotted lines. The employment contract is thicker than a dictionary and there are tabs to sign here, here and a dozen more "heres." The HR rep assures you that it's all standard boilerplate language, and since you don't know a thing about employment law, you take her word for it.

One section catches your eye, though. It's the nondisclosure agreement or NDA. By signing it, you agree not to disclose any Acme trade secrets, including but not limited to:

"patent applications, information relating to inventions, discoveries, products, plans, calculations, concepts, design sheets, design data, system design, blueprints, computer programs, algorithms ... customer lists, supplier identity, marketing and sales plans, financial information, business plans, costs, pricing information, etc."

Seems fair enough. Acme wants to protect its proprietary data and business plans from its competitors. You're not a corporate spy, so no worries there. But what about this other section, the "non-disparagement" clause:

"You shall not at any time, directly or indirectly, disparage Acme Solutions, including making or publishing any statement, written, oral, electronic or digital, truthful or otherwise, which may adversely affect the business, public image, reputation or goodwill of the company, including its operations, employees, directors and its past, present or future products or services."

Huh, that's a bit much. If you leave the company 10 years from now and tweet that its breakroom coffee was rank, could they sue you? It makes you think about those rumors floating around about the genius CEO, that he's settled multiple sexual harassment lawsuits with some former employees. None of them have talked publicly, though. You're starting to understand why.

The HR rep is waiting for your signature. You ask if anyone has ever refused to sign the nondisclosure and non-disparagement agreements. "Nope," she says. "Not if they wanted to work here."

So, you sign the contract, joining more than one-third of the American workforce who are currently bound by a nondisclosure agreement [source: Lobel].

It wasn't always like this. Nondisclosure agreements used to be stuffy legal documents reserved for safeguarding company secrets when meeting with prospective partners and investors. Now even visitors to the headquarters of Google or Facebook are required to sign an NDA before getting past security [source: Bond and Croft]. Companies live and die by their ideas, which is dangerous when employees are frequently poached by competitors. Hence the lengthy and restrictive employment contracts.

While violating an NDA to sell trade secrets to the competition seems like an obvious legal and ethical violation, not all NDAs are about protecting intellectual property. In the wake of the Harvey Weinstein sex scandals, the accusations against President Donald Trump and the burgeoning #metoo movement, important questions are being raised about NDAs being used to silence victims of sexual harassment.

The most important question may be, when is it OK to break an NDA?

What is a Nondisclosure Agreement?

What is a Nondisclosure Agreement?
NDAs traditionally have been used whenever a company has to show its cards to an outsider. PeopleImages/Getty Images

A nondisclosure agreement is a legal document designed to keep secret information secret. Also known as confidentiality agreements or proprietary information agreements, they have long been a necessity for doing business [source: Hayes]. By signing an NDA, the receiving party of confidential information agrees not to share or make public any secrets supplied by the disclosing party. If they do, they'll be sued.

In the business world, NDAs have traditionally been used whenever a company has to show its cards to an outsider. A potential investor, for example, will want to see sales figures and plans for future product lines before handing over her cash to the CEO. For access to that type of insider information, she'll have to sign an NDA. Same with outside marketing consultants, lawyers and even some clients.

The most common type of NDA is called a unilateral NDA, because only one party is disclosing confidential information and the other is bound to keep it secret. But there's also something called a mutual NDA, in which both parties share proprietary information and make the other party promise not to share it [source: RocketLawyer].

Examples of a mutual NDA include the potential merger of two companies. For the deal to work, each will have to expose its financial information, proprietary technology and strategic plans. But if one of the companies gets cold feet, it's strictly forbidden from sharing any inside information with the press, or using any of its competitor's technology to develop its own related products.

As we'll discuss later, NDAs have many uses, including beyond the business world. NDAs and other types of confidentiality agreements are often built into legal settlements. And NDAs are becoming more common in the workplace, both to protect a company's intellectual property and its reputation.

Since an NDA is a contract, the terms of the contract will vary with each new situation. But in general, an NDA will include the following terms [source: Fabio]:

  • What information will be protected? For something to qualify as "confidential," it must be information that is exclusive to the company or individual and can't reasonably be found anywhere else or discovered independently. An NDA can either protect a specific type of information — like unpatented technology — or be written broadly to cover all proprietary information in the company's possession.
  • Approved uses of the information. If a marketing consultant is brought in to come up with a campaign for an upcoming product, he'll need to know everything about the product specs and design. The NDA will limit the use of proprietary information to the campaign.
  • Length of agreement. Some NDAs are in effect forever, while others only keep information secret for a shorter length of time, perhaps until a new product or service is released to the public.
  • Consequences of breaking the NDA. Since an NDA is a legal contract, breaking an NDA puts the signers in a difficult legal position. Companies can sue for injunctive relief — to stop the use of secret information — and damages for lost profits. If the NDA was signed to hide the details of a legal settlement, a breach of contract could result in forfeiting the settled dollar amount.

Before we get into the risks of breaking an NDA, let's get a better sense of how NDAs are used in specific business situations.

Nondisclosure Agreements in the Business World

Traditionally, nondisclosure agreements are employed in certain business situations during which confidential information is shared with outsiders. Experts say that the business use of NDAs has been expanding since the 1970s and 1980s as companies have become more concerned about leaks of proprietary information [source: Bond and Croft]. Examples of common business situations that require an NDA include [source: Long]:

  • Meeting with potential investors. If you're a startup that's actively courting investors in your young company, you will need to give them a peek behind the curtain. While many potential investors will sign an NDA, venture capitalists often refuse. They see so many pitches that they need to protect themselves from getting sued if they back a similar company down the road.
  • Licensing a product or technology. Licensing deals can be terrific for a small technology company looking to expand into new markets, or for a large brand looking to sell franchises in more locations. Before the deal is done, proprietary information like earnings and technological specs will need to be shared, hence the NDA.
  • Collaborating with a marketing partner. Not every business or organization is big enough to have its own in-house marketing department. When a company contracts with an outside marketing firm, it's important to stipulate through an NDA how their proprietary information is used and shared. This is particularly important because the same marketing firm might do work for a close competitor.
  • Selling your company or merging with another. NDAs are essential to any merger or acquisition of a business, as one or both parties will need access to every last detail related to the deal.

But what about employees? As we noted earlier, more than a third of all U.S. employees are working under some kind of NDA. These are typically boilerplate employment contracts that include a standard confidentiality clause meant to protect the employer against leaks of intellectual property. Those kinds of provisions make sense from a legal standpoint.

What gets problematic is when employee NDAs go beyond protecting trade secrets and attempt to silence workplace complaints or punish workers for leaving to take a job with a competitor.

Orly Lobel, a professor of labor and employment law at the University of San Diego Law School, argues that overly broad NDAs effectively "chill" two types of troublesome employee behavior: voice and exit. By including non-disparagement clauses, employees can be sued for calling out their employer for a toxic workplace environment, even after they've left the company. And by writing up NDAs that protect every idea and innovation learned while working at a company, it makes it harder for workers to take their new skills to a better-paying job.

The danger is that NDAs are being written in such ways that employers fear serious legal repercussions if they break their contracts, whether it's to call out unethical or potentially criminal behavior at the workplace, or to exercise their right to leave and work for a competitor.

Nondisclosure Agreements in Legal Settlements

Nondisclosure Agreements in Legal Settlements
Harvey Weinstein appears at his arraignment in court on July 9, 2018 in New York City. Weinstein, previously arrested for sexual assault against two accusers, was arraigned on three new charges. Weinstein had several employees sign NDAs where they agreed not to go public with sexual misconduct allegations. Jefferson Siegel-Pool/Getty Images

Disgraced movie mogul Harvey Weinstein and his production company settled sexual harassment lawsuits with at least eight women over the past three decades [source: Martin]. The details of those settlements — including what the women accused Weinstein of doing and how much money they received to drop the case — have been hidden from public scrutiny because each of Weinstein's accusers signed an NDA as part of the deal.

This is not unusual. It's now become standard practice in employment lawsuits for both parties to sign NDAs promising that they will not talk to anyone about the accusations made in the lawsuit or the amount of the settlement itself [source: Bond and Croft]. While settlement NDAs have been criticized as attempts to silence victims of sexual harassment, they also carry benefits for accusers.

First, an NDA encourages the defendant to settle and offer a monetary payout. The defendant may see no reason to settle if the accuser is free to talk about the alleged wrongs in the press and continue to sully the defendant's good reputation. By settling, the accuser can save money on legal fees and is guaranteed at least some money, which is not necessarily the case if the lawsuit goes to trial [source: Stevens and Subar].

Also, many accusers, including victims of sexual harassment, want justice for their mistreatment, but don't necessarily want to go public with the details of what happened. When both parties sign an NDA as part of a settlement, the victim can feel like the whole episode is behind them. Otherwise, there's a risk that the accused abuser could badmouth the victim in the press and harm their chances at future employment [source: Martin].

But looking at the other side, some legal experts argue that the use of NDAs in legal settlements deletes critical information from the public record. Society benefits from an open and transparent legal system in which the public has the right to know about accusations of bad behavior [source: Burdge]. For example, would you go to a dentist that's settled 10 malpractice lawsuits in the past five years? You'd never know if those settlements were protected by NDAs.

Clearly, the defendant in a lawsuit benefits if the accusations made against him or her aren't published all over the internet. And since a settlement isn't an admission of guilt, one could argue that it doesn't need to be in the public record. It's as if the lawsuit was dropped.

But hiding the details of settlements behind NDAs prevents victims of sexual harassment and other workplace abuses from sharing their story with coworkers and the public. Because Weinstein's alleged victims signed NDAs, they couldn't speak up and potentially protect future victims. Instead, the cycle of abuse was allowed to continue.

Still, some people make the risky decision to break their NDAs in order to break their silence. What could be the legal fallback?

Penalties for Breaking a Nondisclosure Agreement

Penalties for Breaking a Nondisclosure Agreement
Adult film actress Stormy Daniels (Stephanie Clifford) exits the U.S. District Court of New York for a hearing related to Michael Cohen, President Trump's longtime personal attorney. Clifford had signed an NDA with Cohen but broke her silence. Drew Angerer/Getty Images

Nondisclosure agreements are legally binding contracts that are lawfully entered into by two or more parties. While new workers may feel pressured to sign an NDA as part of an employment contract, no one is technically forcing them. Once an employee or a plaintiff in a lawsuit signs on the dotted line, they are under obligation to play by the rules or suffer the penalties set forth in the contract.

At the very least, someone who breaks an NDA can be sued for breach of contract and any monetary damages related to the breach. For example, if an employee under an NDA shares the secret recipe of his restaurant's famous fried oysters with a competitor and the restaurant loses business, the employee could be sued for those lost profits.

In the case above, the employer could also press criminal charges against the worker for theft of intellectual property. A guilty verdict in that case could result in additional fines or even jail time [source: Mintzer].

As for breaking NDAs used in legal settlements, it's common for plaintiffs to surrender any money received as part of the settlement, plus additional penalties. For example, the NDA that Stephanie Clifford (aka Stormy Daniels) signed promising not to talk publicly about her alleged affair with President Donald Trump includes provisions that she would have to give back the original $130,000 paid to her by Trump's lawyer Michael Cohen plus $1 million for each breach of the contract [source: Romo].

Labor and employment law expert Lobel says that plenty of workers have been sued for breaking an NDA when it pertains to sharing or selling trade secrets. But many more, she says, have been sent cease-and-desist letters threatening lawsuits, which is enough in most cases to scare workers from starting their own companies or joining a competitor.

What is far less common is somebody being taken to court for breaking an NDA signed in a legal settlement. Speaking to Wired, employment attorney Mike Delikat said that in his 40 years of defending employers, he's never had a client sue for breaching an NDA [source: Tiku]. The threat of surrendering the money from the settlement is usually enough to keep people quiet.

There are, however, several situations in which it is perfectly legal to break an NDA. We'll take a look at those next.

When It's OK to Break a Nondisclosure Agreement

When It's OK to Break a Nondisclosure Agreement
Andrea Constand (C) celebrates with her lawyers after Bill Cosby is found guilty on all counts of sexual assault. Constand alleged that the entertainer drugged and molested her in 2004. She had signed an NDA after settling her lawsuit earlier but a judge called on her to testify, thus allowing her to legally break her NDA. Mark Makela/Getty Images

Despite being legally binding contracts, not all nondisclosure agreements are airtight. There are certain circumstances that U.S. courts have agreed to allow the breaching of an NDA without any penalties.

First, an NDA cannot prevent a person from cooperating with a criminal investigation. In the criminal trial of comedian Bill Cosby, for example, several of his accusers had signed NDAs with him when settling sexual assault lawsuits. One of those women, Andrea Constand, had kept silent for more than a decade as her NDA had required. But when a judge called Constand to testify in the trial, she was free to tell her story publicly for the first time [source: Dale].

Cosby wanted Constand to return the $3 million she received in her confidential agreement when she went public with her accusations. But a judge ruled that "a provision preventing someone from voluntarily sharing information about crimes with law enforcement would be unenforceable" [source: McCrystal]. Because of her damning testimony, Cosby was convicted on three counts of sexual assault in April 2018 [source: Benshoff].

Also, an NDA cannot prevent employees from reporting illegal workplace conduct to either the police or the Equal Employment Opportunity Commission (EEOC), the U.S. government agency charged with enforcing the nation's workplace discrimination laws. And once an EEOC investigation is underway, other workers bound by NDAs can break them to cooperate with an agency probe [source: Lobel].

In 2016, President Barack Obama signed into law the Defend Trade Secrets Act, which allows U.S. companies or individuals to sue in federal court for breaches of NDAs meant to product trade secrets. The law was meant to better protect companies against leaks and theft of proprietary information, but it also includes an important carve out — no one can be punished under the law for breaking an NDA as a whistleblower. In other words, a worker can publicly expose criminal wrongdoing at her place of business without risk of being sued under the new law [source: Cohen, Renaud and Armington].

Those are the clear-cut cases when the courts have established that it's OK to break an NDA. But there are other situations that are murkier. For example, the U.S. National Labor Relations Board (NLRB) protects workers' rights to engage in a "concerted activity" for their mutual benefit [source: NLRB]. Traditionally, this has protected workers from retaliation from the boss if they meet to discuss unionization or collective bargaining for better wages or working conditions.

But some legal experts wonder if that same "concerted activity" protection shouldn't cover victims of sexual harassment who want to warn coworkers of their boss's predatory behavior, but are stymied by an NDA from a legal settlement. In fact, there are lots of questions being raised about the enforceability of sexual harassment NDAs in the age of the #metoo movement. We'll tackle that topic next.

Nondisclosure Agreements and Sexual Harassment

Nondisclosure Agreements and Sexual Harassment
Amber Tamblyn, Michaela Angela Davis, Cynthia Erivo, Ashley Judd and Mira Sorvino attend 'Time's Up' during the 2018 Tribeca Film Festival in New York City. More than 80 women, including Judd and Sorvino, have accused Harvey Weinstein of sexual misconduct or assault. Astrid Stawiarz/Getty Images for Tribeca Film Festival

The #metoo movement started with multiple allegations against Harvey Weinstein, but has expanded to include accusations of workplace sexual misconduct against dozens of powerful men in Hollywood, the media and politics. In many of these cases, the alleged victims of sexual harassment or sexual assault settled for undisclosed cash payouts and signed NDAs preventing them from going public with their stories.

One of these women, a former Weinstein assistant named Zelda Perkins, decided to break her NDA and talk to the press, despite the very real risk of being sued by Weinstein. Perkins and a colleague had received $200,000 to keep quiet about accusations that Weinstein had attempted to rape the other woman, but Perkins decided to tell her story to the Financial Times in 2017 to call out the unethical practice of using NDAs to buy silence in cases of sexual misconduct [source: Einbinder].

U.S. legislators are now proposing laws that would ban the use of NDAs in legal settlements specifically involving accusations of sexual harassment or abuse. There is currently legislation up for vote in three states — California, New York and Pennsylvania — that would effectively void any existing or future NDAs signed to resolve lawsuits where sexual misconduct was at play. The alleged victims, in some cases, would still be allowed to protect their identities [source: Gottesman].

Such laws recognize the fact that women are particularly hesitant to come forward with accusations of sexual misconduct if they believe that their experience was an isolated incident. If Weinstein's early victims weren't silenced by NDAs, who knows how many other women would have spoken up sooner about their own abuse or harassment?

But until laws banning NDAs in sexual harassment cases are on the books, women who have signed NDAs are still legally bound by the terms of their contracts. At least until one woman is brave enough to break her silence. There's an interesting legal argument that once allegations of sexual misconduct are made public, the information is no longer secret, which means that existing NDAs may no longer be enforceable [source: Bond and Croft].

Weinstein's accusers signed NDAs with the Weinstein Company, not the producer himself. When the company failed to find a buyer in 2018, it filed for bankruptcy and officially nullified all existing contracts, including the NDAs [source: Framke].

Author's Note: How Breaking a Nondisclosure Agreement Works

I went into this article with the opinion that NDAs in sexual harassment settlements were clearly a bad thing. First, they silenced the victim for calling out predatory behavior. And second, they prevented others from learning about the behavior and discouraged them from coming forward with their own #metoo stories. But I was surprised to learn about the potential benefits of NDA for victims. For starters, it keeps their names out of the news if they'd like to stay private. And it always gives defendants a strong reason to come to the negotiation table. Otherwise, they could insist on going to trial, which would be terribly expensive for the victim and could result in a not guilty verdict, leaving her with nothing. So I wonder if banning NDAs in sexual harassment cases is necessarily the best option. Obviously it's a complex topic that's finally getting the attention it deserves.

Related Articles

Sources

  • Benshoff, Laura. "Cosby Convicted of Sexual Assault." NPR. April 27, 2018 (May 29, 2018) https://www.npr.org/2018/04/27/606292771/cosby-convicted-of-sexual-assault
  • Bond, Shannon and Croft, Jane. "Nondisclosure agreements — an explainer." Financial Times. Oct. 24, 2017 (May 29, 2018) https://www.ft.com/content/80dcdd58-b893-11e7-9bfb-4a9c83ffa852
  • Burdge, Ronald. "Confidentiality in Settlement Agreements is Bad for Clients, Bad for Lawyers, Bad for Justice." GP SOLO. Nov./Dec. 2012 (May 29, 2018) https://www.americanbar.org/publications/gp_solo/2012/november_december2012privacyandconfidentiality/confidentiality_settlement_agreements_is_bad_clients_lawyers_justice.html
  • Cohen, Brett and Renaud, Michael and Armington, Nicholas. "Explaining the Defend Trade Secrets Act." Business Law Today. Sept. 2016 (May 29, 2018) https://www.americanbar.org/publications/blt/2016/09/03_cohen.html
  • Dale, Maryclaire. "'I was frozen': Bill Cosby accuser Andrea Constand says she was drugged, groped." The Associated Press. June 6, 2017 (May 29, 2018)
  • Einbinder, Nicole. "What Happens If Someone Breaks a Nondisclosure Agreement?" PBS Frontline. March 2, 2018 (May 29, 2018) https://www.pbs.org/wgbh/frontline/article/what-happens-if-someone-breaks-a-nondisclosure-agreement/
  • Fabio, Michelle. "Do Small Businesses Need NDAs." LegalZoom (May 29, 2018) https://www.legalzoom.com/articles/do-small-businesses-need-ndas
  • Framke, Caroline. "The Weinstein Company is officially bankrupt — and ending nondisclosure agreements that covered up abuse." March 20, 2018 (May 29, 2018) https://www.vox.com/culture/2018/3/20/17142650/harvey-weinstein-company-nda-nondisclosure-agreements
  • Gottesman, Jason. "New bill aims to ban sexual misconduct nondisclosure agreements in PA." City & State Pennsylvania. Nov. 15, 2017 (May 29, 2018) https://www.cityandstatepa.com/content/new-bill-aims-ban-sexual-misconduct-nondisclosure-agreements-pa
  • Hayes, Adam. "How NDAs Work and Why They're Important." Investopedia (May 29, 2018) https://www.investopedia.com/articles/investing/041315/how-ndas-work-and-why-theyre-important.asp
  • Lobel, Orly. "NDAs Are Out of Control. Here's What Needs to Change." Harvard Business Review. Jan. 30, 2018 (May 29, 2018) https://hbr.org/2018/01/ndas-are-out-of-control-heres-what-needs-to-change
  • Lobel, Orly. Phone interview on May 22, 2018
  • Long, Jonathan. "5 Situations That Require a Nondisclosure Agreement." Entrepreneur. Feb. 2, 2017 (May 29, 2018) https://www.entrepreneur.com/article/288581
  • Martin, Areva. "How NDAs Help Some Victims Come Forward Against Abuse." Time. Nov. 28, 2018 (May 29, 2018) http://time.com/5039246/sexual-harassment-nda/
  • Mintzer, Rand. "Nondisclosure Agreement: What Is It? And What Happens If You Break It?" June 24, 2015 (May 29, 2018) http://www.mintzerlaw.com/white-collar-crimes/nondisclosure-agreement-what-is-it-and-what-happens-if-you-break-it
  • National Labor Relations Board. "Protected Concerted Activity" (May 29, 2018) https://www.nlrb.gov/rights-we-protect/protected-concerted-activity
  • RocketLawyer. "What is a Nondisclosure Agreement (NDA)?" (May 29, 2018) https://www.rocketlawyer.com/form/nondisclosure-agreement.rl#/
  • Romo, Vanessa. "Stormy Daniels Files Suit, Claims NDA Invalid Because Trump Didn't Sign on the XXX." NPR. March 7, 2018 (May 29, 2018) https://www.npr.org/sections/thetwo-way/2018/03/07/591431710/stormy-daniels-files-suit-claims-nda-invalid-because-trump-didnt-sign-at-the-xxx
  • Stevens, Gregg and Subar, Lorin. "Confidentiality in Settlement Agreements is a Virtual Necessity." GP SOLO. Nov./Dec. 2012 (May 29, 2018) https://www.americanbar.org/publications/gp_solo/2012/november_december2012privacyandconfidentiality/confidentiality_settlement_agreements_is_virtual_necessity.html
  • Tiku, Nitasha. "How to Pierce the Secrecy Behind Sexual Harassment Cases." Wired. Dec. 4, 2017 (May 29, 2018) https://www.wired.com/story/how-to-pierce-the-secrecy-around-sexual-harassment-cases/