How Breaking a Nondisclosure Agreement Works

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.