Don’t Let Your Nondisclosure Provisions Convert Your Employment Agreement Into An Unenforceable Non-Compete

Nondisclosure, Non-Compete, Fay v. Total Quality Logistics, DTSA

In Fay v. Total Quality Logistics, LLC, the South Carolina Appellate Court determined that the confidentiality provision in an employment agreement was so broad that it needed to be reviewed under the standards applicable to non-competition agreements and, because it lacked a durational provision, held it unenforceable.  

The Agreement at Issue

The agreement contained nondisclosure provisions that precluded the employee from disseminating or making use of the employer’s Confidential Information. The provisions added a presumption that all information that the employee had access to during his employment was Confidential Information “if there was a reasonable basis to believe it to be Confidential Information” or if the employer appeared to treat it as Confidential Information. No time restriction was included in the nondisclosure provisions. 

The nondisclosure provisions expressly stated they were not intended to prohibit the employee from using general skills and knowledge acquired during his employment. The provisions also provided, however, that if the employee accepted employment with a competing business in a similar position it would “necessarily and inevitably result” in the employee “revealing, basing judgments and decisions upon, or otherwise using” the employer’s Confidential Information.

Trial Court Finds the Agreement Enforceable

Litigation began after the employee was fired and started his own business. The trial court found the nondisclosure provisions did not violate South Carolina public policy. On appeal, the employee contended that the nondisclosure provisions restricted competition rather than just protecting confidential information. Accordingly, the employee argued that the validity of the provisions should be tested under the standards applicable to non-competition agreements rather than that applicable to confidentiality provisions.

The Appellate Court Agrees

The appellate court agreed with the employee. While acknowledging that a South Carolina statute expressly provided that provisions limiting the disclosure of trade secrets could not be considered void for lack of a durational element, the appellate court determined that the provisions here effectively prevented the employee from ever working in a similar capacity for any competitor of the former employer. The court reasoned that including language stating that working in a similar capacity would “necessarily and inevitably” involve using the former employer’s confidential information restricted the employee’s “rights to use his talents to earn a living for an indefinite time period, if not forever.” The fact that the nondisclosure provisions permitted the employee to use his general skills and knowledge did not alter the court’s thinking regarding the sweep of the “necessarily and inevitably” language in the provisions. Because of the breadth of the nondisclosure provisions, they had in the court’s estimation become a non-compete that required a reasonable time restriction like any other non-compete agreement.

Similar Result under the Federal Defense of Trade Secrets Act?

While not discussed in the opinion, it is worth noting that the federal Defense of Trade Secrets Act rejects the type of inevitable disclosure requirement contained in the employment agreement at issue in this case. To obtain an injunction under the federal statute, the moving party must present evidence of a threatened misappropriation of the trade secret information. A court cannot enjoin a person from taking a job based solely on the person’s knowledge of a former employer’s trade secret.

A Word of Warning 

This decision reflects a trend toward increased judicial scrutiny of nondisclosure provisions. While employers understandably want to provide the broadest possible protection for their confidential or trade secret information, as this case demonstrates, in drafting such provisions too broadly they run the risk that such provisions may be judged under the stricter standards applied to non-competition provisions and be held unenforceable.

 

Michael Braun concentrates his practice in labor & employment, civil litigation, and financial services. He litigates in both courts and arbitral forums, and counsels in the areas of employment, restrictive covenants, trade secrets, and business disputes. 

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