Posted on May 26, 2015
The Sneaky NDA Clause that Can Bite You in the Behind
Most NDAs are harmless. Despite all that scary-looking legalese, there’s nothing in there that’s likely to hurt you.
But that doesn’t mean you shouldn’t read them carefully – because in rare cases an NDA will have a clause that can bite you in the butt.
For example, you might see something like this:
Receiving Party agrees not to engage in any employment, consulting, or other activity involving [scope of work] that competes with the business, proposed business, or business interests of Disclosing Party, and Receiving Party will not assist any other person or entity in doing so, without Disclosing Party’s prior written consent.
(The Disclosing Party is the party giving confidential information – maybe an employer or a potential business associate. The Receiving Party is the party getting the information – i.e., you.)
Here’s another version of the clause, as flagged by LawGeex:
With this clause, an otherwise-harmless NDA is transformed into a highly toxic non-compete agreement.
Rare but Deadly
Putting a non-compete clause into an NDA is unusual, as the LawGeex tool shows. Not everything that’s unusual is bad, but non-competes are problematic, since they limit a person’s ability to earn a living – which is often considered against public policy.
Non-competes aren’t enforceable in all states or in all circumstances. Some states, such as California, consider non-compete clauses void in most circumstances.
But where non-competes are valid, they can cause major headaches for people who sign them.
The New York Times and the Huffington Post recently reported on non-compete clauses for fast-food workers. A former Subway employee got a letter from her company reminding her of the non-compete she’d signed. When she started work at another sandwich shop in the area, Subway contacted her new boss. She got fired as a result.
Why put a non-compete in an NDA?
So why would anyone put a non-compete clause in an NDA?
NDAs are supposed to help protect a business’s confidential information. But it can be difficult to enforce an NDA in court, because it can be hard for the party with the secrets to prove that the other party is using or spilling those secrets. It can also be hard to prove that the so-called “secrets” are really secret.
It’s much easier to show that someone has gone to work for a competitor, or started a competing business.
Non-competes are most commonly seen in NDAs in the employment context – including employment as an independent contractor or consultant. But they’re sometimes used by parties discussing business deals.
Imagine you’ve just made a new friend – maybe even a potential BFF. New Friend invites you to have coffee. That sounds nice. Only thing is, New Friend wants you to sign a document first – one that says you won’t have coffee with anyone else for two years.
Would you sign it?
With most business deals, there’s more at stake than coffee. But agreeing to a non-compete as a condition of getting access to confidential information is like buying a pig-in-a-poke – you’re giving up something of value (your economic freedom) for something you haven’t even seen yet (the confidential information). You have to take it on faith that the information you’ll be getting will actually be worth what you’re giving up.
So what can you do about it?
If you’re asked to sign an NDA that includes a non-compete clause, you can:
- Sign it, and live with the consequences. You’d be gambling that the issue wouldn’t come up, or that a court wouldn’t enforce the non-compete.
- Refuse to sign it, and not get access to the confidential information. If signing the NDA is a condition of employment, that may mean you won’t get (or keep) the job.
- Ask the other party to strike the clause from the agreement.
- Ask the other party to modify the non-compete to make it less restrictive. For example, if it’s for two years, you could make it for one year. If the definition of “competitor” is broad, you could make it narrower. If the geographic area is 100 miles, you could limit it to 10 miles.
If you have questions or aren’t sure what you should do, you may want to consult a lawyer in your area.
By understanding what you’re signing, and what your options are, you can empower yourself to make better legal decisions – and maybe avoid getting bitten in the butt.
The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.
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