How NDAs and noncompete agreements could kill your guru career | By Stephen Fishman
You've just lined up a new client. You've agreed to the services you'll perform, your payment, and the deadline. You're delighted. Then the client sends you what she calls a "form agreement," something she has all independent contractors sign. As you read through it, you notice one clause labeled "nondisclosure" and another called "noncompete."
Those two words should set off alarm bells in your head. Although they're commonly included in independent contractor agreements, such provisions could legally bar you from working for other clients. They're like hidden legal time bombs that could go off at any time and severely limit your guru career. Here's what they mean and how you should react when you see them.
What You Need to Know
Most businesses are understandably careful not to let competitors and other outsiders find out about their trade secrets. They have many ways of keeping those secrets under wraps -- marking documents "confidential" and locking them away when not in use, requiring passwords for company computers, and restricting photocopying are common methods.
But the most popular way to protect trade secrets these days is the nondisclosure agreement, or NDA. Also called confidentiality agreements, NDAs are contracts in which the signing parties promise to protect the confidentiality of trade secrets that one discloses to the other. If you sign an NDA with a client and you then disclose their secrets without authorization, you can be sued for damages, and the client can ask a court to stop you from blabbing any further.
NDAs can be used to protect any information that isn't generally known and that gives a business a competitive advantage in the marketplace. For example, an NDA can prohibit you from disclosing a client's product design, an idea for a new website, or copyrighted software code. These agreements can be included as clauses in an employment or independent contractor agreement, or they can be separate agreements.
Whatever form NDAs take, they're increasingly common. Many companies -- particularly those in the Internet or computer business -- now routinely require employees and independent contractors to sign them. Take Sabeer Bhatia. Founder of Hotmail, he made everyone who knew about his startup company sign an NDA. In two years, he collected more than 400 NDAs from employees, friends and roommates. He believes that his efforts to keep a lid on his startup's secrets helped him protect a crucial six-month lead on the competition. (He eventually sold Hotmail to Microsoft for a whopping $400 million.)
It's not hard to understand why clients might want you to sign NDAs: They're concerned that you could disclose their precious information to their competitors (or simply use it yourself). After all, it's not unheard of for a consultant to take ideas gleaned from one company and present them to another as her own inventions.
Unfortunately, the NDAs many companies use are unfair and unreasonable. Some are worded so broadly that it is difficult -- if not impossible -- to know for sure what information you must keep confidential. Others attempt to restrict disclosure of information that isn't really a trade secret. These ambiguities can make it hard to work for other clients without fear of violating the NDA.
From a client's point of view, noncompete agreements are even better than NDAs when it comes to protecting trade secrets. It's actually hard to enforce NDAs in court, simply because it's hard to prove that a worker has disclosed, or is about to disclose, trade secrets to a competitor. It's especially hard in cases where the worker claims that the information allegedly disclosed doesn't qualify as a trade secret.
Such problems don't exist with noncompete agreements. To enforce a noncompete agreement in court, the client need only show that the worker went to work for a competitor in violation of the agreement's terms. From a client's point of view, the best part about noncompete agreements is that they deter the worker from seeking employment with a competitor and the competitor from hiring the worker. After all, what company would want to hire a freelancer knowing that one of the unfortunate worker's former clients could get a court order forcing the guru to stop work immediately? Noncompete clauses can prevent you from working for a client's competitors -- thereby depriving the competition of your skills.
Though a sweet deal for clients, noncompete agreements can be hell for workers. They can make it impossible for you to pursue your chosen line of work. The right to earn a living is considered one of the most fundamental rights a person has. For this reason, courts generally look on such agreements with disfavor and will only enforce them if the terms are reasonable and enforcement serves a legitimate interest of the company.
What You Need to Do
"Contractor may be given access to Client's proprietary or confidential information while working for Client. Contractor agrees not to use or disclose such information except as directed by Client."
This provision doesn't spell out exactly what information is and isn't the client's confidential trade secrets. So how are you to know what information you must keep quiet and what you can disclose when working for other clients? It could also bar you from using company information that becomes public. You'd then be tied up in the absurd position of not being allowed to use information the whole world knows about. If you see such open-ended language in an NDA, see if you can get the client to rewrite it to describe specifically the information that's under embargo.
You should also try to delete or rewrite NDAs requiring you to keep confidential any information that you knew before working with the client; that you learn from a third person who has no duty to keep it confidential; that you develop independently (even though the client later provides you with similar or identical information); or that becomes public knowledge through no fault of your own.
From the guru's point of view, the very best NDAs are those that cover only information from the client that's written down and marked confidential; or, if disclosed orally, is later written down in a confidential memorandum and delivered to you. That way, you know exactly what the client deems covered by the NDA. Also, the NDA should last only for a limited time -- preferably no more than one or two years, five at the most.
A Two-Way Street
If you need your own NDAs, you can obtain a downloadable form kit -- containing both mutual and one-way forms -- from Nolo.com. The kit is called Nondisclosure Agreements: Protect Your Great Ideas When You Share Them with Others, by (yours truly) Stephen Fishman.
Beating the Noncompete
If refusal isn't a viable option, at least make sure the agreement is as reasonable and specific as possible. When reviewing a noncompete agreement, pay particular attention to three factors:
Time: The embargo on working for competitors shouldn't last forever. It should have a definite time limit -- the shorter the better. Such agreements rarely last for more than two years, many last for as little as six months.
Scope: Avoid signing an agreement that bars you from working for any of the client's competitors. It's much better for the agreement to specifically name which competitors you may not work for. The agreement should also define as specifically as possible exactly what types of work you can't perform.
Geography: A noncompete agreement should specify the geographic region in which it applies. It should be limited to the geographic area in which the company does business or in which it has made definite plans to do business in the immediate future. Of course, many companies market their services or products to customers throughout the United States, so their noncompete agreements can apply to the entire country.
If the terms of a noncompete agreement are unreasonable, a court may refuse to enforce it entirely or in effect rewrite the agreement so that it's reasonable. If you've already signed a noncompete agreement you feel is unreasonable, have an attorney familiar with the law of your state review it to see if it will stand up in court.
The bottom line: Don't sign anything that'll impair your ability to make a living. Is your career really in such dire straits that you absolutely have to take every gig that comes along? I'd suggest tightening your belt for a month or two and, instead of working for draconian clients who insists you sign your rights away, spend some time marketing yourself to companies who treat their contractors fairly.
ABOUT THE AUTHOR: Stephen Fishman is a Berkeley-based lawyer specializing in business and intellectual property law. He has written six self-help law books, including Wage Slave No More.