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Do you need a confidentiality agreement?

 

In your business, you probably employ many types of contracts for various purposes. You may have distribution agreements with suppliers, a commercial lease for your factory, warehouse or office space, and you may have employment contracts with some of your employees.

One type of contract that may be needed as part of other transactions is a confidentiality agreement. Sometimes referred to as a non-disclosure agreement, it can cover an infinite number of situations. One can be applied to all of your employees or it may be specifically drafted by your attorney to cover a single employee. 

 

As an example, you may have customer lists. A confidentiality agreement may be used to protect those lists, prohibiting your employees from quitting your business and taking that list with them to then poach your customers.

If you employ engineers or other employees with technical skills, internal proprietary systems and inventions may be covered, to prevent such an employee from leaving your company to exploit that invention or technology.

These agreements are flexible and can be tailored to your particular needs, but you should recognize their limits. They cannot be used to prevent the exercise of other legal rights by employees. Whistleblowing activities cannot be encompassed by a confidentiality agreement.

In a case this year, the Securities and Exchange Commission filed an enforcement action with a technology and engineering firm. The firm used an agreement that prohibited disclosure of certain information from some internal investigations to third-parties without prior approval of the company's legal department. The agreement threatened disciplinary action or termination for such disclosures.

The SEC found such a requirement created a "chilling effect" on the potential for employees to report illegal conduct that meant it violated Rule 21F-17. The company agreed to a cease and desist order and changed its agreements to comply with the law. The SEC warned other employers to review their policies in light of this enforcement action.

Confidentiality agreements are an important part of the protections your business needs, and your attorney can help review your situation and recommend they types of agreement you may need.

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