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CONFIDENTIALITY AND NON-COMPETE AGREEMENTS
DO THEY PASS THE REASONABLENESS TEST?


by Arthur K. Engle, Esq.

Today is known as The Information Age, and for good reason: with the advent of the Internet and global communications, information is just a phone call or a mouse click away. With such unprecedented access to information, businesses employ various means to protect their private information, in particular their trade secrets. The reason is simple: in today’s competitive market, a company’s trade secrets can mean the difference between success and failure.
One of the ways businesses try to protect their private information is by limiting what employees can do with that information. Thus, employers will often require that employees sign either a non-compete agreement (also known as a covenant not to compete), or a confidentiality agreement (also known as non-disclosure agreement), or both, as a condition of employment.
A non-compete agreement seeks to set limits on what work an employee may do upon leaving that employer. The purpose of such restrictions is to prevent the former employee from using knowledge or information acquired during the employment to compete with the former employer. A non-compete agreement may be specific in prohibiting one from working in a particular competing business or market for a certain length of time. Or it may be more general in prohibiting one from working in a particular city or area of the country in any kind of business, again usually for a certain length of time. In the absence of such a non-compete agreement, a former employee may freely compete with a former employer.
A confidentiality agreement, on the other hand, imposes no limits on the kind of work one may do or where one may work. Rather, it merely prohibits an employee from disclosing certain private information of the employer.
Non-compete agreements are enforceable only if they impose reasonable restraints on employment. There are generally five criteria for determining the reasonableness of a non-compete agreement: (1) the duration of the restriction; (2) the geographic scope of the restriction; (3) the degree of protection afforded to the employer; (4) the extent to which the restrictions affect the employee’s ability to pursue a trade; and (5) the extent of interference with the public’s interest.
Until recently, there were no Connecticut cases holding that this same reasonableness test applies to confidentiality agreements. However, in a case of first impression, a Connecticut trial court recently held that confidentiality agreements are subject to the same test. The court noted that “a person should not be able to accomplish through some other agreement what would be a restraint of trade violative of public policy if done through a non-compete agreement.”
The court held that in applying the reasonableness test to determine the validity of a confidentiality agreement, a court should take into consideration the purpose of the confidentiality agreement and the specific information sought to be protected. The agreement should be no more restrictive than necessary to achieve its purposes. Historically, courts have viewed confidentiality agreements more favorably than non-compete agreements because the latter act as restraints of trade and employment while the former aim to restrict only disclosure of information, not employment opportunities. While lack of geographical or time limitations will not make a confidentiality agreement presumptively unenforceable, it is certainly a factor for the court to consider.
The full impact of this Connecticut trial court decision is not yet known. While a trial court’s decisions are not binding on other courts, Connecticut courts often look to trial court decisions for guidance, especially where, as here, the decision is one of first impression. Thus, while other courts need not apply a reasonableness test to confidentiality provisions, they are more likely to in the wake of this recent decision.
Therefore, before executing confidentiality agreements, it is best to have legal counsel evaluate their compliance with this reasonableness test. Are they reasonable in geographic scope? Do they last no longer than necessary? Are they too broad, such that they limit an employee’s ability to pursue a trade?
Overbroad or overly restrictive confidentiality agreements do a disservice to both employers and employees. If such an agreement is deemed to be overly restrictive and therefore unenforceable, it will not provide the protection for which it was created and will leave employers vulnerable. On the other hand, overly restrictive agreements are prejudicial for employees who may feel unable to pursue a trade without violating the restrictions. Such employees may be faced with the tough decision of either limiting their career opportunities or ignoring the restrictions and risking a lawsuit.
By making sure that their confidentiality agreements comply with this reasonableness test, employers can be more confident that such agreements are enforceable. Thus, they can better protect their proprietary information and trade secrets against unwanted disclosure. In turn, by negotiating reasonable confidentiality agreements, employees can keep their employment opportunities open and avoid unnecessary lawsuits.
As the old adage goes, “Forewarned is forearmed.” Nowhere is that more true than in today’s information age.

 

ARTHUR K. ENGLE is an associate with the firm. He practices in the areas of commercial litigation and employment law.
Mr. Engle graduated with honors from Harvard College in 1988, with a B.A. degree in psychology. He received his Juris Doctor degree from Fordham University School of Law in 1994. Mr. Engle is admitted to the bar of the State of Connecticut and the U.S. District Court, District of Connecticut, and is a member of the Connecticut and Regional Bar Associations. He is also a member of the Darien Rotary Club and is Chairman of its International Projects Committee.