NDAs Are Out of Control. Here’s What Needs to Change

January 30, 2018 Orly Lobel

hans neleman/Getty Images

Nondisclosure agreements, or NDAs, which are increasingly common in employment contracts, suppress employee speech and chill creativity. The current revelations surfacing years of harassment in major organizations are merely the tip of the iceberg.

New data shows that over one-third of the U.S. workforce is bound by an NDA. These contracts have grown not only in number but also in breadth. They not only appear in settlements after a victim of sexual harassment has raised her voice but also are now routinely included in standard employment contracts upon hiring. At the outset, NDAs attempt to impose several obligations upon a new employee. They demand silence, often broadly worded to protect against speaking up against corporate culture or saying anything that would portray the company and its executives in a negative light. NDAs also attempt to expand the definitions of secrecy to cover more information than the traditional bounds of trade secret law, in effect preventing an employee from leaving their employer and continuing to work in the same field.

For example, beyond the technical secrets of research and development that companies rightfully want to protect from leaking, plaintiffs in trade secrecy litigation frequently try to claim client lists and even general know-how as protected trade secrets. However, judges are rightly skeptical. In the ongoing Waymo v. Uber trade secrecy trial, Judge Aslup reminded the parties of this key distinction between actual secrets and general know-how: “Is an engineer supposed to get a frontal lobotomy before they go on to the next job?” Alsup asked. “The answer’s got to be no, but say they know the recipe for Coca-Cola. They have to forget that before their next job.” In other words, trade secret law tries to balance companies’ need to keep certain things secret with employees’ desire to transfer skills between employers. That’s as it should be. The problem is that NDAs are often written broadly, and once an employee signs one, the case against them is stronger should they take their know-how to a competitor. Moreover, not all courts are diligent in policing the lines between general knowledge and confidential information. Therefore, signing a broad NDA opens employees up to legal risk beyond what trade secret law otherwise would protect.

NDAs chill competition, through expansive definitions of what must remain confidential and proprietary, reducing the ability of a discontent employee or an employee working in a hostile work environment to go elsewhere. Importantly, as recent studies show clearly, preventing workers from using their knowledge and skills beyond a single workplace is harmful not simply to the worker but to entrepreneurship, competition, and economic growth.

NDAs thus often attempt to achieve two things simultaneously: silence a worker during employment and confine them to their current job. Thankfully, there are already several important legal exceptions to the enforceability of NDAs (though courts still enforce them more broadly than they should). First, an NDA can never prevent an employee from assisting in official agency investigations. Even more important, NDAs cannot lawfully prohibit employees from officially reporting illegal conduct. Title VII of the Civil Rights Act invalidates agreements that prohibit employees from filing charges with or assisting the Equal Employment Opportunity Commission in its investigation of any charges. The newly enacted Defend Trade Secrets Act (DTSA) similarly preserves the rights of employees to blow the whistle even if that means revealing trade secrets or breaching an NDA. The DTSA even requires employers to describe this exception in the NDAs themselves, though compliance with this new law has been spotty at best.

Despite these exemptions, employers threaten litigation even under those circumstances in which NDAs would be void. New empirical studies show that employees are largely uninformed about these protections, and the routinely broad language of confidentiality clauses along with the threat of litigation chills even this protected speech.

Moreover, a new common extension of NDAs is the inclusion of a non-disparagement clause, which beyond the protection of concrete corporate information requires employees to never speak negatively about their employer or former employer. A boilerplate non-disparagement clause from a major corporation’s employment contract, illustrating the breadth of the prohibition, reads “you shall not at any time, directly or indirectly, disparage the Company, including making or publishing any statement, written, oral, electronic or digital, truthful or otherwise, which may adversely affect the business, public image, reputation or goodwill of the company, including its operations, employees, directors and its past, present or future products or services.” The National Labor Relations Board has recently held that non-disparagement clauses unlawfully conflict with the rights of all workers — not only unionized workers — to engage in concerted activity on the terms and conditions of their employment. The EEOC has similarly become concerned about these clauses mushrooming, and has taken action against major corporations such as CVS, which require its workers to sign them as part of the standard NDA.

Given all of this, efforts to ban secret settlements in the case of sexual harassment claims should be welcomed. Several states, including California, Pennsylvania, and New York, are contemplating new legislation to this effect, and Congress has introduced a bipartisan bill, named the ME TOO Congress Act, that would similarly limit NDAs in harassment settlements. Banning secrecy as part of settlement agreements is an important step forward, as these certainly aid the code of silence and prisoner’s dilemma that have been the reality for employees in corporations with cultures of harassment.

While such legislation may raise concerns that victims of harassment would have less leverage against their employer if they cannot offer their silence, thus decreasing the payouts plaintiffs can get in a settlement in return for secrecy, the greater goal of our anti-discrimination laws is equality and a harassment-free workplace for all women and men. Legislation that brings light to dark places is key in achieving this goal. Employment protections are meant primarily to prevent harm and to create a future of better, safer, and more-ethical work environments, not simply to provide victims maximum monetary compensation after each wrongdoing.

But policy makers shouldn’t limit reforms to sexual harassment settlements. Instead, they should enact reforms to restrict the scope of NDAs in general — to help workers and to promote competition and economic dynamism. As it stands, countless workers are swallowing the whistle and forgoing new career opportunities because of the threat of litigation.

Legislatures and courts should develop clearer boundaries about the enforceable scope of NDAs and should penalize employers that weaponize these contracts in a way that stifles speech and creativity. The law should make it clear that NDAs cannot expand upon the statutory definitions of trade secrecy to demand confidentiality about information that has little to do with a company’s innovative edge. Trade secret laws have already balanced the trade-offs inherent in fencing some types of information; these laws have weighed the risks and benefits, striking a reasonable policy bargain. Through education campaigns and policies that require employer transparency when drafting employment contract clauses, employees should be made aware of the limits of boilerplate language in their employment contracts. And employers should be incentivized to draft enforceable contracts and eliminate unenforceable provisions. This can be done by imposing penalties on overreaching contracts and adopting a “red pencil doctrine” rendering any contract with unenforceable scope void in its entirety.

NDAs have become a standard feature of employment contracts, but we must not allow them to conceal misconduct or monopolize jobs markets under the guise of protecting company secrets.


Previous Article
How the World’s Oldest Company Reinvented Itself
How the World’s Oldest Company Reinvented Itself

It relied on insiders to lead the change.

Next Article
What Changes When AI Is So Accessible That Everyone Can Use It?
What Changes When AI Is So Accessible That Everyone Can Use It?

Off-the-shelf tools will shift competitive advantage.

Get the Latest People Performance & Human Capital Resources