Your Non-Disclosure Agreements May Not Be Enforceable Under New Ruling

So I tried to come up with a great personal lead in to this blog post. But frankly, this decision has so many implications for my clients that I couldn’t find the right story to lead into such an important change in the law. Protecting a Company’s confidential information is critical for the on-going success of most businesses – whether you treat sick animals, make widgets or brew beer, you have important confidential information that you need to be able to protect. Many employers I know have had employees sign non-disclosure or non-solicitation agreements to protect such confidential information. One of the primary reasons for doing so is because the law in North Carolina had previously been that employers need not offer anything more than continued at-will employment to have current employees agree to non-disclosure and non-solicitation provisions. Taking the less expensive and less intrusive road (as compared to a non-competition agreement), many employers, upon realizing the need to protect their information, have opted to have employees sign non-disclosure agreements or non-solicitation agreements, whereby the employees agree not to disclose the employer’s confidential information and not to solicit either customers and/or employees for a specific period of time post-employment. (The law has been well settled for some time that additional consideration was necessary for current employees to enter into non-competition agreements.)

However, in late February, the Business Court issued a ruling in which the Court refused to enforce non-disclosure and non-solicitation agreements on the grounds that continued at-will employment was not sufficient consideration for current employees. In Roundpoint Mortgage Co. v. Florez, 2016 NCBC 17 (Feb. 18, 2016), an employer sought to enforce a non-disclosure and non-solicitation agreement that several former employees had signed after beginning work at the company. The former employees are alleged to have taken significant amounts of confidential information from the employer to start their own mortgage company. The Business Court refused to enforce either the non-disclosure or the non-solicitation portions of the agreement on the grounds that the employer could not show that the employees had received any consideration for the agreement, specifically holding that promised (or demonstrated) continued at-will employment was insufficient as a matter of law to support the agreements.

In its finding, the Court specifically noted that the employer also could not show that the employees had been given access to any additional confidential information as a result of their signing the agreement or that employees who refused to sign the agreement would be denied access to certain types of information. It also did not disturb the long-held rule with respect to non-competition agreements that having an employee sign a non-competition or other protective agreement at the beginning of employment and as a condition of employment is sufficient to create an enforceable agreement.

So what does this mean for employers? Unfortunately it means that if you have had current employees sign non-disclosure and/or non-solicitation agreements without providing them with any benefit other than their continued employment, your agreements may not be enforceable. The Roundpoint Mortgage decision is brand new and we don’t know yet if it will be appealed or what an appellate court may do with the decision. Given the state’s long-held position that non-competition agreements require consideration, however, I could see the Court of Appeals upholding this ruling. As a result, employers with such agreements should do the following:
1. Consider whether you can show that employees who have signed such agreements have received access to confidential information that they otherwise would have been denied.
2. Consider offering some type of consideration* for employees to re-sign the agreements.
3. If you are going to do number 2, you should take the opportunity to have an attorney review your agreements to make sure that they would otherwise be enforceable under current law.
4. Make sure you are getting new employees to sign such agreements at the beginning of their employment and as a condition of their employment. You can demonstrate this through the language of the agreement itself or in your offer letter to the employee.

*A final note on consideration – Consideration basically means giving the employee something to which the employee is not otherwise entitled in exchange for the employee signing the Agreement. This means that consideration can take many forms – a bonus, a raise, extra vacation, or a specific paid day off from work. As reinforced in the Roundpoint Mortgage decision, courts will not pass judgment on the sufficiency of the consideration, instead focusing merely on whether some consideration was present.

Please take a moment to go through the four steps outlined above. Protecting confidential information can be vital to the success of a company and I want to see you all thrive!

Get Smart Legal Today.