Approximately 57% of U.S. workers have some version of a nondisclosure agreement, or NDA, with their employers, while 70% to 88% of American firms require employees to sign them.
According to a team of researchers at Syracuse University and the University of Maryland, there is about a 40% to 50% chance that if an employer asks an employee to sign an NDA, it’s also asked them to agree to a noncompete contract or another agreement restricting the worker’s ability to seek future employment. And on the flip side, almost every company that requires employees to sign a noncompete contract or other restrictive agreement also requires them to sign an NDA. Nevertheless, NDAs, also known as confidentiality agreements, have been given less scrutiny than other restrictions on workers.
But NDAs are receiving increased attention now as more employers demand them, and due to their role in recent sexual harassment and sexual assault scandals.
What Is an NDA?
A nondisclosure agreement is a contract under which one party promises to another that, in exchange for some agreed-upon benefit, they will not divulge confidential information they’ve received, says Maureen Weston, professor at Pepperdine University Caruso School of Law.
In addition to employment contexts, NDAs are used in business transactions in which firms share information with each other (e.g., a joint venture). Consumers frequently sign NDAs when purchasing products – they may be tucked in agreements such as a software’s terms and conditions. NDAs are also often included in settlement agreements that parties use to resolve a lawsuit out of court.
To describe these as NDAs is a misnomer, says Camilla Hrdy, professor at the University of Akron School of Law. That’s because NDAs don’t just prevent people from revealing information. They can prevent someone from using it, too. This one-two punch – barring disclosure and use – is what gives NDAs such force and catches many people unaware.
There Are Legitimate Reasons for an NDA
“Ideally, confidentiality agreements shouldn’t be bad at all. Companies need to share information with their workers without being worried that employees are running off to tell the competition,” Hrdy says.
While state and federal laws protect trade secrets, companies aren’t entitled to that protection unless they take reasonable steps to protect their trade secrets. Using NDAs to control access to proprietary materials is a way to meet the statutory requirements.
At the same time, NDAs can protect other information that doesn’t qualify as a trade secret but is still important to keep confidential.
Individuals may also find it advantageous to sign an NDA. For example, if an inventor hasn’t yet patented an invention, they can use an NDA to protect their idea when sharing it with potential investors.
NDAs Often Act as Noncompete Agreements
The trade-secret justification for NDAs has meant that confidentiality agreements have been largely given a legal benefit of the doubt. “Even states that have bans on noncompetes allow NDAs,” Hrdy says.
But employees should be aware that NDAs can act as de facto noncompete contracts.
In their analysis, Hrdy and her colleague Christopher Seaman reviewed 446 NDAs involved in federal litigation. They found that 96% of the NDAs did not exempt an employee’s skills and knowledge and 90% had no timeframe. Some companies defined the protected information to cover any information employees encountered during their employment.
A number of firms used NDAs that, if enforced as written, would prevent an employee from ever having another job that related to their general knowledge, skill and experience.
“These ‘surprise’ noncompetes are unlimited in time and can potentially last for the employee’s lifetime,’” Hrdy and Seaman wrote.
State and Federal Officials Are Taking Action Against Abusive NDAs
Increasingly concerned about these contractual wolves in sheep’s clothing, federal and state officials are taking action to limit NDAs.
NDAs that prohibit disclosures required by law or made by a whistleblower are often illegal, and the Federal Trade Commission has proposed banning NDAs that are de facto noncompete contracts.
Colorado has a bill that NDAs cannot cover an employee’s general knowledge. Other states say an NDA can’t stop discussions about wages and other topics relating to public policy. And some courts now apply the same analysis they’d use on noncompete clauses to void NDAs, Hrdy says.
NDAs in Settlement Agreements: Innocuous or Nefarious?
When parties litigate a case in court, the case becomes a matter of public record. Therefore, when a company asks for an NDA during a lawsuit settlement, it’s often “because they want to cover up bad things,” Weston says.
Companies want to protect their reputation, and they’re willing to pay people to do it, she explains.
“Parties settle lawsuits all the time, and if you have a confidentiality provision, it sounds innocuous, but if you have an NDA, it sounds nefarious,” she says.
The #MeToo Era revealed the nefariousness of the “secret settlements” victims of sexual assault and sexual harassment signed in order to settle their claims, allowing serial perpetrators to continue their assaults, as Weston reviewed in a recent analysis.
The “Speak Out Act,” a federal law passed in December 2022, now outlaws employers’ using blanket NDAs to silence later complaints of sexual harassment or sexual assault. States are considering following California’s lead, banning NDAs in related contexts.
However, some advocates argue that NDAs are a negotiating tool that helps victims receive compensation and shields them from unwanted notoriety and that banning NDAs may hurt victims as much as it helps.
As policymakers consider bans on NDAs, they should think about unintended consequences before enacting broader bans, Weston says.
What Employees (and Others) Should Look Out for in an NDA
When given an NDA to sign, read the document closely. Ask questions and get clarifications. Negotiate for a more limited NDA, Weston says.
“The best case would be that it is limited to just trade secrets because those are defined under federal and state statutes,” Hrdy explains.
The second-best scenario is if the NDA does not cover information available to the public, what’s known in the employee’s relevant industry or subsequently revealed by third parties, Hrdy says.
Watch out for NDAs with no limit in time or geography, that are all-inclusive in terms of what information falls within the NDA or that don’t exempt the skills an employee brings to the job. Even though statutes may void those passages, that’s cold comfort to an employee who must defend a lawsuit in the meantime.
“Decide if it is something reasonable and right. And if not, don’t do it,” Weston says. It may seem difficult to say no, but if a company makes unreasonable demands from the get-go, employees should ask themselves, “Do I really want to work there?”