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Is Your Company's Confidentiality Agreement Illegal?

By William Vogeler, Esq. on January 19, 2017 | Last updated on March 21, 2019

If all confidentiality agreements were truly kept confidential, it would be hard to determine if they were legally binding.

That assertion underlies a basic reason that all confidentiality agreements are not, in fact, binding. Public policy and many laws prohibit confidentiality in various areas. Indeed, some laws mandate disclosure of information that cannot be kept confidential.

Here are three types of confidentiality agreements and related problems to avoid:

Confidentiality in Employment Matters

As in contracts generally, the terms of confidentiality agreements will not be enforceable if they are overly broad. For example, a federal court in Illinois refused to enforce an NDA that sought to protect "any methods and manners by which Employer leases, rents, sells, finances, or deals with its products and its customers."

The problem is particularly acute when an employer tries to make employees sign confidentiality terms that are specifically outlawed by statute. In California, for example, a former Google employee has sued the company for violating labor laws by requiring workers to sign agreements that they will not disclose their working conditions or wages.

Confidentiality in Civil Settlements

While settlement agreements are commonplace in litigation, courts will set them aside if they violate the law or public policy. For example, the U.S. Eleventh Circuit Court of Appeal has long held that settlements in Fair Labor Standards Act litigation should not involve confidentiality because it contravenes congressional intent for the law and undermines regulatory efforts.

The National Highway Traffic Safety Administration says that protective orders, settlement agreements, or other confidentiality provisions violate public policy and law if they prohibit motor vehicle safety-related information from being transmitted to the government. The agency said the recent recall of airbags is an example of vital information about motor vehicle risks and defects that should have been disclosed for public safety.

Confidentiality in Regulatory Investigations

In response to regulatory concerns, state and federal agencies have warned against confidentiality agreements that would attempt to stop whistleblowers.

According to Senator Charles E. Grassley, (R-Iowa), a leading advocate for whistleblowers, most federal agencies did not comply with anti-gag provisions of the Whistleblower Protection Enhancement Act of 2012. Under the Act, federal agencies are required to notify employees that they must report fraud allegations, even if they have signed nondisclosure agreements.

In 2015, the Securities and Exchange Commission released a cease-and-desist order declaring illegal a confidentiality agreement that prohibited employees from discussing the substance of internal investigations involving potentially illegal or unethical conduct by the company or its employees.

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