As one method of safeguarding trade secrets and shielding them from misappropriation, companies often use non-competes and non-disclosure agreements (NDAs). The problem, however, is that non-competes and NDAs may not always be legally enforceable, thus falling short of delivering the intended protection.
This article offers a brief global survey highlighting the enforceability of non-competes and NDAs in seven key jurisdictions around the world.
What are trade secrets?
For many companies, regardless of their size, the most prized intellectual property asset may not be a registrable asset (e.g., a patent or a trademark), but rather a trade secret – one that allows the company to maintain a competitive edge. Typical examples include core technical know-how, source code and data.
Our article "Confidential information, know-how and trade secrets: The importance of definition in valuation" outlines how trade secrets are defined across different jurisdictions.
How are non-competes and NDAs enforced around the world?
- Non-competes that are drafted and negotiated in a commercial context are generally enforceable.[1] However, non-competes in an employment context are prima facie unenforceable as restraints of trade. To be enforceable, a non-compete in the employment context will need to be drafted as narrowly as possible, e.g. reasonably limited in geographic scope, length of restriction and activities being restricted. On October 25, 2021, the Province of Ontario adopted a statutory prohibition on the use of non-competes in an employment context, except in agreements for executives in the employer's business and in some limited business sale scenarios.
- NDAs are generally enforceable. However, their enforceability may be called into question when they may be considered to be restraints of trade. A restraint of trade may occur if the receiving party's future liberty to carry on trade with other individuals or businesses is unreasonably restricted.[2] For example, if the NDA is not limited in scope or duration or if it covers information that has already been widely disclosed. Overall, it is important to ensure that the restraint is not excessive or wider than necessary to protect a disclosing party's interest.
[1] Note that there are competition law issues to consider, which are beyond the scope of this article.
[2] Stephens v Gulf Oil Canada Ltd, 11 OR (2d) 129, 25 CPR (2d) 64, 65 DLR (3d) 193 at 24.
- Conditional non-competes in employment contracts are enforceable if they are reasonable in scope, geographic area and duration (two years max). However, they must be in writing and explicitly state the compensation offered to the employee during the non-compete period. Chinese law places particular emphasis on reasonableness, and overly restrictive or unclear non-compete agreements may not be upheld by Chinese courts.
- The Supreme People's Court has determined that foreign employees of Chinese firms must adhere to terms outlined in NDAs and other contractual confidentiality obligations. However, since NDAs are more difficult to enforce in China, non-disclosure non-use non-circumvention agreements (NNNs) can act as stricter agreement for protecting intellectual property.
- Non-compete clauses are generally[3] permitted under French law but, as they infringe fundamental freedoms (freedom of enterprise and freedom of employment) and are likely to restrict competition, they must satisfy certain conditions to be enforceable. Namely, a non-compete clause must be:
- Legitimate: The courts assess legitimacy on a case-by-case basis, and;
- Proportionate: The clause must be limited in its territorial scope, duration, and with respect to the prohibited activities
Moreover, in some specific agreements, non-compete clauses must satisfy some additional conditions. For example, when inserted in an employment agreement, a non-compete clause must be accompanied by a financial consideration.
- NDAs are generally permitted and are subject to the general rules of contract law. However, when concluded between an employer and one of its employees, the NDA must be justified and proportionate since restrictions on individual and collective freedoms that are not justified by the nature of the task to be performed or that are not proportionate to the aim pursued are illegal. In addition, in order to be enforceable, NDAs should be limited to information that is actually confidential and ensure that the information considered confidential is precisely defined.
[3] French law provides that there are some situations where non-compete clauses are prohibited, namely the ones limiting the freedom of subsequent establishment of the collaborator or employee lawyers, employed notaries, salaried bailiffs and auctioneers, court-appointed receivers, temporary employees. Also prohibited are non-compete clauses in commercial leases that would prevent the lessee from extending its business to other fields, non-compete clauses in co-ownership regulations, and non-compete clauses inserted agreements between suppliers and autonomous distributors.
- Non-competes must clearly identify a legitimate business interest that needs protection and impose reasonable restrictions on employees to be valid. Non-competes may be considered invalid if they place too great a burden on the employee (such as restricting an employee's future employment opportunities), are overly broad in scope, or exceed a period longer than two years. Additionally, any non-compete agreement must be in writing, abide by applicable laws against unfair competition, and include proper compensation to the employee during the term of the non-compete.
- NDAs must also meet certain requirements to be enforceable in Germany. These agreements should only protect identifiable confidential information and not contain overly broad restrictions or unreasonable duration periods (for example, an indefinite period). German courts typically respect NDAs that strike a balance between safeguarding business interests and unreasonably restricting the flow of information in a competitive market.
- Non-compete clauses that still apply after the termination of an employment contact are enforceable in Singapore provided that: 1) The non-compete clause protects a "legitimate proprietary interest" of the employer, and 2) the scope of the non-compete clause is reasonable. Examples of legitimate interests include assets regarded as the employer's property, client and trade connections, etc. Non-complete clauses may have an unreasonable scope, if, for example, the clauses apply to all employees regardless of the nature of work, the clauses entirely prevents the employee from working for a competitor, and the clauses have no fixed duration of operation or geographical limits.
- In the event of a breach in NDA, the injured party may claim damages if evidence of disclosure of information can be shown, which harms the interests of the party. In addition, an NDA may last for a few years before the protected information may be publicly disclosed. Once the protected information enters the public domain, the contractual obligation to keep the same confidential (by the NDA) can no longer be enforced in Singapore. Further, when enforcing NDA one needs to be careful to distinguish between confidential information and an employee's personal knowledge and skill that have been developed or improved during the term of employment. The decision in Clearlab SG Pte Ltd v Ting Chong Chai [2015] 1 SLR 163 affirms that while an employer's confidential information should be protected – for example, via NDAs – the scope of protection should not be too wide such that it unreasonably encroaches upon the employee's liberty to make use of their skill and knowledge.
- Non-competes are enforceable provided they meet certain conditions. In particular, they must be reasonable in terms of time (they must not exceed two years from the date of expiry of the contract), location and the type of work necessary and is only permitted to the extent it is necessary to protect the employer's legitimate business interests and not impose undue hardship on the employee. The employer must file an action within one year from the date of discovering the employee's violation. Non-competes are not enforceable where the employer terminates the employment contract in violation of the UAE's Labor Law.
- NDAs are very commonly used in the UAE, and must comply with general principles of contractual obligations. The NDA will need to specify proportionate time limits, locations and the specific type of work covered by the agreement to ensure it complies with UAE law. It is not uncommon for trade secret owners in the UAE to request that employees sign an NDA that would typically include several mutual obligations, warranties and indemnities. In the UAE, the principle of freedom of contract is recognised so parties are able to decide the governing law and jurisdiction of the NDA. However, UAE courts may take jurisdiction themselves in certain cases including employment-related issues.
- Non-competes can be enforced if certain conditions are met. Courts assess whether there is a legitimate business interest that needs protection, as well as whether the restriction imposed by the agreement goes no further than is reasonably necessary to protect that interest. This so-called "reasonableness" test is subject to judicial scrutiny, and non-competes must be carefully drafted to make sure they comply.
- NDAs are, in principle, more likely to be enforced in Britain. However, they must only protect identifiable confidential information (such as sensitive information, trade secrets and intellectual property) and cannot contain overly broad restrictions or unreasonable duration periods. Enforcement is very difficult to police, which is why many employers look to non-competes or "garden leave" (transition period for an employee who has given notice or was terminated and is instructed to stay away from work during the notice period, while still remaining on the payroll) as their primary methods of protecting confidential information. It is also essential to note that NDAs must not be used to prevent whistleblowing or the reporting of wrongdoing, as recent legal developments in the UK have led to increased scrutiny of their use.
Protecting your trade secrets globally
When it comes to trade secrets, a comprehensive global strategy can help you navigate and account for the legal requirements of different jurisdictions.
Gowling WLG is an international law firm with offices in Canada, the UK, Europe, the UAE and China, and valued relationships with firms in other jurisdictions. This allows us to deliver global trade secrets solutions to clients around the world.
Additional insights on the protection of know-how, trade secrets and confidential information is available on our Trade Secrets Law page.
This article was co-authored by Vivian Wei Cheng a patent attorney working in the offices of JurisAsia LLC, with whom Gowling WLG has an exclusive association.