You May Want To Give Nondisclosure Provisions Another Look

By Anderson Ellis

Whether in the context of an M&A transaction or the hiring of a key employee, business attorneys often find themselves drafting three standard contractual provisions aimed at protecting the business interests of their clients: noncompetition, nonsolicitation, and nondisclosure. While noncompetition and nonsolicitation provisions have long been scrutinized because of their inherent effect as restraints on trade, nondisclosure provisions have generally been subject to less judicial prejudice. However, a recent North Carolina Business Court decision may cause practitioners to reconsider the purpose and usefulness of nondisclosure provisions as they relate to the business interests their clients wish to protect.

In Duo-Fast Carolinas, Inc. v. Scott’s Hill Hardware & Supply Co., 2018 NCBC 2 (January 2, 2018), a salesman employed by a hardware company worked to attract business from local construction outfits in the Raleigh area. As part of his job, he saved customer contact information on his company phone, which became commingled with his personal contact book and email account through default syncing features on the device.  The salesman was terminated from the hardware company and returned his phone pursuant to the terms of his employment agreement, but unbeknownst to the salesman and his (now former) employer, the customer contacts remained in his personal contact book and email account. After beginning work with a competing hardware company in the area, the salesman discovered and began to use the old customer contact information in his personal contact book to attract customers to the new company. The salesman’s employment agreement, in addition to noncompetition provisions, contained a section entitled “Nondisclosure of Information,” which purported to prohibit him from “use[ing] or disclos[ing] for [his] own benefits or for the benefit of another or to the detriment of the [former employer] any of the [former employer’s] Trade Secrets or confidential and proprietary information” which included “the contents of any customer lists[,]” among other things, but notably lacked any time or geographical limitations. Id., ¶5. Upon discovering the salesman was soliciting some of its customers, the former employer filed a lawsuit against the salesman and his new employer alleging, among other things, breaches of the employment agreement. The case ended up in front of the North Carolina Business Court and each side filed a motion for summary judgment.

Plaintiff sued to enforce the noncompetition and nondisclosure restrictions against the Defendant, but the Court refused to do so.  In addition to finding that the noncompetition provisions were overbroad and did not protect the legitimate business interests of the employer, the Court made one key finding related to the nondisclosure provision that rendered it similarly unenforceable: the Court found that the information contained in the customer contact lists retained by the salesman were not sufficiently confidential in nature to be protected as such, since the identities of the customers were readily ascertainable by physically going to the customers’ construction sites. This lack of a business interest in the secrecy of the customer information indicated to the Court that the nondisclosure provision was more appropriately meant, in this instance, to prevent the individual defendant from soliciting customers for his business (a clear restraint of trade similar to a noncompetition provision) than to preserve Plaintiff’s legitimate business interests. Id., ¶46. When examined in this light, the Court found that the lack of time and geographical terms in the provision rendered it an overbroad restrictive covenant and declined to enforce it.

The key finding in this case – that information claimed to be private was “readily ascertainable” – may limit its applicability to agreements written for employers with complex customer-related information uniquely developed for a specific industry. Id., ¶45. However, the ruling does raise questions about the power of nondisclosure provisions to protect more general information (like client lists, which are the lifeblood of many sales-based businesses), as well as the level of scrutiny to which such provisions will be subject.  As a result, a prudent practitioner may consider adding reasonable time and geographical limitations to the terms of certain nondisclosure provisions as a safety measure for enforceability.