President Donald Trump and Omarosa Manigault-Newman’s highly publicized rift has brought the acronym NDA to the lips of mainstream USA media, so much so, it has people wondering what secrets Omarosa has about Trump and the goings on at the White House, and for that matter just how enforceable the Non-Disclosure Agreement (NDA) is. Bear in mind that she signed it when she started working for the Trump campaign in 2016 and it probably doesn’t cover her time spent at the White House. Nevertheless, whatever period it addressed, the NDA hasn’t prevented Omarosa from writing her ‘tell-all’ book and appearing on every major TV network across the US to promote it.
The Trump campaign has initiated an arbitration claim against Omarosa for breach of the NDA presumably for secrets she is disclosing in relation to campaign matters, so only time will tell whether she will pay a price for spilling Trump’s beans. In the meantime however, all the brouhaha about Trump’s apparent penchant for having people around him sign these documents reflects a growing practice of the business community and celebrities trying to protect their secrets or business interests. Don’t be surprised if as a potential employee or if you are seeking to strike a business deal, you are asked to sign an NDA before stepping over the employer’s threshold or sealing that business agreement.
But what are NDAs exactly?
Believe it or not, contracts with restrictive covenants or restraint clauses as they are generally called, have had a long existence. There are several varieties of such covenants: there are NDA’s of course, but there are also non-compete clauses, non-solicitation clauses and restraint of trade clauses. They all serve the general purpose of protecting a person’s or organization’s secrets from becoming public on the assumption that if they are shared, it would cause reputational harm or other damage, in the end resulting in financial loss.
Are all secrets equal?
Restrictive covenants have become so common these days that they have become standard boilerplate clauses; they are liberally woven into contracts, sometimes without regard to the context and the unique circumstances of the contracting parties. The truth is however that not all secrets are the same; the clauses to protect them differ in weight and importance, depending upon what the supposed secret is and how important it is to the originator or owner of it, as well as how fair it would be to uphold it.
Take for example the employer-employee relationship; whilst non-compete and non-disclosure clauses were once standard only in the employment contracts of key executives and technical personnel holding vital company secrets, many firms now require a wide range of employees, irrespective of hierarchy, to sign them.
Non-compete clauses in employment contracts prohibit employees from using an employer’s trade secrets, client relationships and proprietary material to unfairly compete with his employer. By agreeing to sign such clauses, employees are prevented from immediately going to work for a competitor. Such clauses are rampant in the United States, though they are increasingly making their appearances in Jamaican contracts too.
So, can this be done? Can an employer “squeeze” an employee in this fashion?
Restrictive covenants will generally be deemed legal in the following circumstances:
• Where the restriction protects a legitimate interest of the employer
• Where the restriction extends no further than reasonably necessary to protect that interest
So the answer is yes, an ex-employee can be prevented from using the secrets of his former employer, provided the restrictions fulfill the above stated criteria. The secrets and proprietary material must however be legitimate interests belonging to the employer and you’ll find that standard non-compete clauses typically define specific parameters including duration, geography, and activities. Some contracts include an additional non-solicitation clause which prevents the employee from bringing over a client or former colleague to any new set up.
Once a legitimate interest has been identified, the restraint must also be proportionate to that interest in terms of scope and other fact-based elements. Issues of contractual consideration may also be looked at by the court – for example the court may investigate whether the party that has been restrained has been paid enough for that restraint. Industry practice may also be considered when deciding whether a restraint is fair and enforceable.
Mr. Latty: Jamaica’s Omarosa?
Not quite. In Columbus Communications Jamaica Limited v Sean Latty and Digicel (2015) Sean Latty had been employed by Digicel for some 13 years before he left and joined Columbus Communications Jamaica Limited otherwise known as Flow. After he had completed his probationary period of 6 months, his employment as Managing Director of Flow was confirmed. Just one month later, Mr. Latty tendered his resignation, and the contract he had signed, which contained both a restraint of trade clause and a confidentiality clause came into question when it became clear to Flow that Mr. Latty was returning to his former employer Digicel. Flow took its former MD and Digicel court. They were both sued for breach of contract and breach of restraint of trade clauses. Digicel was accused of inducing a breach of Latty’s contract when Flow claimed that there were clauses in the contract banning Latty for six months from working with any of its business competitors after the termination of his contract.
Flow lost. The Court found that the Restraint Clause was too wide in its scope and was unreasonable and therefore unenforceable. The judge said that clause went much further than was necessary to protect Flow’s interest or to protect any confidential information belonging to it which was possessed by Latty. On the Confidentiality Clause, the Court was satisfied on a balance of probabilities that there was no serious issue to be tried as to whether Latty had any confidential information on any storage medium and it was therefore not necessary to make any order for the return of such information. The Court also decided that there was no serious issue to be tried as to whether Latty provided any confidential information to Digicel and there was no need for an order for Latty to return such information.
By way of comparison with Omarosa, although there appeared to be some underlying issues between Latty and Flow that underpinned his resignation, there is no evidence that he intended to or had shared Flow’s confidential information with Digicel. Mr. Latty had spent some 13 years in the prior employment of Flow’s competitor and could be said to have developed a level of knowledge and expertise that it would be difficult to use if not with one of the two major players in the market. One of the primary defences to a claim for breach of restraint clause is that it is too wide: it is not meant to prevent someone from earning a living.
It is not possible to draw a precise parallel with Omarosa given that the freedom she seeks is not simply to earn a living plying her trade, but to seemingly write a book the contents of which she probably expressly agreed not to disclose. We do not know the wording of her NDA and whether its breadth of scope is reasonable and thus enforceable, but if her claims to having many tapes of confidential conversations and meetings bear any truth, not to mention what secrets she may have already revealed in her book, she may well have already revealed information considered in law to be private or proprietary and thus worthy of legal protection.
So can restraint clauses be too wide in scope to be enforceable?
Sometimes you’ll see a restraint clause that will prevent an employee from even being “interested in” a competitor so that even being a shareholder in a competitor company could be described as being “interested in” that company. This was the approach taken in English cases Scully UK Ltd v Lee (CA, 1998) and CEF Holdings v Mundey (HC, 2012). In the Mundey case, the Court said that the words “interested in” would cover holding even one share and a restraint including that phrase would, therefore, be too wide.
This was the situation in another English case Tillman v Egon Zehnder Limited (2017), where Egon Zehnder (EZ) was the UK subsidiary of a worldwide group of companies. Ms Tillman was an employee of EZ for 13 years, initially as a consultant and ultimately as a partner. She resigned to go to work for a competitor. Her contract required her for six months from the termination date not to “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company which were carried on at the Termination Date or during the period of 12 months prior to that date and with which (she was) materially concerned during such period” (emphasis added).
EZ issued proceedings, alleging that by working for a competitor, Tillman would be in breach of her non-compete clause. Tillman argued that the covenant was void as it was wider than reasonably required for the protection of legitimate business interests. She argued that being ‘interested in’ a competing business was too wide as it could prevent her from even having a minor shareholding in a competitor. EZ conceded and argued that the covenant could be amended by removing the words ‘or interested’, thereby allowing Tillman to hold shares if she wished to post-termination while leaving the rest of the restrictions in place. It was the joining of a competitor that EZ really wanted to restrain.
So can the court simply remove the offending words to make the clause enforceable?
The answer in Tillman was no. The Court held it was only able to sever separate covenants: it was unwilling to rewrite the covenant to make it work. In any event, even if the words “interested in” could be severed, the remainder of the phrase “engage or be concerned” would still be too wide on the grounds that a minor shareholder can be said to be “concerned in” the company.
So what should we make of NDA’s?
The significant development of caselaw has helped us develop a better understanding of how the restraint clauses are generally viewed by the courts. The cases serve as a warning to in-house counsel and practising attorneys hired to draft employment contracts against using template non-compete clauses. What can work in one scenario may not equally work well in another. What is clear are the following:
• If a non-compete clause has general wording such as ‘interested in’ or ‘concerned with’ then there is a risk that this will be deemed too wide, and thus unenforceable.
• Individual restrictive covenants should be separate obligations (separate clauses) so that, if one is found to be unreasonable and so void, it can be severed while allowing higher chances for preserving the enforceability of the remaining restrictions.
• A “one size fits all” policy that does not customize clauses according to the unique nuances of the relationship between the contracting sides risks covenants being unenforceable.
• A covenant’s reasonableness will be determined as at the date the contract was entered, considering what was in the parties’ contemplation at that time. Employers should check whether covenants need updating from time to time, particularly after an employee is promoted or there is a change in the scope of employment.
• A secret must be a secret. Therefore an employer may need to show the court that he has other protections in place to maintain secrecy, besides an NDA.
Like you, we’ll be watching the media to see whether Omarosa or the Trump campaign wins the war in arbitration; as to who wins the media and political war, that’s a whole other story.
As caselaw suggests, the survival of restrictive covenants is highly fact-based: consult an attorney to guide you if you intend to rely on using them. At Nicholson Phillips, we have been helping clients with NDAs, restraint of trade clauses and restrictive covenants in many key executive contracts and commercial transactions. Feel free to contact us.
