One of the many things Donald Trump has been attacked for in the news lately are non-disclosure agreements. As discussed previously on this site, Mr. Trump’s campaign requires all staffers to sign agreements forbidding them from speaking about the campaign while they work for the campaign, after they leave the campaign, and even after the campaign has finished. There have been further concerns about Mr. Trump’s running of the Miss USA, Miss Universe, and the associated Miss State Pageants. It turns out that the agreement all contestants must sign includes a similar non-disclosure clause. This highly contentious political figure has thrust what would otherwise be an esoteric issue of business law into the public spotlight. Criticism of non-disclosure agreements abound. It is valuable then to ask, why have non-disclosure agreements? What value do they add to justify their existence?
Boundaries on the Relationship
Non-disclosure agreements are usually set out at the beginning of a professional relationship whether between employer and employee, contest and contestant, or any other such relationship. The agreement, at its most basic level, recognizes the signer’s free speech rights. That is, by even making the agreement, the one who made the agreement understands that, normally, the signer would be within their rights to speak about what they’ve learned. To allow for the professional relationship to work, the one making the contract requests that the signer keep information secret. This is usually done to protect hard work and business by both the maker and signer of the contract.
For a business, this might be protecting some secret idea, formula, or recipe. Coca-Cola might want someone who works for them to ensure that the Coca-Cola formula is kept secret. For a contest, this might be protecting some knowledge that could skew the contest. The current Miss USA might learn who will be the judges for next year’s contest. If some of the new contestants were to know this information, it might skew the contest. Non-disclosure agreements therefore are not only useful in facilitating professional relationships, but are sometimes necessary. There are, however, concerns about their use.
A valid concern about non-disclosure agreements states that such agreements can prevent concerned employees from addressing issues within the organization. Non-disclosure agreements may prevent or dissuade whistleblowing. A well-written non-disclosure agreement should protect secret information while allowing for concerns to be aired without fear of repercussion.
A company should have strong internal whistleblowing policies that allow an employee to voice their concerns internally without fear of repercussions. This sort of policy benefits both the company and the employee. The employee can voice their concerns without fear. The company then can either prevent issues from developing or deal with issues internally before regulators and media attention have the chance to impose penalties on the company.
A company should realize, no matter how thoroughly activities are monitored, management can never be privy to everything that goes on in the company. A company should realize that their employees are the prime sources of information pertaining to possible threats to a company and, accordingly, should encourage them to provide this information. An employee in a foreign office may notice bribery taking place that company headquarters has missed. Through robust whistleblowing policies the company can foreclose any further bribery which may expose the company to liability under US bribery law, the Foreign Corrupt Practices Act.
Unfortunately, in some cases, companies have opted to censor this valuable source of information. Policies that enforce this censorship virtually ensure that, if there is a leak of corporate wrongdoing, the fallout will be catastrophic. One major example of this was the 2008 financial crisis. Mortgages were knowingly made to those who could not afford them and any whistleblowing, if it occurred, was ignored.
This issue has been recently addressed by the US government in the Dodd-Frank act, adopted by the US Securities and Exchange Commission in Rule 21F-17. The rule forbids publicly traded companies from preventing their employees from blowing the whistle on corporate issues to the Securities and Exchange Commission. In addition, most states have their own laws protecting whistleblowers. For example, California strengthened its protection of whistleblowers in 2014 by providing additional protections in the California Whistleblower Protection Act.
Authored by Tom Bird, LegalMatch Legal Writer