Breaching a Confidentiality Agreement Can Lead to Serious Legal Liability
Plaintiff is the former employer of Defendant. Plaintiff and Defendant entered into a confidentiality agreement (the “Agreement”). The Agreement stated that any information exchanged between Plaintiff and Defendant is proprietary and designated as a trade secret and/or confidential. The Agreement gives examples of such covered information including, “but is not limited to (Plaintiff’s) concepts, drawings, designs, and other related proprietary information.” Under the Agreement, Defendant agreed to keep any covered information confidential and to not disclose it to any other party. The Agreement stated that Defendant’s confidentially obligations survive the termination of employment and shall have no time limit, except as otherwise provided for in the Agreement, however the Agreement did not set out any time or geographical limitations.
Defendant left his employment with Plaintiff and began employment elsewhere. Plaintiff alleged that Defendant obtained a maintenance agreement with a customer because of Defendant’s “disclosure of pricing, and other proprietary information as precluded by the (Agreement.)”
As a result Plaintiff sued for breach of contract, tortious interference with a contract, and conversion.
Defendants argued that the Agreement is an unreasonable and unlawful restraint of trade and, as such, is unenforceable. Defendants also argued that Plaintiff’s claim was premised on the existence of a valid underlying contract, of which there was none.
The Following is a Discussion by the Court of the Legal Claims Made by Both Parties Breach of Contract and Confidentiality Agreement
A valid breach-of-contract claim requires the assertion of:
- The existence of a valid and enforceable contract;
- An obligation on the part of the defendant
- A breach of that obligation
- Damages resulting from the breach
Case law is not particularly well developed regarding how courts should determine whether a confidentially agreement is enforceable. Courts use the same test to determine whether confidentially agreements and non-compete agreements are enforceable.
Enforcement of Non-Compete Agreements
The party challenging the validity of a covenant bears the burden to show that the covenant is unreasonable and contrary to public policy. “In order for a non-compete agreement to be valid, three requirements must be met:
- There must be a valid interest to protect
- The geographical restriction must not be overly broad
- A reasonable time limit must be imposed
All three of these factors must be present to create a valid non-compete agreement, as the law will not enforce a contract that serves merely to prohibit ordinary competition. “If a covenant prohibits a person from engaging in activities which are unnecessary to protect the promise, the covenant is unreasonable.” “The test of reasonableness of contracts in restraint to trade is that the restraint imposed upon one party must not be greater than is reasonable necessary for the protection of the other and not so great as to injure a public interest.”
To be sure, an employer has a legitimate desire in seeing that a former employee does not appropriate its customers. However, any covenant utilized to prevent appropriation of customers must be reasonably drawn, so as to not constitute an unreasonable restraint on trade. Plaintiff did not tailor the Agreement in a way that explicitly protected information related to its customers or pricing, but instead drafted it to cover “all information provided by either party (to the other).” Therefore, the court found that the Agreement was not reasonably drawn, as it not only bars Defendant from disclosing any trade secrets learned during his employment, but also prevents him from disclosing any information, including his experience and knowledge gained during that time.
The Law in New Jersey on Tortious Interference with Contracts
Plaintiff’s complaint also alleged that Defendant tortuously interfered with the contract between Plaintiff and Defendant by accepting confidential information from Defendant. Defendant argues that this claim should be dismissed.
The elements of tort interference are:
- The existence of a valid contractual relationship or a business expectancy
- Knowledge of the relationship or expectancy on the part of the interfering party
- Intentional interference inducing or causing a breach or termination of the relationship expectancy
- Resultant damage to the party whose relationship or expectancy has been disrupted
- Improper conduct by the interfering party
The Court agreed with Defendants since the Agreement is an unreasonable restraint of trade and, thus, is unenforceable because it does not alleged facts demonstrating all essential elements of the claim. Specifically, Plaintiff did not demonstrate the existence of a valid contractual relationship.
The New Jersey Law on Conversion
Plaintiff’s alleged that Defendant converted Plaintiff’s confidential information for their own use and benefit. To establish liability for the tort of conversion, a plaintiff in N.J. must prove that the defendant wrongfully exerted dominion and control over the property of another, which is a denial of, or is inconsistent with, the owner’s rights.
The court agreed with Defendants since the Agreement is an unreasonable restraint of trade and is unenforceable. Nothing prevented Defendant from disclosing the information he came into contact with while employed with the Plaintiff.
To discuss your NJ Contract and Confidentiality Agreement matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Breach of Contract and Confidentiality Agreement Attorney