Non-disclosure agreements are a sticky issue in the business world.
Some groups contend non-disclosure agreements prevent companies from being held accountable for defective products. Local attorneys and business representatives said they're a vital tool to protect intellectual property.
In simple terms, non-disclosure agreements are contracts. The agreements can be created unilaterally — where one party, like an employer, forces another to sign an agreement — or mutually — where two parties working together agree to sign an agreement.
Doug Nelson, senior vice president of Government Contracting at Lathrop Gage Consulting in Jefferson City, said parties typically use non-disclosure agreements to foster an open exchange of ideas.
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This article appeared in the July 23, 2018, edition of #jcmo Inside Business. To view the full edition, click here.
An NDA allows both parties to work without worrying what the other may disclose to the public.
"The basic concept is it's a contract," Nelson said. "In the contract, you agree to get access to information and not to disclose it."
NDAs can be used for a variety of reasons. Often companies use non-disclosure agreements while negotiating mergers. Other times, companies require hired contractors to sign the agreements.
Typically, companies use NDAs to protect intellectual property. Nelson said, though, that financial sector companies often use the agreements, especially when negotiating mergers.
Kari Schulte, a partner at Jefferson City law firm Cook, Vetter, Doerhoff & Landwehr, practices business litigation and employment law among other forms of law. Schulte said small businesses also can use NDAs to seal terms of court settlements.
Typically, high-tech industries like pharmaceutical companies developing new drugs, technology companies developing new software and financial sector companies use NDAs the most, Nelson said.
Locally, Nelson said, information technology companies often use NDAs when hiring sub-contractors. Schulte said she's helped lumber yards, doctor's offices and nursing homes execute NDAs.
Companies often use NDAs when executing mundane contracts, Schulte said, like signing a cleaning contractor to prevent the contractor from misusing any information its employees might come across.
Both small and large businesses use NDAs, Nelson said. Each agreement typically is unique to the parties it serves because of variables like the industry and company at which an agreement is made and the information being protected.
Nelson said NDAs typically contain basic things like the parties involved, reasons the disclosure of confidential information is a concern and what that information is.
"It's good to have a form, but within that form you're going to have very different information," Nelson said.
David Overfelt, president of the Missouri Retailers Association, a Jefferson City-based trade group that represents retailers across the state, said manufacturers and retailers often use NDAs to protect new inventions or financial data.
Some industries like retail use NDAs to protect financial data important to a company.
"There's so much a company could lose if they didn't have the ability to have these agreements," Overfelt said.
Large and small companies typically use NDAs more with upper-level managers. Nelson said he's not familiar with companies that require every employee to sign an NDA. Still, Overfelt and Nelson said, some low-level employees at small businesses can be forced to sign NDAs.
"For the rank and file, it would not be important," Overfelt said. "But for management, it would be very important."
Companies often wrap NDAs into larger agreements, Schulte said. So new employees at companies should be careful to examine all documents closely before signing anything.
"(Employees) need to be aware of that when they're signing their employee packet because (non-disclosure agreements) are stuck in the middle sometimes," she said.
Enforced through civil court
Because NDAs are contracts, they usually are enforced through civil court.
Schulte said arbitration agreements also can be tucked into NDAs to enforce them.
Employers also can insert clauses into NDAs, forcing employees to pay for all attorneys' fees if cases to go court. Schulte said this gives companies another financial means by which to enforce agreements.
NDAs often contain time restrictions ranging from a few months to several years. Nelson said agreements often limit what information can be disclosed for a period of time after an employee leaves a company.
A court case involving a local company revolves around this principle.
In March, Kansas City flexible packaging manufacturer Gateway Packaging sued Jefferson City baggage manufacturer Morris Converting and Schell & Kampeter, parent of Meta-based Diamond Pet Foods in U.S. District Court for the Western District of Missouri. Gateway alleged two former Gateway employees used proprietary information to help Morris develop a 40-pound dog-food bag similar to the one Gateway made for use by Costco.
Gateway said the employees signed NDAs which prohibited them from disclosing trade secrets for more than two years after their employment ended, according to court documents. Gateway alleged employees who left Gateway in 2016 and 2017 helped Morris develop a competing bag in 2017 that Diamond used to package the dog food.
After Morris developed the competing bag, Gateway alleged Diamond ended switched to the bag made by Morris to package the dog food. Gateway said in court documents this cost the company $9.8 million in lost sales and development costs.
Court documents allege Gateway spent $2 million in research and development costs. Gateway asked the court for at least $9.8 million in actual damages plus an additional $9.8 million in damages for unjust enrichment on the part of the defendants, and exemplary damages in the amount of twice the sum awarded to Gateway.
The case is still pending.
In general, Nelson said, violators can be held liable for a wide range of damages, depending on the agreement and varying from case to case.
"They're all very unique to the situation," Nelson said.
A non-disclosure agreement former Gov. Eric Greitens allegedly violated played a role in the saga that led to his resignation June 1.
In May, the Missouri House Special Committee on Oversight found Greitens violated an NDA he signed in November 2012 with The Mission Continues, a veterans charity he helped found in 2007. Greitens allegedly used a donor list compiled by the charity during his 2016 run for governor.
A report by the House committee says the agreement forbade Greitens from disclosing confidential information to any third party during his time working for the charity or after his employment at the charity ended. Greitens also agreed not to use any intellectual property or trade secrets created by the charity, including intellectual property he created while working for the charity, outside of his employment for The Mission Continues.
In that non-disclosure agreement, the report says, "Greitens agreed to hold in strict confidence 'the identities of any donors or investors, and any personal information of donors or investors, and any contact information for donors or investors,' as well as any 'lists, databases trade or business secrets, and similar or dissimilar information relating to the operations or activities of TMC.'"
Committee Chairman Jay Barnes, R-Jefferson City, said in a statement at the time that the report found The Mission Continues was the true owner of the fundraising list.
"The report shows the governor took advantage of a charity that works hard to take care of our veterans," Barnes said.
In April, a St. Louis prosecutor charged Greitens with a felony computer tampering charge relating to the donor list. That case rested upon the idea Greitens and others improperly took and used data owned by the Mission Continues, using a computer to gain access to the files.
Greitens never faced civil or criminal charges directly related to the NDA he allegedly violated, but the allegation played a role in the saga that led him to resign.
Prosecutors later dropped the computer tampering charge.