What is a Confidentiality Clause?
The success of many companies often hinges on a secret formula, an exclusive client base or a patented process. In order to protect these vital secrets, companies routinely add a special addendum to hiring contracts called a confidentiality clause. This is a legally binding agreement between employers and employees which assigns severe penalties if certain secrets are revealed. Participants on game shows or personal assistants to celebrities may also be asked to sign this type of clause.
The penalty phase of this type of clause is usually financial in nature, although the employer may seek other forms of relief in court. Typically, a confidentiality clause for contestants on a reality game show would assign a multi-million dollar fine if anyone revealed the eventual winner to the press. Since very few contestants could afford such a financial blow, they usually remain silent until the information is no longer considered secret. Employees of celebrities may also face substantial fines if they divulge personal information about their famous employers.
In the corporate world, a confidentiality clause offers protection against former employees who might use confidential information at a new workplace. This doesn't mean an engineer cannot draw on his general work experiences elsewhere, but he or she cannot take photographs of specific machines or use secret formulas or processes. A clause for confidentiality alone cannot force former employees to forget names on a client list or the contact information for suppliers. What it can do is provide enough financial and legal incentive to discourage former employees from using 'objective' information gathered from the job.
One difficulty with a confidentiality clause is enforcement. It is always possible that a company's secret formula may be revealed by someone other than a former or current employee. In order to prevail in court, an employer would have to have compelling evidence that a specific employee violated confidentiality. They would also have to establish that the employee revealed truly confidential information, not merely a basic process or non-exclusive formula.
Another problem employers may face with a confidentiality clause is the true effectiveness of financial penalties. While a maid working for a celebrity may not be able to afford a $4 million fine for revealing intimate details, a top chemist for Coca-Cola might not feel so threatened. The financial penalties connected with breach of a confidentiality clause must be commensurate with the level of potential damages. A disgruntled contestant on a game show might decide to reveal the winner's name regardless of the clause. Even if the producers successfully sue for a $4 million fine, the potential damage to the show's commercial appeal could be much higher.
"The financial penalties connected with breach of a confidentiality clause must be commensurate with the level of potential damages."
This is the part that may well render such clauses in reality show contracts invalid/unenforceable.
@ GlassAxe- There are many different types of businesses that use non-competition clauses. Companies from sporting goods manufacturers to restaurants use non-competition clauses to protect their products.
I used to manage a restaurant, and many of my peers had to sign non-competition clauses. I was friends with the owner, and he knew I was moving out of state eventually so I was not required to sign one, but I did agree to a generic non-disclosure agreement. One of my friends who managed a nearby restaurant had to sign a non-competition clause saying he would not open a competing restaurant within the same county two years after his employment with the company ended.
I also had a friend work for Burton Snowboards. He worked in the snowboard division, but had to wait to start his winter clothing line because Burton sells winter wear as well. Once his non-competition clause ended, he started his base layer company.
@ Cougars- What types of companies make an employee sign a non-compete agreement? Is it only technology companies that add non-competition clauses, or do other industries commonly include this stipulation? Can non-compete clauses be negotiated?
Similar to a confidentiality clause is a non-compete agreement. Companies often add non-compete clauses to managerial contracts, forbidding the employee from starting a similar type of business for a certain period of time, or within a certain radius.
The reason a company might add a non-compete clause is to protect secrets that have made a company successful. For example, a two year non-compete clause in a technology company would prevent an employee from taking an idea for a product and creating her own product to compete with her former company's. By the time the two years are up, the company would have adequate time to develop new technologies, and retain its competitive advantage.
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