Understanding Confidentiality and Nonsolicitation Clauses
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Before you sign an employment agreement, make sure you know what you're committing to.
Fam Pract Manag. 2000 Jul-Aug;7(7):73-74.
In today's competitive health care marketplace, anything that distinguishes one practice from another is worth protecting. A name, a location, an affiliation, a telephone number and a patient list can together or separately give a practice a competitive advantage. Organizations traditionally protect their competitive edge by having employees sign a written employment agreement. This agreement usually includes three types of restrictions: a confidentiality provision, a nonsolicitation clause and a restrictive covenant.
If you're a salaried physician or are considering a move into salaried employment, it's likely you'll be asked to sign an employment agreement. Your employer may present it to you as “a mere formality,” but, to best protect yourself against future litigation, you should have a clear understanding of what you're being asked to sign.
What is a confidentiality provision?
If you quit or are terminated, the confidentiality provision can obligate you to treat certain information (defined specifically in the agreement) as confidential and prohibit you from using that information or disclosing it to third parties without your employer's expressed written permission. These clauses typically cover trade secrets and other types of proprietary information.
A trade secret is a plan or process known only to your employer and to those employees in whom your employer has confided such information. In the medical field, a trade secret is considered to be any program, device, method, technique or process that has independent economic value and cannot be obtained by prop-also benefit economically from its disclosure or use.
Anything that represents a material investment of your employer's time and money and meets this definition is considered a trade secret. Examples include employer-generated computer programs, a practice's operating manuals, policy and procedures manuals, advertising or marketing techniques, and lists of vendors, patients or employees.
Even if your employment contract does not specifically include a clause protecting the confidentiality of this type of information, you should be aware that true trade secrets are protected under the common law.
What is a nonsolicitation clause?
A nonsolicitation clause is sometimes confused with a restrictive covenant. Whereas a restrictive covenant can prohibit you from practicing in a certain area for a certain period of time, a nonsolicitation clause can deter you from inviting patients or other employees to move with you to a new practice for a certain period of time. (An upcoming article in Salaried FP will address restrictive covenants in greater detail; however, if you'd like more information in the meantime, see “Building a Solid Employment Agreement With a Small Group Practice,” FPM, April 1997, page 57.)
To fully protect themselves, most employers will include a confidentiality provision, a nonsolicitation clause and a restrictive covenant in the employment agreement. Less comprehensive agreements could provide you with a significant competitive advantage should you decide to leave the practice. For example, if your employment agreement doesn't include a nonsolicitation clause, upon leaving the practice you could legally solicit your employer's patients as long as you didn't use confidential information (e.g., the patient list) in your efforts. If your employment agreement doesn't include a restrictive covenant, you could leave the practice and enter into direct competition with your employer by setting up practice nearby. If your employment agreement includes only a restrictive covenant, you could use your employer's confidential information (within the restrictions of common law) as well as solicit your employer's patients.
Enforcing nonsolicitation clauses
On the one hand, a nonsolicitation clause protects an employer from the unwarranted use of confidential information. On the other hand, a nonsolicitation clause can restrain trade and limit competition. In order to be enforceable, a nonsolicitation clause must satisfy a four-part test in a court of law:
It must not injure the public. If a court determines that it does, the clause will not be enforced.
The clause must not be broader than deemed necessary to protect the employer. If it is, it will be modified or rejected, depending on the jurisdiction and the judge hearing the injunction request.
The clause must not cause undue hardship for the former employee.
The time limitation and geographical scope of the clause must be reasonable. If a nonsolicitation clause passes this test, it's likely that the court will enforce it.
Enforcing confidentiality clauses
If you use a former employer's trade secret you may be engaging in unfair competition and could find yourself facing a lawsuit. However, your former employer will first have to show that it has met certain requirements to protect the secrecy of the information in question. This may include:
Keeping confidential information in a locked cabinet in the bookkeeper's office or in the company's safe,
Using a password that is changed frequently to protect computerized confidential information,
Limiting access to confidential information to only those employees with a legitimate need to know,
Routinely having new employees sign confidentiality provisions and providing a definition of confidential information in the employee policy and procedures handbook.
If an employer meets these requirements and the court is convinced that special care and attention were taken to protect against the dissemination of confidential information, you may have to pay damages and/or face injunctive relief. For example, the court might order you to return the patient list or prohibit you from using it. Or, you may be ordered to account for all income received as a result of your use of the trade secret and to return any related profits you received.
Before you sign
While most prospective employers are likely to ask you to sign an employment contract that includes the three restrictions I've mentioned, you must ensure that the agreement does not significantly compromise your future. Confidentiality provisions, nonsolicitation clauses and restrictive covenants can be tailored to meet an employer's concerns and provide you with maximum flexibility. Don't just sign, thinking you have no other option. Instead, work with your potential employer to tailor these provisions to best serve your mutual interests.
David Dearden is a shareholder and officer in the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd. in Wayne, Pa.
Copyright © 2000 by the American Academy of Family Physicians.
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