My independent contractor clients are sometimes surprised to find out that non-disclosure agreements (also known as a confidential disclosure agreements, and called “CDAs” in this article) can have traps. Some clients think a CDA merely says they won’t disclose the confidential information of the hiring company (like a pharmaceutical, tech, or artistic company) to others. They think, “well, I have integrity and wouldn’t do that anyway, so it’s fine to sign” without reading or understanding the CDA.
In fact, I often see CDAs that (despite their title) go far beyond merely agreeing not to disclose sensitive business information. They can limit a contractor’s ability to earn a living in the future, can leave a contractor defenseless if sued over their work quality, and may make the contractor responsible for the hiring company’s attorney’s fees in a future dispute. How does this happen?
Some companies put non-compete language in the CDA, even though the title doesn’t say so. This language may prohibit the contractor from working with her other clients in the industry. For example, a pharmaceutical company may forbid the contractor doing future work for its competitors, even if the contractor doesn’t disclose confidential information, and even on completely different projects. A non-compete section may even have punitive provisions for payment of damages if the contractor acts contrary to the non-compete.
Some CDAs require the contractor to return all files and materials to the hiring company after the project or when otherwise requested. If that happens and then the hiring company sues the contractor claiming he didn’t perform his duties properly, the contractor no longer has evidence needed to prove his performance. The contractor is literally defenseless. It is important to negotiate a right to keep one archival copy of any materials reasonably needed to prove performance under the parties’ contracts.
A few CDAs require the contractor to pay for the hiring company’s attorney’s fees to enforce the agreement even if the hiring company merely feels a violation of the agreement is “threatened.” That is awfully broad, and can be punitive to the contractor.
CDAs often say that if there is any conflict between the CDA and a later contract between the parties (like a contract for services or a master services agreement), the CDA controls. That means if a client sees me after a problematic CDA is signed, asking me to help negotiate a service contract, I can’t fix the CDA problems by simply negotiating different terms in the service contract, because the CDA will still govern. We have to then try to renegotiate the CDA and negotiate the new service contract, which makes things harder, more time consuming, and more expensive than if the client had seen me before signing the CDA.
Clients may not realize that CDAs are negotiable, but they have to ask, and have to know what to ask for – before signing. Because CDAs are so common, there’s a risk that they become routine. There is a common misconception that they “just” protect confidential information, so they are harmless. Independent contractors can protect themselves by having a plan to read and understand the CDA, and to negotiate with the hiring company if needed before signing it.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or firstname.lastname@example.org.