In the ever-evolving landscape of the cannabis industry, the use of non-disclosure agreements (NDAs) is becoming more prevalent as the demand for difficult to grow exotic strains increases and more brands and businesses flood the market. Previously we have blogged about the importance of NDAs to safeguard confidential business information. Cannabis businesses should continue to use NDAs, but must take care to not structure them as disguised covenants not to compete or they will lose all value.
Legal scrutiny and enforceability
To maintain a competitive advantage in the cannabis industry that is now facing serious challenges to remain profitable, many employers have greatly expanded the scope their NDAs and made their execution a condition to employment. However, in California, the need to protect trade secrets and confidential information is balanced against a strong public policy favoring employee mobility and competition. As a result, over inclusive NDAs will not withstand the scrutiny of California Courts and will not be enforced.
Navigating legal frameworks
Per California Business & Professions Code section 16600, absent statutory exception, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The result is that California courts scrutinize NDAs closely to ensure that they are not disguised as a covenant not to compete or unduly restrict an employee’s ability to pursue employment opportunities or to engage in fair competition. To ensure that an NDA is effective and enforceable, it must be narrowly tailored both in time and scope so that the courts can readily ascertain what information employers are seeking to protect.
Challenges and exceptions
There is an exception to Business & Professions Code section 16600 for trade secrets, but the former employee’s actual use of the trade secret must be shown. California Courts have soundly rejected a doctrine utilized in other states known as inevitable disclosure, which assumes that if an employee has knowledge of a trade secret and accepts a similar job with a competitor, then he will “inevitably disclose” the trade secret in the performance of his job duties with his new employer. In an industry known for its high turnover of employees, by the time a cannabis business can demonstrate actual use and receive relief from the courts, the damage will have been done and the employee responsible will have moved on.
Strategic use of NDAs in the cannabis industry
In the dynamic arena of cannabis, the strategic use of NDAs remains vital to safeguard trade secrets and proprietary information. However, businesses must tread carefully to ensure that NDAs do not inadvertently morph into disguised covenants not to compete, risking their enforceability in California courts. By striking a delicate balance between protecting confidential information and upholding principles of employee mobility and fair competition, businesses can harness the power of NDAs effectively while navigating the legal landscape with confidence and compliance.
