[Updated 5:30 p.m. EDT, May 15, 2012, to revise what is now the next-to-last bullet point and add a new final bullet point, as well as supplement the closing sentence.]
I find myself revisiting a favorite topic: stating in a contract how a nonparty is to act. (That something I explored most recently in this post about shall require.) Consider the following examples and the accompanying annotations:
- Each Acme employee shall enter into a confidentiality agreement with Acme in the form of exhibit 2. [No: It doesn’t make sense to impose a duty on a nonparty.]
- Each Acme employee will enter into … . [No: Using “will” suggests that this is language of policy, that each employee will automatically enter into a confidentiality agreement.]
- Each Acme employee must enter into … . [An improvement, in that it states an obligation without imposing a duty. But implicitly the obligation is actually imposed on Acme—why not make it explicit? Oh wait—maybe this states a condition that Acme must satisfy. So there’s plenty of room for improvement.]
- Acme shall cause each Acme employee to enter into … . [Unlike, say, wholly owned subsidiaries, individuals are possessed of free will and so can’t be instrumentalities of others, so this doesn’t make sense. Acme can’t make employees enter into a confidentiality agreement. Instead, all it can do is ask them to and fire them if they refuse to.]
- Acme shall require each Acme employee to enter into … . [Aside from exhibiting the same shortcoming as “shall cause,” this is unclear, as it could be read as suggesting that Acme has a duty to impose on each Acme employee a duty to enter into a confidentiality agreement.]
- Acme shall ensure that each Acme employee enters into … . [Aside from exhibiting the same shortcoming as “shall cause,” this is too genteel, and not specific enough.]
- Acme shall enter into a confidentiality agreement in the form of exhibit 2 with each of its current employees, unless any one or more current employees refuses, in which case Acme shall terminate those one or more current employees. Acme shall not hire as an employee any person who does not enter a confidentiality agreement with Acme in the form of exhibit 2 as a condition to becoming an Acme employee. [My initial version of this didn’t include the “unless” clause, but westmorlandia’s comment showed me the error of my ways: without the “unless” clause, imposing on Acme an obligation to enter into a confidentiality agreement with each employee is functionally identical to imposing on Acme an obligation to “shall cause” each employee to enter into an employment agreement. But this version is way too cumbersome.]
- Acme represents that it has entered into a confidentiality agreement in the form of exhibit 2 with each of its current employees. Acme shall not hire as an employee any person who does not enter a confidentiality agreement with Acme in the form of exhibit 2 as a condition to becoming an Acme employee. [I think this is the most realistic option.]
I had intended with this post to show why it’s problematic to impose obligations on nonparties who are individuals, and I was more successful than I had planned, in that I ended up confusing myself!
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Acme shall not make Confidential Information available to any of its employees who has not entered into a confidentiality agreement with Acme in the form attached as Exhibit 2.
cf: Point taken, but your version changes the meaning. My language assumes that the counterparty doesn’t want Acme to have around anyone who doesn’t want to sign a confidentiality agreement. Ken
Well, OK. “Acme shall terminate any employee who does not enter into a confidentiality agreement with Acme in the form attached as Exhibit 2.”
But, if you don’t like that, “Acme shall enter into a confidentiality agreement in the form attached as Exhibit 2 with each of its current employees and shall not hire any future employee unless such employee enters into such agreement with Acme.”
That doesn’t really help the underlying complaint, though — what if it wasn’t a contract; what if each person was supposed to read a book or take some training or be well-rested before starting work? At some point, you can’t really say “You will make sure that each of your people gets a good 8 hours of sleep every night.”
cf: From the perspective of the categories of contract language, your version and my version are the same. But your version contains bits that I’ll happily steal!
I’m not sure that your well-rested-employee scenario is plausible: it’s hard to imagine the other party wanting some contract remedy for tired employees.
Incidentally, have you tried not using such to mean this, that, these, or those?
Ken
Obnoxious? Hardly — That’s like Josh Hamilton apologizing for giving batting lessons.
With regard to the well-rested employee, my point was sort of a higher-level: That solution only works in the context of a contract with Acme. What happens when the obligation isn’t to enter into a contract with Acme? So, for example, what happens when you want to say “Acme shall cause each purchaser of its Stock to enter into the existing co-sale agreement among the company’s stockholders,” where Acme isn’t a party to the co-sale agreement?
Greg: My objection to shall cause in this context is that it collapses the dynamic. All Acme can do is tell people that they have to enter into a confidentiality agreement if they want to be employed, or remain employed.
But at least in this context shall cause is less problematic than Acme shall cause Acme employees not to disclose confidential information.
More generally, if a party doesn’t have control over compliance with an obligation, I won’t impose the obligation. Instead, I’d use some other form of risk allocation, such as an “efforts” provision plus a termination fee or indemnification.
I’m not crazy about your “even of default” language, as remedies are inherent in failure to comply with an obligation.
Ken
Ken – I think the answer depends on the circumstances. If you are dealing with Microsoft, you can’t expect the company to go out and have each employee sign off on Exhibit 2, nor would it be necessary. Under those circumstances, I would opt for cfulmer’s initial suggestion, with the added proviso that Microsoft would be responsible for any breach of confidentiality by an employee, regardless of whether that employee signed a confidentiality agreement or not. On the other hand, if you are dealing with a 3 person firm, it is feasible to require each of those persons to sign Exhibit 2, in which case your final proposal fits the bill. I don’t think this is a “one size fits all” and you have to balance the need for confidentiality against the benefits of doing the deal.
Andrew: My issue is more basic: You can’t control an individual the way you control a wholly owned subsidiary, in that an individual nonparty can simply refuse to comply with an instruction from a party. So instead of imposing an obligation that a party has no control over, I prefer to use a different category of contract language. What works would depend on the context. Ken
Ken – I understand the distinction between an employee and a wholly-owned subsidiary; that’s why I think ultimately the solution should focus not on what an employee does or does not sign, but on ensuring that the company is contractually responsible for the conduct of its employees, regardless whether they signed anything or not. Andy
Andrew: Then I suggest that if you can’t somehow impose the obligation on the party in a manner that makes sense, the best approach would be to treat it as a risk-allocation matter, by means of indemnification, a termination fee, or otherwise. But the more theoretical the discussion, the less sure I become. That’s why I find it helpful to deal with actual language. Ken
If I’m representing the side being asked for confidentiality agreements from its employees, I generally delete anything that looks like the last approach. As a practical matter. . . well, it’s not practical, especially for companies with more than about three employees. Imagine what would happen if EVERY contract a company entered into had a similar clause, each with a different Exhibit 2. As a philosophical matter, I don’t want anyone else sticking their noses into the relationships between my client and its employees (and neither do my clients’ HR organizations). Unless my client is a very small company, the only way I accept that willingly is if it is worded so that my client’s standard employee confidentiality agreement (if it has one) will satisfy the obligation.
One possible alternative is for the employer to expressly accept liability for any unauthorized disclosure by its employee, even if the disclosure is outside the scope of employment (including unauthorized disclosure after the employee becomes a former employee). However, that may not always be good enough for the disclosing party because it may be difficult to get an injunction against the individual, and some companies on the receiving may not want to expressly accept that liability.
My preferences are some flavor of the 4th or 5th alternatives or the third alternative written as a condition to the employer’s authorization to disclose the other side’s confidential information to its employees. I agree with your preference of “require” over “cause” for the reason you state, but I’ll agree to either one of them — at least as long as I know that all my client’s employees are employees at will.
Mike: My choice of hypothetical was unfortunate, as having all employees sign confidentiality agreements would indeed be annoying, unless exhibit 2 were simply Acme’s standard confidentiality agreement rather than something that the other party cobbled together. This is an issue considered in Koncision’s confidentiality-agreement template. For purposes of this post, my focus was in the semantics, rather than practical implications. Ken
I don’t such have a philosophical objection to “Acme shall cause/ensure that each Acme employee…”. It is understood that Acme may be unable to make every Acme employee sign the agreement, in which case it is in breach of the agreement and consequences ensue. That is an allocation of responsibility and risk to Acme, and an incentive for Acme to do what it can to make the employees sign up. I would be a little hesitant if I were Acme, but it is hardly uncommon to agree to do something that you are not 100% sure you can do.
Exactly the same practical issue exists with the last option – Acme cannot enter into an agreement with its employee unless the employee agrees.
That said, if I were Acme I would prefer to say “Acme shall not disclose confidential information to any employee who has not entered into a confidentiality agreement with Acme in form of Exhibit 2.” That provides Acme with another solution if an employee does not sign (though the counterparty may be concerned that the information will leak anyway).
W: I’m looking to make the dynamic explicit, rather than incorporating assumptions.
The question of what level of certainty is tolerable when you assume an obligation is an interesting one. I’ll explore it in a separate blog post.
And $#%&*! You’re correct about my attempt to impose the obligation on Acme. Back to the drawing board; expect further revisions.
Ken