Former Employee Allegedly Coughs up Cold Remedy Formula: Broad Non-Disclosure Agreement Largely Ineffective

A New Jersey appellate court’s decision last week in UCB Mfg., Inc. v. Tris Pharma, Inc., serves as a cautionary tale for employers when drafting confidentiality agreements to protect their trade secrets and confidential information.  In UCB, the court found that the confidentiality provision in a pharmaceutical company’s employment agreement with one of its former employees was unenforceable because it was overly broad in time and scope, did not further a legitimate business interest, was contrary to public policy, and was unduly burdensome on the employee.

The case emerged when plaintiff pharmaceutical company UCB alleged that its former lead cough syrup formulator, Yu-Hsing Tu, disclosed confidential information about one of its cough syrup formulas after leaving UCB and joining the company’s competitor, Tris.  After Tu’s arrival, Tris became the first company to produce a generic form of one of UCB’s profitable cough syrups.  UCB sued Tu and Tris for misappropriation of trade secrets, breach of Tu’s confidentiality agreement with UCB, and unfair competition.  UCB later dropped its trade secrets claim after failing to secure a preliminary injunction.

While working for UCB, Tu had signed a confidentiality agreement which stated Tu would not disclose “secret or confidential information” without UCB’s consent.  The agreement specified that “secret or confidential information” included:

“acquisition or merger negotiations or information, know-how, designs, formulas, processes, devices, machines, inventions, research or development projects, plans for future development, materials of a business nature, financial data, legal documents and records, trade secrets, processes, formula data, techniques, know-how, improvements, inventions, marketing plans, strategies, forecasts, pricing information, customer information, work procedures, personnel and labor relations information, product specifications, financial information, models, blueprints, drawings, vendor information, proprietary information of other persons that has been disclosed to the Company and any other information of a similar nature in a form or to the extent not available to the public.”

The trial court found for the defendants on summary judgment.  The appellate court affirmed, holding that that the confidentiality agreement was not enforceable under New York law (which the parties agreed applied to the agreement).

The court first discussed New York’s policy against anti-competitive covenants restricting a former employee’s ability to seek future employment.  It then found that under New York law, when trade secrets are not involved, confidential information can be protected only if an employee’s services are “truly special, unique or extraordinary and not merely of high value to his employer[,]” and that employees may not be restrained from using general techniques learned during their employment.

The court held that the confidentiality agreement between UCB and Tu was unenforceable because it was not limited in time, space, or scope.  It pointed out that the list of information to be protected was so exhaustive (specifically citing the terms “materials of a business nature” and “work procedures”) as to include “every phase of Tu’s work experience.”  And the court found that because UCB dropped its trade secret claim and did not show that Tu’s services were not truly special or unique, UCB had no legitimate business interest in protecting the supposedly disclosed information under New York law.  It also found that enforcing the confidentiality agreement did not further public policy because the free flow of information gained by employee mobility encourages innovation, and patent laws already protect intellectual property and the progress of research and development.  Finally, it held that the confidentiality agreement was overly burdensome on Tu because its broad terms would render him a “virtual hostage[]” of his employer by prohibiting him from working in a field that was his specialty.

Employers sometimes may try to include all conceivable types of confidential information in a confidentiality agreement to make sure something doesn’t fall through the cracks.  But employers should be careful about overreaching as a court may ultimately find such an agreement invalid ­— a result that can be hard to swallow when your company’s trade secrets are in your competitor’s hands.