Covenants not to compete and confidentiality agreements: How should legal auditing assess them?
Jayme Vita Roso*
I – INTRODUCTION
Covenants not to compete (CNCs) and confidentiality agreements (CA) are being used ever more frequently by multinational companies to protect their trade, industrial, technological or marketing secrets and they have begun, rightly so, to be scrutinized in all their multiple facets by operators of law.
On the other hand, if the operators of law took it upon themselves to protect their clients, from the phase in which such agreements are outlined and drawn up, calling upon the legal auditor to pronounce himself on a concrete case, such auditor would not be content with the text that materialized with the express desire of those who engaged him. It is for this reason that it is necessary, in this approach, to increase the auditor’s field of study so that he may, with information gathered relative to any fact or act generated during negotiations and in previous drafts or still existing in the company, or together with his lawyers, finally prepare his report.1.
II – LEGAL AUDITING AND COVENANTS NOT TO COMPETE OR CONFIDENTIALITY AGREEMENTS
Bearing in mind that a confidentiality agreement is the result of the convergence of the wills of the parties thereto, may it be assumed to be a contract? And if so, what kind of contract? How far-reaching is it? Do ethics sustain this manifestation of wills?
These questions start occurring to the legal auditor when, once he has gathered together all the information and the documents prior to or after the signing of the confidentiality agreement, he begins his work of understanding all the pieces, how they arose, why the parties decided to negotiate such an agreement and what the interests that must be protected are. This process will finally lead to a thorough study of all the material that was presented to him. From that point on, the legal principles involved in the deal will come to the fore.2.
It is common practice for executives, researchers, accountants and companies, when using CNCs as a prior condition to engagement, to enter into a confidentiality agreement, commonly known as “covenant not to compete”, although they are by nature distinct.
This certainty leads the legal auditor to reflect thus:
a. was there a legitimate business interest to be protected?;
b. what is this legitimate business interest?;
c. does it concern confidential information that was transmitted to the employee?;
d. how does one certify oneself, beforehand, that the employee received “confidential information” during his or her time in the job?
e. in addition to the confidential information, did the employee have access to “the company’s business secrets”? How would he or she come by such information? By what means? In what way? Did he or she indeed come by it?; and
f. is the company information protected by the confidentiality agreement contemporaneously valuable and confidential?
Once these questions have been meticulously considered by the legal auditor, in the preparatory process, he will go on, with particular interest, to weigh the merits of the considerations3 that were included in the confidentiality agreement. The determining reason for the legal auditor’s interest in pondering such considerations is that, since they are the underpinning of the confidentiality agreement, they are the cause4 of the agreement, or the cause that led the parties to contract. Below are set forth some examples:
(a) Adequate consideration: is that which is satisfactory and reasonable to the circumstances of the agreement.
(b) Due consideration: sufficient consideration.
(c) Continuing consideration: an act or the performance thereof extended over time.
(d) Future consideration: this can assume a variety of meanings in the construction of cases, each one of which is specific. Only one is relevant in the sphere of this work: the consideration that is due after the other party performs its obligation (this hypothesis is frequently remembered in the case of pre-nuptial agreements).
On the whole, it is generally accepted that these conclusions of the legal auditor were known to the employee before the CNC was signed.
However, any clause that limits the freedom of the employee, be it by preventing them from working, or embarrassing them in the performance of their duties for which they were hired, may be annulled by the Labor Courts5 should the pain or profound distress of the employee, by whatever means, be the result thereof; the employee is also allowed to claim redress for any pain and suffering effectively sustained6.
III – THE CERTIFICATE OF THE LEGAL AUDITOR
The legal auditor's report that draws to a close the job for which he was retained, must be grounded. Whoever receives such report must be unable to infer any unwritten conclusions from the text, which is why extreme caution is required, so that the grounding of the report may explicitly set forth the reasons, motives and grounding that guided the legal auditor's mental process in the conception of his labor, before such report is handed in to whoever hired him.
Some considerations on the text of the legal report deserve a brief analysis.
The wording of the clauses considered critical in this type of agreement will certainly be the object of scrutinous analysis, which may lead the legal auditor to consider them void in the face of any succeeding fact, or a plurality thereof, that puts into question the relationship between the parties.
With much care, the auditor, if expeditious, will read and re-read the confidentiality clause.
Once such clause is systematically interpreted, along with the other clauses of the contract, and is compared against the object of the questions that was given to the legal auditor, he will assess the subtlety of the wording with the intentions of the parties drawn up in the text.
His conclusion may often not coincide with that of the company or of the employee that hired him.
The same will take place regarding the clause not to compete, which, in American Statutory Law, has been consolidated under the title of “covenant7 not to compete”.
In agreements of this nature, the way in which the parties - cognizant of their interests to be defended - reciprocally projected and defined in the agreement each of their interests, and which interest (interests) these would be, will not escape the legal auditor.
The occasion may arise when one or more circumstances will make the legal auditor opt for an alternative means of resolving the squabbling, so that, with propriety and promptness, a conflict that could be economically harmful to the parties may be brought to an end.
Within this alternative means, the choice of mediation8 could be the most appropriate, above all when the parties still intend to continue business relations; when the parties endeavor but do not reach an agreement because they disagree on either of the two hypotheses dealt with in this article; when there is imminent danger that the disagreement results in irreparable damage and when, lastly, it becomes desirable to reach an agreement to confidentially bring to an end that relative to which the parties were unable to reach an understanding.
IV - CONCLUSIONS
(i) The work of the legal auditor in questions crucial for companies that involve confidentiality agreements or covenants not to compete, or both, is an effective way for the interested party that uses such agreements to find a solution for an event that appears harmful at first sight, but that, in the long run, does not turn out to be so, neither by fault, much less by malice, since the specialization and the tradition of the legal auditor can serve as an orientation to decision-making thereby drawing to a close any possible disagreements. The certainty shall come from qualified work that will orient the interested party, or both parties.
(ii) It is not possible to hire a legal auditor from any company that is not a law firm and, it is, similarly, not possible to provide therefor in contracts, confidentiality agreements or covenants not to compete, by express provision of the Statutes of the Brazilian Bar Association9.
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1By legal auditing, we understand: “Legal auditing is work that can be done exclusively by a lawyer in the regular exercise of his profession, through prior written engagement, pursuant to law, to operate the review of cases or to proceed with the evaluation of one or more concrete situations that are presented to him, within the sphere of law, in order that he may issue, in both eventualities, and in due compliance with legal and ethical principles, his opinionative assessment”. With regards the assessment, which may or may not be conclusive, it shall always be binding for whomsoever issues and signs it. ROSO, Jayme Vita. Auditoria jurídica para a sociedade democrática. São Paulo: Escolas Profissionais Salesianas, 2001. p. 43.
2For practical reasons, without doctrinal digressions, the confidentiality agreement is an innominate agreement that must be written, stipulated and concluded by capable agents, adhering strictly to the teleology of social finality, with a strong ethical content in its stipulations, that cannot injure the freedom to work of any person much less serve as a “manoeuvre” against the interests of the country or violate conduct typified as anti-competitive.
3“Consideration. Something of value (such as an act, a forbearance, or a return promise) received by a promisor from a promisee. Consideration, or a substitute such as promissory estoppel, is necessary for an agreement to be enforceable”. In: GARNER, Bryan A. Black’s Law Dictionary. Saint Paul, West Group, 1999. p. 300-301. GORLA, Gino. Enciclopedia del Diritto. vol. IX. Milano, Giuffrè Editore, 1961. p. 176-184.
4Incidently, in all his wisdom, Miguel Reale, in the Anteprojeto do Código Civil (Draft of the Civil Code), points out that “it is this spirit of ethical understanding of the socio-economic reality that guides the review of the general rules on the formation of contracts and the guarantee of their equitable execution”, and he adds with certainty that, while disciplining the obligations, it is also essential “to make explicit, as a principle that conditions the entire hermeneutic process, that freedom to contract may only be exercised in accordance with the social ends of the contract, thereby involving the primordial values of good faith and probity. This is a fundamental precept, dispensable perhaps in light of a limited positivistic understanding of the Law, but essential to the compliance of the norms particular to the ethical concretion of the legal experience”. Diário Oficial, Brasília, 7th. Aug.1972, Suplemento AC nº 149, p. 5.
5“Section 9 – The acts practiced with the objective of perverting, preventing or defrauding the application of the precepts contained in this Consolidation shall be deemed null ipso jure”. Consolidation of Labor Laws (CLT).
6The reparation of personal injury is guaranteed by the Brazilian Federal Constitution, in the chapter on immutable norms. The text is worded thus: “Section 5 All persons are equal before the law, without distinction of any nature, guaranteeing to Brazilians and foreigners resident in Brazil the inviolability of the right to life, freedom, equality, safety and property pursuant to the following: ... V – the right of response, proportional to the grievance is assured, in addition to damages or pain and suffering.”
7“Covenant. A mutual consent or a agreement of two or more persons to do or to forbear some act or thing; a contract; a compact; a bargain; arrangement; or stipulation; a writing containing the terms of agreement or contract between parties. To enter into a formal agreement; to contract; to bind one’s self by contract. To grant or promise by covenant”. In: THE WEBSTER ENCYCLOPEDIC Dictionary of the English Language. vol. I. Nova York Grolier Inc., 1968. p. 198. Conhecendo-se, também, dentre outros: “absolute covenant”; “affirmative covenant”; “assertory covenant”; “auxiliary covenant”; “collateral covenant” e “concurrent covenant”. In: GARNER, Bryan A. Black’s Law Dictionary. Saint Paul, West Group, 1999. p. 369.
8“Mediation is a voluntary procedure in which the disputants meet with a neutral party in a good faith effort to negotiate a resolution of their dispute. Through mediated negotiations, the parties whose agreement is necessary for a comprehensive resolution of a dispute are identified, brought to the negotiating table, educated as to the factual contentions and legal theories of all sides, and given the opportunity to evaluate in confidence the realistic options for resolution. Ideally, the end product is a settlement agreement that is reduced to writing and executed at the mediation”. COOPER, Corinne. MEYERSON, Bruce E. A drafter’s guide to alternative dispute resolution. Chicago: American Bar Association – Committee on Dispute Resolution – Business Section, 1991. p. 34.
9Here collated are sections 25 and 27, of the Code of Ethics and Discipline of the Brazilian Bar Association that deal with professional confidentiality: “Section. 25 Professional confidentiality is inherent to the profession, and is required to be respected, except in cases of grave threat to the right to life, honor, or when the lawyer finds himself assaulted by his client and, in self defense, must reveal the secret, always restricted, however, to the interest of the cause”. “Section. 27 – The confidences entrusted to the lawyer by the client may be used to the limits required by the defense, provided such is authorized by the constituent. Sole paragraph. Confidences are presumed to be the epistolary communications between lawyer and client, which may not be revealed to third parties”.
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*Attorney at Jayme Vita Roso Advogados e Consultores Jurídicos
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