A “Culture Of Concealment” – Scrutinizing Overbroad NDAs

Sheppard Mullin Richter & Hampton LLP
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Sheppard Mullin Richter & Hampton LLP

Courts are increasingly scrutinizing agreements that extend beyond what is necessary to protect bona fide confidential information and trade secrets. The recent decision in Hamilton v. Juul Labs, Inc., Case No. 3:20-cv-03710-EMC, illustrates this trend. On January 27, 2021, a California federal judge ruled that an ex-employee’s lawsuit against e-cigarette manufacturer Juul Labs, Inc. regarding Juul’s allegedly over-restrictive non-disclosure agreements (NDAs) may move forward. The case, filed by Juul’s former Director of Program Management, Marcie Hamilton, is pending before the U.S. District Court for the Northern District of California, Judge Edward M. Chen presiding.

In her amended complaint, which alleges numerous PAGA violations under the California Labor Code and violations of California’s Unfair Competition Law, Plaintiff alleges that via its pre-employment NDAs, Juul maintains a policy of restricting employee speech, competition and whistleblowing. The complaint alleges that the company’s pre-employment NDA prohibits employees from disclosing virtually anything related to Juul (e.g., information about Juul’s customers, products, and markets, as well as other broad categories such as “other business information of the Company” and “information developed or learned by Employee during the course of employment with Company”). The NDA also contains a non-disparagement clause that prohibits employees from disclosing any information that “could be detrimental to the interests of the Company.” Plaintiff alleged that Juul illegally enforced its employment agreements via numerous policies and practices that violate the Labor Code, including prohibiting employees from speaking with the press, regulatory or law enforcement agencies, and other third parties regarding any matter that could be detrimental to Juul, and suppressing employees’ political activities outside of the workplace.

In moving to dismiss these claims, Juul argued that Plaintiff failed to show that Juul’s pre-employment NDA and other employment policies prohibited employees’ protected activities, such as whistleblowing. Instead, Juul argued that these agreements and policies merely sought to prohibit the dissemination of the company’s proprietary and confidential information, as permitted under California’s Labor Code.

However, Judge Chen ruled that Plaintiff sufficiently alleged that Juul maintains a “culture of concealment,” including via allegations that Juul instructs employees not to speak to the press; Juul instructs employees not to relay information in recorded form concerning potential illegal conduct or the public health risks associated with Juul’s products; Juul instructs employees not to speak to government regulators unless they have to; Juul instructs employees to conceal information if they are forced to speak with government regulators; and Juul retaliates against employees for internally reporting instances of unlawful conduct or negative publicity.

The Court ultimately found that Plaintiff had sufficiently alleged six of the amended complaint’s seven claims, including those related to whistleblowing, an employee’s right to disclose working conditions, and an employee’s political activities. This case will be worth monitoring, as it may provide further guidance to companies regarding how best to tailor their employment agreements, NDAs, and workplace policies to avoid claims predicated on their overbreadth.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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