Five years ago (my how time flies), I wrote about a risk facing those who seek to protect their trade secrets by use of a non-disclosure agreement (“NDA”). Several people asked me whether the passage of time brought new Texas case law or statutes that solved this problem. The answer is no.
Here is the conundrum. On the one hand, a party disclosing a trade secret pursuant to an NDA often desires to make the NDA confidentiality restriction go on forever. The goal in doing so is to avoid the risk of waiving trade secret protection upon expiration of the NDA. On the other hand, Texas law generally provides that when a contract has an indefinite term of existence either party to the contract may terminate the contract at will.
This is an important issue to Texas businesses. Based on the unscientific evidence of what I have seen in business transactions over the past few years, I believe many Texas businesses continue to use NDAs that perpetually restrict the disclosure of trade secrets. I suspect they do so without understanding the risk that the other party to the NDA could someday argue the NDA is terminable at will. If so, the recipient of the trade secret information would then be free to disclose the information to others.
I have not found any relevant Texas court opinions or statutes enacted since my post addressing this problem five years ago. I still believe Texas courts should permit perpetual enforcement of trade secret NDAs as a matter of public policy. However, until the law is settled, you can click this link to my “oldie but a goodie” discussion of strategies for choosing the term of NDAs.
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A lawsuit that I worked on last year involved an interesting issue. May a business plaintiff use a confidentiality agreement to prevent its former salesperson from continuing business relationships with the plaintiff’s customers? Yes, an employer can use a properly crafted non-competition agreement to achieve this goal. But if there is no such agreement, can a plaintiff achieve the same end by relying upon a confidentiality agreement? Continue reading
Employee exit interviews are a useful tool for protecting businesses trade secrets. Many businesses use exit interviews for a different purpose – eliciting candid answers from a former insider about what the business is doing right and wrong. It is also a time to talk to the employee about trade secrets that may be at risk due to the employee’s departure.
Trade secrets may be at risk in two different ways. The first risk is knowledge loss. The second risk is inadvertent or intentional disclosure of trade secrets to a competitor. Continue reading
When using a non-disclosure agreement or non-use agreement (collectively, a “NDA”) to protect trade secrets, a good practice is to include a tolling clause in the contract to extend the life of the NDA if the restricted party breaches the contract.
Imagine a plaintiff who files a theft of trade secrets claim against a defendant who continuously violates a NDA. If the lawsuit takes several years to complete, the NDA might expire before the plaintiff obtains a judgment. The defendant would then argue that the plaintiff is not entitled to an injunction prohibiting the defendant’s further use or disclosure of the trade secrets because the NDA expired. After all the defendant asserts, “Regardless of whether I breached the NDA, I am entitled to use the trade secrets once the contractual restrictions expire.”
To avoid this situation, include language in a NDA stating that the term of the NDA will be extended for the amount of time that the restricted party breaches the contract.
Although it is a good practice for employers to require their employees to sign confidentiality agreements covering trade secrets, failure to do so is not fatal to a theft of trade secrets claim. This is because Texas law places a duty on employees not to use trade secret information acquired during the employment relationship. No written confidentiality contract is required. This duty survives termination of the employment relationship.
Do not assume employees are free to use their employer’s trade secrets just because there is no signed confidentiality agreement.
Here are two cases applying this rule of law: Lamont v. Vaquillas Energy Lopeno, Ltd., 421 S.W.3d 198, 211 (Tex. App.—San Antonio 2013, review denied); Reliant Hospital Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488, 499 (Tex. App.—Dallas 2012, review denied).
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