To view a July 8, 2019 update to this post, click this link.
There is an unresolved issue in Texas law that is important to those using non-disclosure agreements (a/k/a confidentiality agreements) to protect trade secrets. For brevity, we’ll call these contracts “NDAs.”
The tension exists between these two items: (i) for NDAs covering trade secrets, the disclosing party often desires to place a perpetual obligation on the recipient to maintain the trade secret in confidence – thereby avoiding the risk of waiving trade secret protection upon expiration of the NDA and (ii) case law holding that parties to a contract with a term of indefinite length may terminate the contract at will. I am unaware of a single court decision answering the question of whether a perpetual NDA governed by Texas law is terminable at will.
This is not arcane trivia. It is potentially a very big deal to those seeking to protect their trade secrets. Nevertheless, I think that Texas courts should permit perpetual enforcement of trade secret NDAs as a matter of public policy. A contrary rule of law would place trade secret owners in a “Catch 22” situation when drafting NDAs – either put a limited term on NDAs and risk waiving trade secret status at expiration of the term; or put an infinite term on NDAs and risk that the NDAs are found to be terminable at will (and risk the loss of trade secret status when termination occurs). Not enforcing perpetual NDAs would also be bad for business. Texas is typically pro-business.
Until a court tells us whether I am right or wrong, there are precautions trade secret owners can take to minimize the risk. I discuss those at the end of this post.
But first, here are more details about the problem. Several courts in other states applying the Uniform Trade Secrets Act have stated that information no longer qualifies as a trade secret if it was disclosed to a third party under a NDA that expired. The reasoning is that the plaintiff failed to take reasonable efforts to maintain the secrecy of the information because a third party is now free to use the information. Here are citations to the cases with links to the opinions that are publicly available on a free website. Silicon Image, Inc. v. Analogix Semiconductor, Inc., 2008 WL 166950, **16-17 (N.D. Cal. Jan. 17, 2008); ECT Int’l, Inc. v. Zwerlein, 228 Wis.2d 343, 355-56 (1999); see also DB Riley, Inc. v. AB Eng’g Corp., 977 F. Supp. 84, 91 (D. Mass. 1997) (not a UTSA case). Therefore, owners of trade secrets with a long shelf-life do not want to sign NDAs that expire before the trade secret loses its value.
However, Texas follows the general rule that when “a contract ‘contemplate[s] continuing performance (or successive performances) and . . . [is] indefinite in duration,’ it may be terminated at the will of either party. Trient Partners I, Ltd. v. Blockbuster Videos, Inc., 83 F.3d 704, 708 (5th Cir. 1996) (quoting Clear Lake City Water Auth. v. Clear Lake Util. Co., 549 S.W.2d 385, 391 (Tex. 1977) (finding a licensee could unilaterally terminate a license agreement); see also Flourine On Call, Ltd. v. Fluorogas, Ltd., 380 F.3d 849, 856-57 (5th Cir. 2004) (“The MOU is an indefinite length contract, and therefore terminable at will); NJ & Assocs., Inc. v. CAN Unisource, Inc., 2001 WL 515210, *5 (N.D. Tex. 2001) (contract of indefinite duration held to be terminable at will).
So what is the trade secret owner to do?
Option number 1: determine whether this issue really matters to you. Some trade secrets are only valuable for a limited amount of time. For example, the plan for next year’s advertising campaign is only valuable before the advertisements are published. When the trade secrets at issue have a defined shelf life, set the term of the NDA to the outside edge of that time period. This gives the NDA a definite term and thereby avoids the risk of the contract being terminable at will.
Option number 2: run from the problem. A trade secret owner can insist on having its NDAs governed by the law of a state in which there is no doubt about the enforceability of perpetual NDAs.
Option number 3: build protections into NDAs governed by Texas law. This route does not provide the trade secret owner with 100% assurance merely because the courts have not yet addressed the enforceability of NDAs that last forever. But if an NDA will be governed by Texas law, consider doing the following to maximize the likelihood that a court will permit perpetual enforcement of the NDA. In the NDA, identify events that will cause its termination. For example, NDAs often state that the duty of confidentiality expires if the information becomes publicly available or if the recipient obtains the information from a third party under no duty of confidentiality. This would give a later reviewing court the ability to extend the Texas Supreme Court’s decision in City of Big Spring v. Bd. Of Control, 404 S.W.2d 810 (Tex. 1966) to perpetual trade secret NDAs. Big Spring found that a contract between government entities had a definite term and was not terminable at will because the contract term would expire once the State of Texas ceased operating a hospital in a location. Note, however, that federal cases have characterized Big Spring as an exception that may be limited to contracts between government entities. In contrast, the Fort Worth Court of Appeals followed Big Spring to find that a telephone directory publishing contract was not terminable at will. Brittian v. General Telephone Co. of Southwest, 533 S.W.2d 886, 891-92 (Tex. App.—Ft. Worth 1976, writ dism’d).
Also include the NDA in a larger contract where possible. If the majority of the information recipient’s obligations under that contract will end in a definite time period, a court could support a decision to enforce perpetual confidentiality obligations by citing University Computing Co. v. Leader Corp., 371 F. Supp. 86, 88 (N.D. Tex 1974). Although Leader did not deal with confidentiality obligations, the court rejected the argument that a license agreement of indefinite duration was terminable at will. In its analysis of the issue, the court indicated that a contract with an indefinite term is not terminable at will if the party seeking to terminate the contract will complete “a substantial portion” of its obligations in a definite time period. Leader, 371 F. Supp. at 88.
Extending this concept to a NDA, imagine a license agreement requiring perpetual confidentiality, but only obligating the licensee to pay royalties for a specified time period. If the licensee’s only obligation after royalties cease is to maintain confidentiality of the trade secrets, the licensor could cite Leader to support its position that the contract is not terminable at will.