{"id":149,"date":"2014-10-13T20:55:52","date_gmt":"2014-10-13T20:55:52","guid":{"rendered":"http:\/\/pkeating.com\/?p=149"},"modified":"2019-07-08T14:44:23","modified_gmt":"2019-07-08T20:44:23","slug":"a-gap-in-texas-nda-law","status":"publish","type":"post","link":"https:\/\/pkeating.com\/?p=149","title":{"rendered":"A Gap in Texas NDA Law"},"content":{"rendered":"

To view a July 8, 2019 update to this post, click this link<\/a><\/em>.<\/p>\n

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.\u00a0 For brevity, we\u2019ll call these contracts \u201cNDAs.\u201d<\/p>\n

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 \u2013 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.\u00a0 I am unaware of a single court decision answering the question of whether a perpetual NDA governed by Texas law is terminable at will.<\/p>\n

This is not arcane trivia.\u00a0 It is potentially a very big deal to those seeking to protect their trade secrets.\u00a0 Nevertheless, I think that Texas courts should permit perpetual enforcement of trade secret NDAs as a matter of public policy.\u00a0 A contrary rule of law would place trade secret owners in a \u201cCatch 22\u201d situation when drafting NDAs \u2013 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).\u00a0 Not enforcing perpetual NDAs would also be bad for business.\u00a0 Texas is typically pro-business.<\/p>\n

Until a court tells us whether I am right or wrong, there are precautions trade secret owners can take to minimize the risk.\u00a0 I discuss those at the end of this post.<\/p>\n

But first, here are more details about the problem.\u00a0 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.\u00a0 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.\u00a0 Here are citations to the cases with links to the opinions that are publicly available on a free website.\u00a0 Silicon Image, Inc. v. Analogix Semiconductor, Inc.<\/em>, 2008 WL 166950, **16-17 (N.D. Cal. Jan. 17, 2008); ECT Int\u2019l, Inc. v. Zwerlein<\/em><\/a>, 228 Wis.2d 343, 355-56 (1999); see also<\/em> DB Riley, Inc. v. AB Eng\u2019g Corp.<\/em><\/a>, 977 F. Supp. 84, 91 (D. Mass. 1997) (not a UTSA case).\u00a0 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.<\/p>\n

However, Texas follows the general rule that when \u201ca contract \u2018contemplate[s] continuing performance (or successive performances) and . . . [is] indefinite in duration,\u2019 it may be terminated at the will of either party.\u00a0 Trient Partners I, Ltd. v. Blockbuster Videos, Inc.<\/em><\/a>, 83 F.3d 704, 708 (5th<\/sup> Cir. 1996) (quoting Clear Lake City Water Auth. v. Clear Lake Util. Co.<\/em><\/a>, 549 S.W.2d 385, 391 (Tex. 1977) (finding a licensee could unilaterally terminate a license agreement); see also<\/em> Flourine On Call, Ltd. v. Fluorogas, Ltd.<\/em><\/a>, 380 F.3d 849, 856-57 (5th<\/sup> Cir. 2004) (\u201cThe MOU is an indefinite length contract, and therefore terminable at will); NJ & Assocs., Inc. v. CAN Unisource, Inc.<\/em>, 2001 WL 515210, *5 (N.D. Tex. 2001) (contract of indefinite duration held to be terminable at will).<\/p>\n

So what is the trade secret owner to do?<\/p>\n

Option number 1: determine whether this issue really matters to you.\u00a0 Some trade secrets are only valuable for a limited amount of time.\u00a0 For example, the plan for next year\u2019s advertising campaign is only valuable before the advertisements are published.\u00a0 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. \u00a0This gives the NDA a definite term and thereby avoids the risk of the contract being terminable at will.<\/p>\n

Option number 2: run from the problem.\u00a0 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.<\/p>\n

Option number 3: build protections into NDAs governed by Texas law.\u00a0 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.\u00a0 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.\u00a0 In the NDA, identify events that will cause its termination.\u00a0 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.\u00a0 This would give a later reviewing court the ability to extend the Texas Supreme Court\u2019s decision in City of Big Spring v. Bd. Of Control<\/em><\/a>, 404 S.W.2d 810 (Tex. 1966) to perpetual trade secret NDAs.\u00a0 Big Spring <\/em>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.\u00a0 Note, however, that federal cases have characterized Big Spring<\/em> as an exception that may be limited to contracts between government entities.\u00a0 In contrast, the Fort Worth Court of Appeals followed Big Spring<\/em>\u00a0to find that a telephone directory publishing contract was not terminable at will.\u00a0 Brittian v. General Telephone Co. of Southwest<\/em><\/a>, 533 S.W.2d 886, 891-92 (Tex. App.\u2014Ft. Worth 1976, writ dism\u2019d).<\/p>\n

Also include the NDA in a larger contract where possible.\u00a0 If the majority of the information recipient\u2019s 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.<\/em><\/a>, 371 F. Supp. 86, 88 (N.D. Tex 1974).\u00a0 Although Leader<\/em> did not deal with confidentiality obligations, the court rejected the argument that a license agreement of indefinite duration was terminable at will.\u00a0 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 \u201ca substantial portion\u201d of its obligations in a definite time period.\u00a0 Leader<\/em>, 371 F. Supp. at 88.<\/p>\n

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. \u00a0If the licensee\u2019s only obligation after royalties cease is to maintain confidentiality of the trade secrets, the licensor could cite Leader<\/em> to support its position that the contract is not terminable at will.<\/p>\n

\n\t\t\t\t\t\tFollow me<\/a>\n\t\t\t\t\t<\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

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.\u00a0 For brevity, we\u2019ll call these contracts \u201cNDAs.\u201d The tension exists between these two items: (i) for NDAs covering trade […]<\/p>\n","protected":false},"author":1,"featured_media":146,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","jetpack_publicize_message":"","jetpack_is_tweetstorm":false},"categories":[8],"tags":[11,9,10],"jetpack_featured_media_url":"https:\/\/i1.wp.com\/pkeating.com\/wp-content\/uploads\/2014\/10\/Confidentiality-Agreement-Small-e1413139488422.jpg?fit=240%2C319&ssl=1","jetpack_publicize_connections":[],"jetpack_shortlink":"https:\/\/wp.me\/p52Eew-2p","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/posts\/149"}],"collection":[{"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/pkeating.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=149"}],"version-history":[{"count":7,"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/posts\/149\/revisions"}],"predecessor-version":[{"id":849,"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/posts\/149\/revisions\/849"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/pkeating.com\/index.php?rest_route=\/wp\/v2\/media\/146"}],"wp:attachment":[{"href":"https:\/\/pkeating.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=149"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/pkeating.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=149"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/pkeating.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=149"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}