Non-Disclosure Agreements (NDA)

Non-disclosure agreements (NDA) are not as often litigated in Texas for its enforceability unlike non-compete agreements. One of the primary reasons is that, unlike con-compete agreements, NDA’s do not restrain trade and are, therefore, far more enforceable. Another reason is litigation over NDA’s has been relatively sparse because these agreements typically merely require a departing employee to refrain from disclosing or using his former employer’s business and trade secrets.

Among the many uses of an NDA is that it is commonly used to maintain the competitive advantage of the business by keeping its working projects, innovative ideas, or product secrets from falling into the hands of its competitor. On a similar point, startup companies having new and profitable ideas can only succeed in the market if what they are working on remains under wraps. In effect, a non-disclosure agreement is a legal document that keeps the lid on such sensitive information that once made public can be detrimental to your company. These agreements are sometimes called confidentiality agreements, confidentiality statements or confidentiality clauses within a much larger legal document. If you are in need of an NDA to safeguard your business, our dedicated Business Specialists will be able to assist you.

An NDA is typically used by businesses to seal confidential information and prevent it from being disclosed to potential investors, creditors, suppliers or customers. If there is confidentiality in writing and signed by all parties, mutual trust is better circulated among the parties and it also deter intellectual property theft. The nature of the confidential information will be laid down in the non-disclosure agreement. There are NDA’s that will bind a person to secrecy for an indefinite period of time so that no lapse of time can be allowed for the confidential information to be leaked. Without the NDA, any information that has been disclosed in trust and confidence can be made public or shared maliciously. The corresponding penalties for breaking any of the clauses in the NDA are provided in the agreement and this can include damages from lost profits and possibly criminal charges.

Non-disclosure agreements do not specifically prohibit an employee from competing with a former employer, unless there is an added prohibition on the agreement. The problem lies when the NDA is over broad or goes too far or if the wording of the NDA is so broad that it is in fact a non-compete agreement. If this be the case, will the usual respect given to non-disclosure agreements apply? What will happen if a Texas non-disclosure agreement likewise prohibits an employee from using or disclosing employer’s trade secrets as well as prohibits the using or disclosing of the knowledge an employee gains while working with his employer? Will the clause be valid and enforceable?

What is the nature of a non-disclosure agreement?

Case law describes non-disclosure covenants to prevent the disclosure of confidential information and trade secrets. One Texas court stated that non-disclosure covenants do not necessarily restrict a former employee’s ability to compete with a former employer by using the general knowledge, skill and experience gained from his or her work experience. In Texas, it is acknowledged that NDA’s are designed to safeguard and protect the confidential information of the company and its trade secrets from being used against it. It is not therefore designed to prevent or prohibit a former employee from competing, using his general knowledge and skills learned on the course of the employment. When in doubt as to the limitation set forth in your NDA, please give us a call and we will gladly assist you with your concerns.

Effects if your non-disclosure agreement is overly broad

If your NDA is overly broad and in a sense it practically prohibits a former employee from using the skills learned in competing with a former employer, although the skill used is general knowledge and skill derived during the course of the employment, this may be considered as a non-compete agreement instead. When a supposedly non-disclosure agreement goes beyond merely protecting the trade secrets and confidential information of a former employer, the effect is, it may actually restrain trade in the same manner as a non-compete agreement does.

The distinction is important because when a Texas court determines an agreement to be a legitimate NDA, in most cases, it will certainly enforce it. The courts in Texas have been consistent to hold the enforceability of non-disclosure agreements and at the same time provides that non-compete agreements can be enforceable provided that it must strictly comply with the requirements of Tex. Bus. & Comm. Code § 15.50. The code provides that a non-compete agreement must be reasonable in scope which means that when an employee convinces a court that a NDA prohibits him from using his general knowledge and skills, it can be treated as a non-compete agreement by the court. The law provides that an overly broad non-compete agreement must be reformed to make it reasonable. Should you have concerns with regards to the contents of your NDA, do not hesitate to contact us and we will be more than happy to assist you.

As an employer you might ask why these things matter. Under the Texas statute, if the court is required to reform a con-compete agreement to make its scope reasonable, no claim for damages can be recovered on a breach of contract theory if the violations claimed existed prior to the reformation of the agreement. Reformation of an overly broad agreement is a “get out of jail free” card on the part of the employee being sued, as it virtually wipes out what had happened in the past, provided it is under the contract theory and not based on a tort theory.

Simply stated, an employer who wants to have a right to recover for damages for a breach of a non-disclosure agreement must ensure that the scope of the agreement is reasonable at the outset. The least that the employer would want is for the court to reform its covenants for reason of being over broad. When in doubt as to the construction of your NDA, our dedicated Business Specialists will be able to assist you to ensure that your business interests and legal rights are duly protected.