What is a Non-Disclosure Agreement?
What is a Non-Disclosure Agreement?
As the name suggests, a non-disclosure agreement (NDA) is a contract between at least two parties that prohibits either or both parties from disclosing specific information to third parties. In other words, NDAs, or confidentiality agreements, are intended to keep information safe from prying eyes.
So, what types of information should be protected with a non-disclosure agreement? Generally, any sensitive information that if made available to a third party could cause harm to the business that owns such information is worthy of protection via a non-disclosure agreement. This is particularly true for information that is not already in the public domain and is not otherwise discoverable by third parties. For example, trade secrets of any kind should always be covered by an NDA. Trade secrets include proprietary and confidential information on production, distribution and development secret recipe formulas. In these circumstances, the parties involved in the business enterprise typically require their employees and business partners to sign NDAs acknowledging that they will not reveal or exploit the confidential information they are privy to when working with the business . Most businesses use executable NDAs when requiring third parties to keep information confidential, including:
Be advised that while non-disclosure agreements allow you to specify the type of information you want protected, they do not require the parties to keep the information confidential. Unless there are real penalties for violating the terms of the NDA, violating the terms will not necessarily result in liability unless the agreement is enforceable in a court of law.
A non-disclosure agreement has many positive benefits. However, creating and executing a non-disclosure agreement demonstrates your need to protect confidential information; it also allows you to sue a third party for harming your business.
In Texas, for non-disclosure agreements to be valid, there must be consideration. That means that both you and the other party must benefit from the agreement. If you’re asking a third party to sign a non-disclosure agreement to protect your business secrets, the consideration is your benefit of keeping your trade secrets.
Essential Components of an NDA in Texas
In Texas, certain key elements must be included in a non-disclosure agreement so it can be enforceable. These elements usually include a definition of "confidential Information," obligations of the parties, and duration of the NDA, among others.
While there is no one-size-fits-all approach for drafting NDAs, the following subsections are commonly found in most NDAs: Definitions – NDAs in Texas typically define what constitutes confidential information. A broad definition is generally preferred as it creates a broader claim to protect all types of confidential information. Of course, does the NDA need to define "confidential information" at all? In Texas, the answer is yes. Obligations of Parties – Section 1 of most NDAs specifies what confidential information can be disclosed and how it should be treated. The NDA also specifies how confidential information is to be used, whether it can be copied and returned, and if notes regarding the confidential information may be made. It is usually preferable for the NDA to require the receiving party to keep all confidential information in a secure place, and in a manner that protects against disclosure. Confidentiality Obligations After Termination – Section 2 of the NDA deals with the obligations of the receiving party after the NDA has expired. Typically, the NDA will specify that the receiving party must promptly return all copies of confidential information – including notes, extracts or summaries of confidential information – as soon as practicable. Term of the Agreement – Section 3 of the NDA provides for the duration of the Confidentiality Agreement, and the duration that the obligations of the receiving party are in effect. There are several preferred terms of confidentiality for Texas NDAs: Texas courts have ruled that a confidentiality provision that extends for a "reasonable time" is enforceable, and can be voided if classified as an unreasonable period. Provisions for Injunctive Relief – Section 6 of a Texas NDA provides for injunctive relief to ensure that the opposing party complies with the terms of the agreement.
Different Types of NDAs in Texas
In Texas, a variety of non-disclosure agreements (NDAs) are commonly used in different contexts. General classifications include unilateral NDAs and mutual NDAs.
A unilateral confidentiality agreement, one that binds only one party, is the most frequently used NDA in Texas. In a traditional business transaction, the involved parties may be a vendor and a business that sells or distributes a product. The vendor, privy only to his or her own confidential information, uses a unilateral NDA to maintain the secrecy of his or her proprietary information. If a business, however, is simultaneously applying for a license or permit with a regulatory agency, both a unilateral NDA and an appropriate licensing contract should be filed with the licensing application if such are required by Texas law.
In Texas, mutual NDAs are less common than unilateral NDAs, however, there are situations in which a mutual NDA may be necessary. For example, two parties may decide to partner with one another to pursue a joint business opportunity. The NDA requires each party to mutually keep confidential any proprietary information disclosed when pursuing the joint opportunity.
In summary, Texas recognizes a variety of NDA types. Generally though, a business may need a unilateral NDA in order to keep its proprietary and confidential information secret and confidential.
Enforceability and Requirements under Law
The legal requirements for enforceability of a non-disclosure agreement are not too demanding. It must (1) be in writing, (2) be signed by the party to be charged and (3) contain an agreement to keep information secret (i.e., a confidentiality provision). Tex. Civ. Prac. & Rem. Code § 15.004. But there is an often-ignored fourth requirement – the agreement also must be supported by consideration, e.g., payment of a sum of money. See, e.g., Scott v. Ingle Bros. Packing Co., 104 S.W.2d 333 (Tex. Civ. App.—Dallas 1937, writ ref’d).
The Texas Uniform Trade Secret Act ("TUTSA") imposes additional requirements for enforceability, at least for posting the post-term and time-distance restrictions outside the two-year post-tem period. Those restrictions would not be enforceable unless the employer can show (1) the existence of a trade secret, (2) reasonable efforts to maintain its secrecy, and (3) the former employee is "threatening to use or use" the trade secret. See Tex. Civ. Prac. & Rem. Code § 134.003(6). A plaintiff must satisfy these criteria by preponderance of the evidence and may be required to do so in a temporary injunction hearing. See, e.g., Plastic Container Corp. v. Brown, 643 S.W.2d 618 (Tex. App.—Houston [14th Dist.] 1982, writ ref’d n.r.e.).
Some common problems for non-disclosure agreements when they are being challenged include:
- overbroad provisions, such as:
- undefined geographical restriction;
- "all aspects of any business" as a defined scope of confidential information;
- pleading for trade secrets but including disclosures of non-confidential information (business plan, source code, client lists, etc.); and
- time periods that are longer than necessary to protect the employer’s interests;
- not adequately identifying trade secrets or information to be kept confidential;
- not having any geographic scope;
- not being mutually binding;
- not adequately preventing former employees from working with competitors/clients; and
- not having some requirement that the company considers the information secret.
One key emphasizing courts’ disfavor of overly broad agreements includes Tranter v. Zephyr American Holdings, Inc., 116 S.W.3d 273 (Tex. App.—Dallas 2003, no pet.), where the court noted "A non-competition agreement is void to the extent it imposes greater restraint than necessary to protect the goodwill or other business interest of the promisee." 116 S.W.3d at 276 (citing Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 858 (Tex. App.—Dallas 2009, pet. denied).
How to Draft a Proper NDA
As stated previously, a well-written non-disclosure agreement is of utmost importance to the disclosing party. The better drafted the agreement, the better the outcome when seeking to protect an alleged breach. To ensure the non-disclosure agreement is effective in protecting confidential information, the following items should be considered when drafting the agreement:
Non-Disclosure Agreements Should Be in Writing
In Texas, and all states, an agreement may be created by "any manifestation of oral or written agreement…sufficient to show agreement." See Black’s Law Dictionary 753 (8th ed. 2004). This means a Texas court may enforce a verbal NDA if they believe two parties reached an agreement. However, in nearly all situations, a verbal NDA is not advisable without at least one party having a fair amount of trust in the other. Thus, NDAs should always be in writing.
NDAs Should Not Reimplement Employment Agreements
Some companies may desire to remove specific obligations regarding confidentiality from their employment contracts and reimplement them in a separate NDA. The thinking behind this is that the NDA will best protect the disclosing party against misappropriation. This is not true for trade secret law. Texas law states "a covenant not to disclose or misappropriate trade secrets which is not supported by consideration other than that which supports the employment agreement is unenforceable." See Title 11, Texas Uniform Trade Secret Act, § 133A.006(b) . This means if an NDA is already a part of a contractual agreement (an employment agreement for example), then it cannot be separated out and reimplemented as its own agreement. It can be amended, but not reimplemented as a new contract. The only parties that are unaffected by this restriction are the parties who are not employed by your company. In other words, someone with whom you are conducting business that is not your employee. So if you attempt to reimplement (or at least amend) your employment NDA and remove the obligations from your employment agreement, you may:
NDAs Should Not Disqualify Independent Contractors
Many organizations desire to have independent contractors sign NDAs to protect confidential information. An independent contractor is "a person who contracts to do work for another but who is not subject to that person’s control regarding the physical performance of the work but only as to the results of the work." Constr. & Bldg. Laborers Local 130, AFL-CIO v. H.B. Zachry Co., 627 F.2d 753, 754 (5th Cir. 1980). If an organization desires to hire a permanent employee, they should not disqualify independent contractors from also signing the same NDA for the sole reason that they are not an employee. If an independent contractor is privy to the same confidential information as your employee, then including them within the scope of the NDA is acceptable. Hence, an organization can have its cake and eat it too (or rather can have as many workers as they want sign an NDA and spend the least amount of money), as long as the obligations to maintain confidentiality apply equally among all workers.
The Repercussions of Breaching Your NDA
If a party breaches a non-disclosure agreement, the applicable remedies and effects will depend on the specific terms of the contract and any applicable law. A business may seek a number of remedies if another party violates an NDA, including: injunctive relief, monetary damages, and attorney’s fees.
Injunctive Relief
Often, parties will seek injunctive relief for the other party’s violation of the NDA. An injunction is a court order that requires the violating (or enjoined) party to stop a specified activity. There are a number of different types of injunctions that Texas courts can issue. Among these types are temporary, final permanent, and temporary ex parte injunctions. Temporary injunctions generally remain in effect until a final judgment is made in the case; while a permanent injunction does not expire; a temporary ex parte injunction is a very short-term order that can cease the offending activity, but is temporary in nature and is meant only to operate until a more formal injunction might be issued. If a party can show that the other violates a non-disclosure agreement, a Texas court may grant an injunction.
Monetary Damages
Monetary damages can take many forms. The following are some forms of monetary damages available when there is a violation of a non-disclosure agreement: The applicable form or forms of monetary damages will depend on the facts of the case and the specific facts of the violation of the NDA.
Attorney’s Fees
In a breach of contract action, an injured party may recover attorney’s fees from the offending party if they are "provided for either by statute or by contract." Texas Civil Practice & Remedies Code § 38.001. Although it is relatively common to provide for the recovery of attorney’s fees in a contract, before a court may award the fees, it must find: If there is no provision for the recovery of attorney’s fees in the subject non-disclosure agreement, or if the NDAT should not be read broadly, a Texas Court may decide that this type of damages is not available.
Conclusion
Injunctive relief and monetary damages which might be available upon breach of a non-disclosure agreement in Texas will depend on the specific language of the parties’ contract as well as any applicable statutory provisions.
Require Legal Help
The understanding of non-disclosure agreements is critical for the protection of trade secrets. As with all contracts, it is wise to have an attorney review the agreement before signing. While one can certainly create an enforceable Nondisclosure Agreement without a lawyer, there are numerous ways that the issue can be complicated. The agreement can be perceived by a court as being an invalid restriction on trade (i.e. a covenant not to compete), there could be clauses that are unconscionable, or there could be boilerplate provisions that do not apply to the facts at hand .
It is possible under Texas law for a business that has some relationship with somebody that knows trade secrets to negotiate a nondisclosure agreement protecting that information. For instance, an independent contractor or an employee that works in a confidential position can provide some protection. A licensee or franchisee of a product, however, would not be able to be bound because they know a trade secret. In such circumstances, a non-compete could be the appropriate mechanism to prevent misuse of the information.