In my practice, I see this scenario all the time: an employee leaves to work for a competitor, the employer realizes that its non-disclosure (NDA) or non-compete agreement was inadequate to protect it from what just happened, so the company rolls out a new (and improved) non-disclosure or non-compete agreement and makes all employees sign it.
The legal department now sighs with relief, the HR department gets a pat on the back, and the new NDAs and non-competes get filed away in employees’ personnel files to be whipped out when the next employee defects for greener pastures. What could possibly go wrong now that the company has a perfect non-compete / non-disclosure in place with all the employees, right?
A recent case out of the Fourteenth Court of Appeals demonstrates exactly how a perfectly drafted non-disclosure agreement can still end up being unenforceable when an employer fails to provide new consideration for the agreement. In Eurecat US Inc. v. Marklund, et al., Eurecat sued two of its former employees who started a competing business, alleging that they stole trade secrets and proprietary data, breached fiduciary duties and breached their NDAs with plaintiff.
Eurecat’s claims were based on the NDAs that the two employees signed in 2011. The Court of Appeals held that these agreements were not supported by consideration and were unenforceable because, prior to 2011, both employees were already required to maintain confidentiality of Eurecat’s trade secrets under the prior versions of the NDAs. The only consideration stated in the 2011 NDAs was continued employment at-will. Eurecat did not promise to provide new confidential information to the employees after they had executed the 2011 NDAs, but only stated that they “may” learn such information. At trial, Eurecat failed to show that its claims for breach of the 2011 NDAs were based on disclosure of confidential information it provided to the employees after January 21, 2011 that differed from information they previously possessed. In fact, Eurecat was unable to show that it provided any new confidential information that was different from what the employees had received from Eurecat prior to signing the NDAs. The Court, therefore, affirmed the jury’s verdict that the employees did not breach their non-disclosure agreements with Eurecat.
BOTTOM LINE FOR EMPLOYERS: Periodic updates of employment agreements, including non-compete and non-disclosure restraints, are necessary to make sure that the agreements comply with the new legal developments. However, companies should always make sure that the new agreements are supported by new consideration, whether it is new confidential information, a bonus, or some other type of consideration. (check your state laws to make sure that the type of consideration provided to an employee meets the state requirements to support restrictive covenants).
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.
The reality is that NDAs are not a bad thing, in fact, they are essential to business and all business owners and entrepreneurs should not be afraid to use them to their advantage.