5 Common Mistakes That Companies Make With Non Disclosure Agreements

imagesWhether you are talking to a potential buyer of your company, an interested investor, or a joint venture partner, before any confidential information is shared with that person, they should execute a Non Disclosure Agreement, often referred to as “NDA.”  The NDAs are very popular and come in a variety of shapes and length. Their main purpose is to protect the confidentiality of information shared with a company outsider. Not having a signed enforceable NDA may result in a major headache down the road when the information that was meant to be confidential falls into the wrong hands. In my experience, here are the most common mistakes that companies make when it comes to non disclosure agreements:

Mistake No. 1: Not specifying what information will be covered and for how long. 

A non disclosure agreement should describe: (1) what type of information is being disclosed; (2) whether the NDA covers only written disclosures or also oral disclosures; (3) how will this information be disclosed; (4) how may this disclosed information be used by the recipient; and (5) how long will the recipient have to maintain the confidentiality of the information.  A NDA missing one or more of these terms may cause problems between the parties  when they actually begin to disclose confidential information to each other.

Mistake No. 2: Not specifying when or how disputes related to the NDA will be determined. 

A good NDA will have a clause that will specify where and how any disputes related to the NDA will be resolved – whether it’s through mediation, arbitration or litigation.  It should also specify what law will govern the agreement.

Mistake No. 3: Not keeping an electronic copy of a signed NDA.

It’s 2016 so this advice might seem painfully obvious.  However, it happens more often than you would think – a hard copy of a signed NDA somehow disappears or “walks away” and nobody can find an electronic copy with all the signatures. To prevent this from happening, a company should always designate one person to be in charge of collecting all the necessary signatures and saving the NDA somewhere where it can be easily found should a problem arise.

Mistake No. 4: Not designating the disclosed information as “Confidential.” 

Any information shared under the NDA should be marked as “Confidential” or “Highly Confidential.” Many companies mistakenly believe that once a party signed a non disclosure agreement, they are automatically protected. That is not the case.  Failing to designate all shared information as confidential may lead to future disputes as to whether certain data or information was meant to be confidential.   Moreover, should a problem arise with the NDA agreement, such as a missing signature, the confidentiality stamp will provide a back-up protection.

Mistake No. 5:  Not limiting the scope of what you are disclosing to the party who signed the NDA.

A party should always limit the scope of what it is disclosing to only that which is absolutely necessary for the other party to know related to the purpose of the NDA. The costs of enforcing or attempting to enforce an NDA may be significant, so limiting the disclosure of information may help a party avoid the risk and expense of litigation.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

A Placed Employee Embezzles $15 Million. Is the Staffing Agency Responsible?

businesswoman holding a wad of cashThe answer, of course, is “maybe.” In this case, a staffing agency placed a receptionist with a company, who, after being promoted to the head of accounting, proceeded to embezzle $15 million in the course of eight years. When the company discovered the theft, it sued the staffing agency arguing that it should have conducted a criminal background check on the woman (she had a prior theft record) before placing her with the company and that the staffing agency failed to notify the company of the woman’s criminal record when it discovered it at some point after she had been placed.

The trial court held the staffing agency did nothing wrong and dismissed all of the company’s claims finding that:

  • the staffing agency’s contract with the company did not require it to conduct criminal background checks;
  • the agency did not owe the company a fiduciary duty in placing employees because their contract specifically stated that the staffing agency was an “independent contractor;”
  • the agency was not negligent in supervising the employee because the staffing contract excluded the accounting department from the list of departments to be supervised by the agency;
  • the agency was not negligent in hiring or retaining the employee without a background check because it was not foreseeable that the employee would engage in embezzlement as a receptionist – the position in which she was originally placed.

The Court of Appeals agreed with the trial court on all except one claim.  It found that the staffing agency could be liable for negligent retention  i.e. for continuing to employ the employee after it found out about her criminal record and after it found out that the company had placed the employee in its accounting department, and failing to notify the company about the employee’s criminal background. Thus, a jury will have to decide whether it was foreseeable that an employee with a theft record would embezzle money when placed in an accounting department.

TAKEAWAY FOR COMPANIES: If your company uses a staffing agency, make sure your contract accurately and fully describes every responsibility and duty that you want the staffing agency to undertake. e.g., criminal background checks.  If a placed employee does something that creates potential liability, the language of the staffing agreement will be key in determining who is held responsible for that employee’s actions.

TAKEAWAY FOR STAFFING AGENCIES: Sharing suspicions, concerns, or red flags about placed employees with the company with which they are placed can help avoid a later argument by the company that it had no knowledge of these concerns and blaming the agency. Also, when contracting with a company, consider limiting the staffing agency’s indemnification obligations only to those situation where the agency itself is negligent. If a company transfers or assigns a borrowed employee to a task or department that is not covered by the staffing agreement, consider getting a written release from the company confirming that the agency is not responsible for monitoring such employee after the transfer.

To read the entire Court of Appeals’ opinion, see Davis-Lynch, Inc. v. Asgard Technologies, Inc. (Tex. App.–Houston [14th Dist.] June 30, 2015.

Leiza Dolghih litigates employment and business disputes. She advises employers and employees on how to minimize the risk of litigation before it occurs and pursues and defends their rights in courts and arbitration once litigation arises. For more information, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Not Reading a Contract Costs a Party Half a Million Dollars

200567130-001The Texas Supreme Court just confirmed what most of us already know – that you should read your contracts before signing them. In National Property Holdings, L.P., et al. v. WestergrenWestergren sold a piece of real estate to National Property Holdings (NPH) pursuant to a written agreement. Additionally, NPH orally promised to Westergren that once it develops the property, it will pay Westergren $1,000,000.

Once NPH developed the property, Westergren demanded his $1,000,000. Instead of paying the full amount, NPH gave him $500,000 and asked him to sign a release agreement, which was titled in bold and underlined AGREEMENT AND RELEASE and stated that Westergren agreed to relinquish any and all interest in the property and all claims against NPH in exchange for the total payment of $500,000. Westergren signed it without reading.

He later sued NPH for breach of their agreement to pay him $1,000,000 and claimed that he was fraudulently induced to sign the release.  Westergren argued that at the time of the signing, NPH representatives told him that they will be making the second payment as soon as the building is built, that the release agreement was just a “receipt” and that he will be getting the other half of the $1 million as soon as their development of the land starts.  Westergren admitted that he did not read the release because he “was in a hurry” and “forgot his reading glasses ” and that he relied on the NPH’s representations about the second payment instead.

The jury found that NPH fraudulently induced Westergren to sign the release and the Court of Appeals agreed. The Texas Supreme Court, however, was less forgiving.  It found that Westergren had an ample opportunity to read the document and that had he done so, he would have discovered that the language of the agreement directly contradicted the representation made by NPH. The Court, therefore, found that NPH did not fraudulently induce Westergren to sign the release, reinforcing the old rule that “instead of excusing a party’s failure to read a contract when the party has an opportunity to do so, the law presumes that the party knows and accepts the contract terms.”  The Court even cited the 19th century U.S. Supreme Court’s opinion that best describes this point of contract law as follows:

It will not do for a man to enter into a contract, and, when called upon to respond
to its obligations, to say that he did not read it when he signed it, or did not know
what it contained. If this were permitted, contracts would not be worth the paper on
which they are written. But such is not the law. A contractor must stand by the
words of his contract; and, if he will not read what he signs, he alone is responsible
for his omission.

Thus, while a party may have a claim for fraudulent inducement where it as induced to enter into a contract by false promises, where the written agreement’s terms directly contradict the false promises, the claim for fraudulent inducement will most likely fail.

CONCLUSION: As the old saying goes, “trust, but verify.” When it comes to signing a legal agreement, do not rely on the other party’s explanation of what the agreement does or means.  Read it, and where appropriate, have an attorney review it on your behalf so that you know and understand what you are signing.  Remember, that in Texas, if somebody tells you one thing, and the written agreement actually says something else, barring a rare exception, you will be held to what the written agreement says, not the oral representations.

If you have been sued in Texas for a breach of contract or are thinking of pursing a breach of contract claim, contact Leiza Dolghih for a consultation at Leiza.Dolghih@GodwinLewis.com.