Renewing Non-Disclosure Agreements with Employees? Consider this . . .

sale baIn 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 litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. If you are a party to a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

 

You Got a Non-Compete Injunction, But Can You Make it Stick in Texas?

imagesLast month, the Dallas Court of Appeals ruled on two temporary injunction orders – one was affirmed (i.e. it continued to be enforce) and the other one was dissolved (i.e. it was declared void). What was the key difference? The first injunction, in HMS Holdings Corp., et al. v. Public Consulting Group, Inc., complied with all the requirements set out in the Texas Rules of Civil Procedure, but the second injunction, in Medi-Lynx Monitoring, Inc., et al. v. AMI Monitoring, Inc., did not, so it was dissolved. This means that all the hard work, time and money that went into getting ready for the temporary injunction hearing and obtaining the order from the district court judge, was all for naught. 

Businesses often seek injunctions against former employees and competitors who have violated their non-disclosure agreements or non-competition and non-solicitation agreements. In such circumstances, a temporary injunction order from a court is ideal because, if granted, it prohibits a former employee or a competitor from engaging in competitive activities or using confidential information that was shared under the non-disclosure agreement while the lawsuit between the parties goes on. Thus, a temporary injunction, provides the wronged company with immediate relief and helps prevent further damage to its business by stopping the hemorrhaging of clients, employees, or confidential information. Needless to say, when a business is loosing money due to wrongful activities of a former employee or a competitor, such an injunction order can be of paramount importance. 

In Medi-Lynx Monitoring, the injunction order was declared void by the Court of Appeals because it did not set the case for trial on the merits – an express requirement under the Texas Rules of Civil Procedure. The defendant against whom the order was entered, moved to dissolve it, and the Dallas Court of Appeals granted its motion finding that the trial court abused its discretion in granting a temporary injunction that did not set the cause for trial on the merits.  

In contrast, in Holdings Corp., the temporary injunction met all the requirements specified in the Texas Rules of Civil Procedure, and, therefore, was upheld by the Dallas Court of Appeals, event though it was challenged on other grounds.  

Takeway: A party seeking a temporary injunction from a Texas court in a non-compete or a trade secrets misappropriation case should make sure that the order contains all the bells and whistles required by the Texas Rules of Civil Procedure. 

Leiza has handled multiple temporary restraining order and temporary injunction hearings and has assisted clients in all aspects of trade secret protection, from audits to litigation. Contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

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.