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Is Your Confidentiality Agreement Enforceable?

12.22.14

           "The most valuable commodity I know of is information."[1] For that reason, confidentiality agreements ("CAs," also commonly referred to as non-disclosure agreements, or "NDAs") are routinely used in all facets of the energy industry - from an E&P company exploring strategic transactions, to a seismic company negotiating the manufacture of equipment, CAs are commonplace. And for good reason: highly valuable, confidential, and/or proprietary information often needs to be entrusted to a third party with assurance that such confidences will not be breached.

However, simply entering into a CA may not be enough. Recently, the Seventh Circuit held that a CA was not enforceable when the party seeking its enforcement merely required the opposing party to sign the agreement "at the outset of their business relationship," but did not require particular individuals who subsequently accessed the information to sign additional CAs, or mark the files at issue as "confidential."[2]

In nClosures, nClosures Inc. designed metal enclosures for electronic tablets, and hired Block and Company, Inc. to manufacture the devices it designed.[3]  Before entering into a formal business relationship, the two companies executed a CA that protected nClosures' designs during the negotiations.[4] The parties ultimately reached an agreement concerning the manufacture and sale of the devices, yet nClosures did not subsequently require Block to sign additional CAs.[5] Eventually, the parties terminated their relationship and nClosures brought suit against Block alleging that Block violated the CA by using the confidential information to compete directly with nClosures.[6]

On appeal, the Seventh Circuit analyzed the enforceability of the CA,[7] which was governed by Illinois law.[8]  The Seventh Circuit held that under Illinois law, CAs are enforceable "only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential."[9]  Thus, in order to enforce the CA, the court was required to find that "nClosures took reasonable steps to keep its proprietary information confidential."[10]  Such reasonable steps would include marking the proprietary information as "confidential," keeping it under lock and key, storing it on a computer with limited access, or requiring individuals who accessed the information to sign additional CAs.[11] Without more, nClosures' mere requirement that Block sign the CA at the negotiation stage of the business relationship was not deemed a "reasonable effort" to keep the information confidential, and the agreement was, therefore, held to be unenforceable.[12]

From the perspective of a party that regularly requires others to sign CAs, the nClosures decision may seem remarkable - after all, when two parties sign an agreement, they expect the agreement to be enforced. However, the Illinois law at issue in nClosures is not altogether unusual. Laws governing trade secrets (under which many CA disputes arise) generally grant relief only when a party has made reasonable efforts to maintain the secrecy of information it seeks to protect.[13] The ruling in nClosures is noteworthy because it held that signing a CA at the outset of the business relationship, in itself, did not rise above the "reasonable effort" threshold.

The important question, then, for a party seeking to protect its information is whether the applicable jurisdiction requires more than simply executing an agreement to keep information confidential.  In Texas, the answer is not entirely clear.  Formerly, Texas made it unlawful for a party to use information that was acquired in confidence, but such information must have constituted a trade secret to warrant that protection.[14] In the oil patch, there are many types of information that may fall under the heading of "trade secret."  For example, the Texas Supreme Court has specifically determined that geological seismic data and its interpretations constitute trade secrets.[15]

Under the old law, evidence of a CA was relevant, but not always necessary, to find the existence of a trade secret.[16] Thus, a party might be entitled to damages or injunctive relief against someone who used or disclosed the party's confidential information, even if they never formally executed a CA. In other words, the enforceability - or existence, for that matter - of a CA was not determinative for relief. Rather, the question was whether the information disclosed amounted to a trade secret, as defined by Texas law, regardless of whether the parties executed a CA. However, the existence of a CA supported a finding that the information was a trade secret under the former law, as some cases held that the mere execution of a CA was sufficient to show that a party took steps to maintain the secrecy of the information.[17]

The analysis is now slightly more complicated because Texas recently enacted a new law governing these issues, the Texas Uniform Trade Secrets Act ("TUTSA").[18] Under the former law, efforts to maintain secrecy was just one of six, non-exhaustive factors to consider in determining whether information constituted a trade secret.[19] That was why the existence of a CA between the parties was helpful, but not always necessary, for recovery. To recover under TUTSA, however, a party must demonstrate that it made efforts to maintain secrecy.[20] It is presently uncertain what types of efforts will satisfy that element. Is a CA alone sufficient? Or is something more - as was the case in nClosures - required?

We do not currently know whether the prior cases, under which the mere execution of a CA was a reasonable effort to maintain secrecy, will have any bearing on the interpretation of TUTSA.[21] Will courts look to pre-TUTSA cases as persuasive authority, or will they develop a new body of cases that displaces the old rules when interpreting TUTSA? There is not yet a large body of case law applying or interpreting TUTSA, as it became effective on September 13, 2013. Furthermore:

It is expected that court interpretation of the new TUTSA definition will be delayed to some extent because the old law will still be applied to all acts of misappropriation that occurred before the new statute and for all continuing acts. This could be a minimum of three years, but could be longer [due to] … the discovery rule ….[22]

Because there is no apparent case law interpreting TUTSA's requirement that a party make reasonable efforts to maintain secrecy, it is presently unknown whether a CA, by itself, would meet that element. Future courts interpreting TUTSA could rely on former Texas common law as persuasive authority, or could look to cases from other states applying a similar version of TUTSA (such as Illinois) for guidance. Ultimately, since TUTSA considers what is "reasonable under the circumstances," there may never emerge a bright-line rule concerning CAs.[23]

Considering nClosures' holding that a CA is not enforceable unless additional protective measures are taken, and the lack of case law interpreting TUTSA in Texas, entities desiring to rely on the enforceability of a CA should do more than simply enter into such an agreement.  Prudence dictates that entities take affirmative protective measures beyond execution of a CA (such as those mentioned above in nClosures) to maintain the secrecy of that information in order to bolster the enforceability of that CA.


[1] Gordon Gekko, Wall Street (20th Century Fox, 1987).

[2] nClosures Inc. v. Block and Company, Inc., 770 F.3d 598, 602 (7th Cir. 2014).

[3] Id. at 599.

[4] Id. at 600.

[5] Id. at 602.

[6] Id. at 601.

[7] Id. at 601-03.

[8] Id. at 601.

[9] Id. at 602.

[10] Id.

[11] Id.

[12] Id.

[13] Forty-eight states have adopted some version of the Uniform Trade Secrets Act ("UTSA"), which defines a trade secret, in part, as information that is "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." See Unif. Trade Secrets Act 1 (amended 1985), 14 U.L.A. 538-44 (2005 & Supp. 2013) (listing statutory citations for states that have adopted the Uniform Trade Secrets Act).

[14] American Precision Vibrator Co. v. National Air Vibrator Co., 764 S.W.2d 274, 778-79 (Tex. App.—Houston 1988).

[15] See In re Bass, 113 S.W.3d 735, 742 (Tex. 2003).

[16] See Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195, 1200 (5th Cir. 1986) (holding that the existence of a confidential relationship between the parties is not required for relief under Texas law; rather, confidentiality is one of many factors to consider whether information is a trade secret).

[17] See, e.g., Astoria Industries of Iowa, Inc. v. SNF, Inc., 223 S.W.3d 616, 635 (Tex. App.—Fort Worth 2007) (holding that a party's disclosure of drawings to third parties only when it knew that the drawings were to be kept confidential weighed in favor of classifying such drawings as trade secrets); ZEP Manufacturing Co. v. Harthcock, 824 S.W.2d 654, 663 (Tex. Civ. App—Dallas 1992) ("Employers have an interest in protecting trade secrets and confidential information disclosed to employees during the course of the employment relationship, especially when, as here, the former employee had signed an employment agreement containing a nondisclosure covenant.").

[18] See Tex. Civ. Prac. & Rem. Code Ann.  134A.001-.008 (West Supp. 2014).

[19] See Bass, 113 S.W.3d at 739.

[20] See Civ. Prac. & Rem.  134A.002.

[21] See Michelle Evans, Determining What Constitutes a Trade Secret Under the New Texas Uniform Trade Secrets Act (TUTSA), 46 Tex. Tech. L. Rev. 469, 470 (2014) ("[I]t is unclear [what] … law Texas courts will rely upon for persuasive authority when called to interpret [TUTSA].").

[22] Id. at 475.

[23]  See Civ. Prac. & Rem.  134A.002.

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