Many wars have been fought in Texas courts over the enforceability of noncompete agreements. But relatively few have been waged over the enforceability of nondisclosure agreements. The reasons for this are many, including the fact that Texas courts have routinely held that, unlike noncompete agreements, nondisclosure agreements do not restrain trade; hence, they are far more enforceable. Also, litigation over nondisclosure agreements has been relatively sparse because these agreements typically only require a departing employee to refrain from using or disclosing his former employer’s trade secrets. Nondisclosure agreements typically do not prohibit an employee from competing.
But what if a nondisclosure agreement goes too far? What if the wording of a nondisclosure agreement is so broad that it is, de facto, a noncompete agreement? In that case, would the usual deference given to nondisclosure agreements apply?
What if, for example, a nondisclosure agreement prohibited an employee not only from using or disclosing his former employer’s trade secrets, but also prohibited him from using or disclosing any of the knowledge he gained while working for the employer? Would a clause like that be as enforceable as a run-of-the-mill NDA?
Nondisclosure Agreement Defined
The first step in answering this question is to examine how courts have defined nondisclosure agreements. As one Texas court put it, “Nondisclosure covenants prevent the disclosure of confidential information and trade secrets.” Another court noted, “Nondisclosure covenants do not necessarily restrict a former employee’s ability to compete with the former employer by using the general knowledge, skill, and experience gained from his or her work experience.” As these cases acknowledge, a nondisclosure agreement is designed to protect a company’s confidential information and trade secrets from being used against it—it is not designed to keep a former employee from competing by using his general knowledge and skills.
Impact of Having Overly Broad Nondisclosure Agreement
If an NDA is so broad that it “has the practical effect of prohibiting the former employee from using, in competition with the former employer, the general knowledge, skill, and experience acquired former employment,” it may be held to be a noncompete agreement. The reason for this is that if a purported nondisclosure agreement goes beyond merely protecting an employer’s trade secrets and confidential information, it may actually restrain trade, just as a noncompete does.
Why Does It Matter?
If a Texas court construes an agreement as a legitimate NDA, it will almost certainly enforce it. Texas courts have consistently held nondisclosure agreements to be enforceable. Conversely, noncompete agreements, to be enforceable, must meet the strict requirements of Tex. Bus. & Comm. Code § 15.50. For example, a noncompete agreement must be reasonable in scope. If an employee convinces a court that a nondisclosure agreement prohibits him from using his “general knowledge and skills,” the court may treat the nondisclosure as a noncompete agreement. Under the statute, an overly broad noncompete agreement must be reformed to make it reasonable.
So what?, an employer might ask. Here’s why it matters: Under the Texas statute, if the court is required to reform a noncompete agreement to make it reasonable in scope, no damages can be recovered (on a breach of contract theory) based upon pre-reformation violations of the agreement. From the perspective of the employee who is being sued, reformation of an overly broad agreement is a “get out of jail free” card—it wipes away what has happened in the past (on a contract theory; obviously, if the employer can make a tort theory, like trade secret theft, that’s a different matter). Thus, if an employer wants to maintain its right to recover damages for breach of a nondisclosure agreement, it should ensure that the agreement is reasonable in scope at the outset. The employer does not want the the court to have to reform its covenants because they are too broad.
In the realm of noncompete and nondisclosure agreements, “more” is not always better. Employers have an incentive to draft reasonable covenants so that the court will not have to reform them. If a court has to reform an overly broad covenant, it can have the effect of absolving the employee of wrongs that occurred before the reformation happened. Therefore, precision in the drafting of these agreements is extremely important.