Commentary: Is your confidentiality agreement enforceable?

Confidentiality agreements (CAs), or non-disclosure agreements, are routinely used in all facets of the energy industry. From E&P companies exploring strategic transactions to seismic companies negotiating the manufacture of equipment, CAs are commonplace, and for good reason as highly valuable, confidential and/or proprietary business information often needs to be entrusted to a third party. But, there must be assurances that such confidences will not be breached.

Simply entering into a CA may not be enough to protect such information. Recently, the Seventh U.S. Circuit Court of Appeals held that a CA was not enforceable when the party seeking its enforcement required the opposing party to merely sign the agreement at the outset of their business relationship.

In nClosures, Inc. v. Block and Company, Inc., 770 F.3d 598, 602 (7th Cir. 2014), the Seventh Circuit’s analysis of the enforceability of a CA found that these agreements are enforceable “only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.

According to the court, “reasonable” efforts include clearly marking the proprietary information as “confidential,” keeping the information under lock and key, storing it on a computer with limited access, or requiring the specific individuals who access the information to sign additional CAs. Relying on existing Illinois law, the court ruled that failing to take any of these additional steps, and merely requiring another to sign a CA at the negotiation stage of the business relationship could not be considered a “reasonable effort” to keep the information confidential. As a result, the original agreement was held to be unenforceable.

For E&P companies that regularly require and rely on CAs to protect their operations, 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 (which would include, for example, seismic data) generally grant relief only when a party has made reasonable efforts to maintain the secrecy of information it seeks to protect. 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 for an energy company seeking to protect its information then becomes whether the applicable jurisdiction requires more than simply executing an agreement to keep information confidential.

In Texas, the answer is not entirely clear. That is because Texas recently enacted the Texas Uniform Trade Secrets Act (TUTSA), a new law governing these issues (Tex. Civ. Prac. & Rem. Code Ann. §§ 134A.001-.008 (West Supp. 2014)). Just like the law in nClosures, to recover under TUTSA, a party must demonstrate that it made efforts to maintain secrecy. However, since there is not yet a large body of case law applying or interpreting TUTSA, it is presently uncertain what types of efforts will satisfy that standard. Is a CA alone sufficient? Or is something more – as was the case in nClosures – required?

Future courts interpreting TUTSA could rely on cases from other states applying a similar version of TUTSA for guidance. Because Texas and Illinois law on this issue are so similar, Texas courts could look to the Seventh Circuit’s holding in nClosures as persuasive authority.

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, energy companies 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 to maintain the secrecy of that information in order to bolster the enforceability of that agreement.

Michael S. Haynes is a partner in the financial restructuring and reorganization practice group at Gardere Wynne Sewell LLP, with focus on energy sector restructurings. Matt Pyeatt is an associate in the financial restructuring and reorganization practice group at Gardere Wynne Sewell LLP.