United States: Non-Disclosure Agreement Enforceable Although Unlimited In Time And Area

Last Updated: December 21 2015
Article by Paul E. Freehling

A salesman for a medical device manufacturer signed a confidentiality covenant at the time he was hired. A dozen years later, he resigned and went to work for a competitor.  The former employer sued him in an Ohio federal court.  Because the covenant had neither temporal nor geographic limitations, the trial court invalidated the covenant and dismissed the breach of contract claim. The appellate court reversed, holding that no such limits are required for a confidentiality agreement. Orthofix, Inc. v. Hunter, Case No. 15-3216 (Nov. 17, 2015).

Status of the case. Orthofix's complaint alleged trade secret misappropriation, breach of non-compete and confidentiality covenants, and tortious interference with sales contracts. The company sought $1.6 million in lost profits.  The trial court entered judgment in favor of Orthofix on the tortious interference claim (awarding $62,000 in damages) but found for the defendant with regard to trade secret misappropriation and breach of contract. In a recent decision not recommended for publication, the Sixth Circuit Court of Appeals (a) held that the confidentiality covenant was enforceable, (b) determined that the defendant violated it by using and disclosing Orthofix's confidential information, and (c) remanded the case for calculation of breach of contract damages.

Background. Orthofix makes and sells orthopedic medical devices. Hunter, who had no prior experience selling those products, worked for Orthofix for 12 years. The same day he resigned, he went to work for an Orthofix competitor. According to the appellate court, he possessed on his computer and in his memory confidential information such as Orthofix's customer list, sales and pricing data, and physician schedules, preferences, and prescribing habits. He used and disclosed this information by introducing his former customers to his new employer and providing their buying history.

The non-disclosure agreement.  Hunter's non-disclosure agreement with Orthofix stated that he would "never use or disclose any confidential information which [he] acquired during the term of [his] employment with the corporation." The term "confidential information" was defined as anything "pertaining to [Orthofix's] business or financial affairs . . . developed by [Orthofix] at considerable time and expense, and which could be unfairly utilized in competition with the corporation."  The parties agreed that Texas contract law applied (Orthofix is headquartered in Texas).

Trial court's decision.  The lower court concluded that Orthofix could not maintain a breach of contract claim for misuse of "confidential information." That court reasoned that under Texas law, the only proprietary data qualifying as "confidential information" would be trade secrets protected by the Ohio Uniform Trade Secrets Law. However, the court determined that there weren't any. Accordingly, the court said the covenant would be deemed to constitute a non-compete and was unenforceable because it was missing duration and territorial limitations.

Ruling on appeal. The Sixth Circuit applied the following very different analysis.

(a) A confidentiality covenant that prohibits the use and disclosure of "general skills or knowledge" is invalid under Texas law as an unreasonable restraint on trade. Here, however, the covenant protected "confidential information," not "general skills or knowledge."

(b) A covenant that applies to data that is "valuable, not readily available, and acquired at great expense and effort" is valid in Texas. That is how "confidential information" was defined in the covenant here, and that is the kind of data Hunter used and disclosed. Therefore, the covenant is enforceable.  The absence of duration and geographical limits does not change this result.

(c) A covenant that protects "trade secrets," as defined under applicable state law, might also be valid.  However, in light of the appeals tribunal's ruling regarding "confidential information," that court found no need to review the trial court's decision that Orthofix did not have any "trade secrets" as defined in the Ohio Uniform Trade Secrets Act.

Takeaways. The enforceability of a confidentiality covenant in an employment agreement without time or geographical limitations may turn, at least in part, on how the information that may not be disclosed is defined. Precluding dissemination of "general skills and knowledge" may constitute an invalid attempt to restrain trade. But, a covenant that prohibits the use or disclosure of narrowly tailored and carefully defined "confidential information" may be enforceable.

The Sixth Circuit observed that "confidential information" under Texas law includes memorized data. In a minority of states, courts hold that a non-disclosure agreement is not violated by revealing a prior employer's proprietary data which the ex-employee only committed to memory.

Although not an issue in Orthofix, a judge might decline to enjoin an ex-employee's disclosure or use of a former employer's "confidential information" if the information is deemed to be stale. In that event, disclosure or use may be unlikely to injure the movant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Paul E. Freehling
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