Keeping secrets deep in the heart of Texas

texasHow much time should you spend in negotiating the law and jurisdiction clause in a confidentiality agreement (CDA)?

This question probably assumes that the parties are based in different jurisdictions.  If both parties are located in the same jurisdiction, it would be rare for them to propose a different jurisdiction for their contract.  Rare but not impossible: some Russian oligarchs seem to prefer to use the English courts to resolve their business disputes.

In most types of business contract, it would be unwise to gloss over this important issue in negotiations or to leave the point unaddressed in the contract.  But there are exceptions.  Research contracts with US state universities commonly leave the point unstated, as many US state universities claim to be not allowed, as a matter of state law, to agree to a law and jurisdiction outside their state.  A practice has developed, particularly in multi-party collaborations that involve several US state universities, for the collaboration agreement to remain silent on law and jurisdiction.

frogAnother exception may be routine CDAs.  Some technology-based companies enter into dozens, or sometimes even hundreds, of CDAs per year.  Often, these CDAs are the first stage in a business courtship.  For any given package of technology, the technology owner may enter into CDAs and then discuss potential business transactions with multiple, potential collaborators, before entering into a more substantive agreement with one of them.  Put more graphically, the company kisses a large number of frogs before finding, and consummating a relationship with, what it hopes will be a charming prince.

Given the large number of CDAs that some companies sign, and the smaller number that lead to a substantive transaction, it is tempting to try to minimise the time and costs of negotiating each CDA.  Thus, when a sticking point in the negotiations is the law and jurisdiction clause (as it often is), it is tempting to omit the clause completely.

IP Draughts recognises that this is a pragmatic approach in CDAs, and in many cases he would not fight with a client who proposed to follow this route, particularly if the other party’s jurisdiction is a reasonably mainstream one, and preferably (but not essentially) one with a familiar, common law legal system.  To take an example at random, this thought process might be followed if one party is based in England and the other party is based, say, in Texas.

Forum shopping with Frankie Howard

Forum shopping with Frankie Howard

Although this is a pragmatic solution, and saves costs in the short term, there is always the risk that the CDA will be litigated.  In that case, the litigation costs may well be increased, and the outcome of the litigation may be less predictable, if there is no law and jurisdiction clause in the contract.

A good illustration of this point, and the reason for writing this article, is the recent litigation between two listed companies operating in the market for touch-screen displays: (1) a UK company based in Yorkshire, England, Carclo plc (listed on the London Stock Exchange), and more particularly its subsidiary Conductive Inkjet Technology Limited (CIT), and (2) a US corporation based in Texas, UniPixel Displays, Inc (UPD, listed on NASDAQ).

These parties are currently engaged in simultaneous litigation in both the English and Texas courts in relation to a claim that UPD has breached confidentiality obligations with CIT.  Essentially CIT claims that certain patent applications filed by UPD claim inventive concepts and subject matter that were disclosed to UPD by CIT in confidence, and therefore CIT should be treated as the owner or part-owner of these patent applications.

Forum shopping with Mr Justice Roth

Forum shopping with Mr Justice Roth

The English version of the litigation has most recently surfaced with the publication on 7 October 2013 of an interim decision in the Patents Court case of Conductive Inkjet Technology Limited v Uni-Pixel Displays Inc [2013] EWHC 2968 (Ch).  Roth J was asked to set aside permission previously granted to CIT to serve claims on UPD outside the jurisdiction of the English court – ie in Texas.  He was also asked for a stay of the English proceedings while parallel proceedings in Texas were pending.

IP Draughts would not usually trouble readers with a report of interim proceedings that discuss arcane legal principles such as applicable law, forum non conveniens, the court’s power to stay proceedings,

Forum shopping in the Texas state court with Judge Cara Wood

Forum shopping in the Texas state court with Judge Cara Wood

and jurisdiction provisions in the European Patent Convention.  He does so now only to illustrate the expensive procedural mess that parties can find themselves in, when litigating an international CDA.  The case is also interesting for its discussion of how the Texas courts have approached the parallel proceedings (with the case being bounced up to the Federal court and then back to the State court), and how two expert witnesses on Texan law (both retired Texas judges) differed in their interpretation of applicable legal principles.

The remainder of this article will therefore pick up some interesting titbits from the case rather than summarise all the legal arguments.

The case report discusses three CDAs between the same parties, referred to

Forum shopping with Judge Simeon Lake III in the Federal court for the Southern District of Texas

Forum shopping with Judge Simeon Lake III in the Federal court for the Southern District of Texas

variously as the 2005 NDA, the 2006 NDA, and the 2010 NDA.  The court focuses mainly on the 2005 and 2010 NDAs.  It seems that the parties negotiated the 2005 NDA in some detail, and agreed to remain silent on law and jurisdiction, after CIT rejected UPD’s proposal for Texas law.

When UPD presented a similar NDA in 2010, which included their preferred wording on law and jurisdiction, it seems that CIT chose not to spend time in negotiating its terms, and therefore the following wording remained in the final version:

This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except for its rules concerning the conflict of laws, and venue shall lie exclusively in the courts of Montgomery County Texas.

montgomeryInterestingly, CIT framed part of its case as a claim that UPD had breached an equitable obligation of confidence.  IP Draughts surmises that this is an attempt to bypass the argument that claims for contractual breach of confidence, under the 2010 NDA, should be heard in the Texas court.

After extensive legal analysis, Roth J dismissed UPD’s application to set aside permission to serve out of the jurisdiction or stay the action pending the outcome of the Texas case.  This is an oversimplification, but will do for now.  For complex legal reasons it seems that CIT may be in difficulty in serving proceedings overseas for anything other than a claim for a UK-wide injunction.  In other words, CIT may have to forego a claim for a worldwide injunction.

This brings us on to another point.  Although this case is also about ownership of patents, the typical claim in a breach of confidence case is for an urgent (ie interim or interlocutory) injunction.  It may be very difficult to enforce interim orders outside the jurisdiction of the court in which the injunction is granted.  Therefore negotiating for the exclusive jurisdiction of your own country’s or state’s court in a CDA may be counterproductive if you need to bring interim proceedings in the other party’s court.

yorkshireIt is not clear to IP Draughts where the CIT v UPD case is going.  It will be interesting to see whether the case comes to trial (in either the English court or the Texas court or both) and, if it does, what evidence CIT has for a claim that UPD misused CIT’s confidential information.  IP Draughts will report on the case as it develops.  In the meantime, as both companies (or their parents) are listed companies, they may have to make public disclosures of the progress of the litigation.  This report from a regional UK newpaper, the Yorkshire Post, reports on the litigation as follows:

In a separate development, Carclo’s chief executive Chris Malley said he was pleased to announce that the English High Court has said CIT can pursue claims against US rival Uni-Pixel Displays in the English courts for breach of confidence and patent entitlement.

He added that as a result of this successful decision, Uni-Pixel will be obliged to pay the majority of CIT’s costs.

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