The U.S. Court of Appeals for the Seventh Circuit has recently reminded businesses that non-disclosure, or confidentiality agreements only go so far to protect a company’s confidential and proprietary information. In nClosures, Inc. v. Block and Company, Inc., No. 13-3906 & 14-1097 (7th Cir., October 22, 2014), the federal appeals court ruled that, to be enforceable, confidentiality agreements must relate to information that by itself is ostensibly “confidential” and also is subject to reasonable efforts on the part of the company to preserve its confidentiality.
In 2011, Block approached nClosures about forming a business partnership to develop, market and sell enclosures for communications devices, such as iPads and other tablets. The two businesses entered into a mutual non-disclosure agreement (NDA) so that they could share information needed to explore a potential partnership. The NDA stated that “[t]he parties…agree that the Confidential Information received from the other Party shall be used solely for the purpose of engaging in the Discussions and Objective….such information shall not be used, either directly or indirectly, by the Receiving Party for any other purpose.” This language restricting the use of another party’s confidential information to a particular business purpose covered by an NDA typically appears in such agreements. Under the NDA in this case, nClosures provided Block with confidential and proprietary product designs, market knowledge, manufacturing specifications, solid models and assembly drawings.
In August, 2012, Block launched its own iPad and tablet enclosures and told nClosures that Block no longer wanted to participate in a partnership to sell such products with nClosures. nClosures reiterated that an oral partnership existed between the parties. nClosures filed suit against Block alleging claims for fraud, trade secret misappropriation, breach of fiduciary duty, breach of contract (the NDA) and unfair competition. The district court granted nClosures a preliminary injunction enjoining Block from using nClosures’ tablet enclosure designs, manufacturing know-how and market know-how until the district court reached a final decision on the merits of the contract and other claims. Eventually the district court granted a summary judgment motion in favor of Block, throwing out nClosures’ breach of contract and other claims. nClosures appealed the ruling to the Seventh Circuit Court of Appeals.
A Written Contract Does Not Automatically Rule
The Seventh Circuit Court of Appeals ruled against nClosures on its breach of contract claim. Interpreting Illinois law, the Court explained that courts “will enforce confidentiality agreements only when the information sought to be protected actually is confidential and reasonable efforts were made to keep it confidential,” citing Tax Track Sys. Corp. v. New Investor Worlds, Inc. (emphasis added). In supporting its decision, the court noted that nClosures did not require NDAs to be signed by other companies or individuals who accessed its design files for its proprietary enclosure products, including an independent third-party contractor who created the initial enclosure designs and a third-party company that initially manufactured the enclosure products. Further, the court emphasized that nClosures did not mark its design drawings with designations, such as “CONFIDENTIAL” or “PROPRIETARY INFORMATION.” Nor did nClosures maintain the design files in locked files or store them in a computer with restricted access. Consequently, the court concluded, “[t]hese facts show that nClosures did not engage in reasonable steps to protect the confidentiality of its own proprietary information, and therefore the confidentiality agreement with Block is unenforceable.”
Practical Tips about Non-Disclosure Agreements
At least in the Seventh Circuit (which includes Wisconsin), NDAs will only go so far. A party with proprietary information must take affirmative and reasonable steps to protect its confidential information and not just assume that, because a confidentiality agreement is signed with another party, such information, by virtue of the NDA terms alone, is and will be enforced as confidential. An NDA will not fill in the gaps if a company does not take steps to safeguard its own confidential and proprietary information.
Practical and reasonable steps for protecting a company’s confidential and proprietary information, including trade secrets, include:
- Maintaining restricted access to the information, such as locked file cabinets or restricted access to only those employees who need to know about such information in order to perform their jobs;
- Requiring all third parties who will be given access to such information to sign an NDA;
- Keeping NDAs current and updating them as needed;
- Marking written or documented forms of confidential or proprietary information as “CONFIDENTIAL” OR “PROPRIETARY” or “TRADE SECRET”;
- When confidential information is oral or non-tangible, taking steps to limit outside parties’ access to such information and reminding the recipient of such information that such information is required to kept confidential. Further steps in this case may be to follow up with an email or other writing stating that the confidential information orally shared is proprietary and subject to a confidentiality agreement;
- If manufacturing equipment or methods of manufacturing are believed to be proprietary by a company, then such company should require all third parties and independent contractors who have access to the manufacturing floor —even those who are hired to clean the facilities, pick up and take out doorway rugs or fill vending machines in the lunch room—to sign an NDA and restrict customer and supplier access to such manufacturing areas where proprietary equipment or methodology is maintained;
- Require any third party entering the facility, whether or not the third party will enter a manufacturing area or other area where proprietary information is observable or could be overheard, to sign a Visitor’s Confidentiality Pass, even if the third party’s employer has signed an NDA with your company.
- Create a waiting room or area in which truck drivers who deliver raw materials or pick up manufactured goods can wait and are segregated from the manufacturing floor;
- Make sure that all employees sign an NDA upon hire and that such NDAs are updated and kept current as needed;
- Require all third parties with whom a company has an NDA to obtain a written confidentiality agreement from any third parties or subcontractors who also will be given such confidential information; and
- Require all parties who sign an NDA to limit the use of confidential information for a restricted purpose and to share such information to only those employees who need access to the information to carry out the restricted purpose.
In summary, an NDA alone does not protect a company’s confidential or proprietary information alone unless the company takes reasonable steps to maintain its secrecy.
**For other practical tips on the use of NDAs or for the drafting of specific one-way or mutual NDAs, contact LEGAL BUSINESS EDGE, LLC, Attorney Sarah DeBruin, at 920-851-7761, or sdebruin@LegalBusinessEdge.com