For many companies, entering into confidentiality or non-disclosure agreements is common practice when sharing confidential or proprietary information with third parties. However, as the recent case nClosures, Inc. v. Block and Company, Inc., No. 14-1097 (7th Cir. 2014) illustrates, companies must use reasonable efforts to maintain the confidently of such information for these agreements to be enforceable.
SUMMARY OF THE CASE
In May 2011, nClosures, Inc. (“nClosures”) and Block and Company, Inc. (“Block”) entered into a business relationship where nClosures would design and Block would manufacture certain electronics enclosures such as covers for iPads and electronic tablets. As most companies do, nClosures and Block executed a confidentiality agreement which included the following language:
The Parties…agree that the Confidential Information received from the other Party shall be used solely for the purposes of engaging in the Discussions and evaluating the Objective (the “Permitted Purposes”). Except for such Permitted Purposes, such information shall not be used, either directly or indirectly, by the Receiving Party for any other purpose…
Pursuant to the agreement, nClosures disclosed its designs for the enclosures to Block and Block started manufacturing them. Around the same time, Block started manufacturing its own competing product and in August 2012, Block terminated its relationship with nClosures. NClosures filed suit against Block for, among other things, breach of contract and the District Court granted summary judgment for Block.
The Court stated that confidentiality agreements will only be enforced if the “information sought to be protected is actually confidential.” The issue of whether or not an enforceable contract existed between the Parties then turned on whether or not nClosures took reasonable steps to maintain the confidentiality of its information.
In this case, the Court found several deficiencies in nClosures treatment of its confidential information. First, although they entered into a confidentiality agreement with Block, they did not require any individuals who accessed their designs to sign confidentiality agreements. Second, nClosures did not mark their designs with words such as “confidential” or “proprietary.” Third, the designs were not kept in a secure location, such as a locked cabinet.
Based on these facts, the Court found nClosures did not take reasonable steps to maintain the confidentiality of its information and therefore the confidentiality agreement with Block was unenforceable.
PRACTICE TIPS:
Confidential information must be confidential. Trade secrets must be a secret.
Executing confidentiality agreements are an important first step in protecting confidential information, including trade secrets. However, the protection plan cannot stop there. This information must also be subject to reasonable efforts to maintain its confidentiality/secrecy.
Examples of reasonable efforts may include:
Mark the information
• Confidential information should be marked “confidential” and/or “proprietary,” even if it is not required by the governing agreement.
• Only confidential information should be marked as such, marking all documents “confidential” and/or “proprietary” is not a viable protection strategy.
Restrict access
• Restrict access to network folders where confidential information is stored.
• Store hard copies of files in a locked and secure cabinet.
• Share confidential information with only those employees or third parties that have a “need to know” the information and only share the amount of such confidential information that is necessary.
Educate employees at all stages of employment
• Train new and existing employees about what information is confidential and what obligations they have with respect to such information.
• Conduct confidentiality “exit interviews” to remind employees of their duties of confidentiality when then terminate their employment.
Audits
• Periodically audit your company’s confidentiality agreements, what information has been shared, and to what third parties.
• These audits are important for ensuring the agreement has not expired and the information shared is still confidential.
• Audits are critical for determining what third parties know the confidential information and may have permission to use it. Potential conflicts of interest between current and potential business partners may also be assessed.
