When It Comes to Confidentiality Agreements, Just Getting the Signature Is Not Enough

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Automotive suppliers and other manufacturers frequently have to share their valuable intellectual property with third parties. A supplier might need to share CAD files with another supplier to ensure that the finished product works, or a business that has designed a product may outsource the manufacturing to a business that can better handle production. Parties to such arrangements frequently sign a confidentiality agreement forbidding disclosure or unauthorized use of the design before proceeding with their arrangement. But is the confidentiality agreement ironclad at that point?

Not necessarily. In nClosures, Inc. v. Block & Co., the Seventh Circuit Court of Appeals, applying Illinois law, held that a confidentiality agreement entered into between a product designer and manufacturer was unenforceable, because the owner of the confidential information had not taken reasonable steps to protect its confidentiality.

According to the ruling, nClosures designed cases for electronic tablets and other devices, and entered into an agreement with Block to manufacture those cases. As part of that process, the parties entered into a confidentiality agreement covering nClosures’s designs. Five months after nClosures’s device went on sale, Block released its own competing product. Litigation followed.

Block moved for summary judgment on each of nClosures’s claims, including nClosures’s claims for trade secret misappropriation breach of the confidentiality agreement. The trial court granted summary judgment on each claim, holding in part that nClosures could not enforce its confidentiality agreement because it had not taken reasonable steps to protect its design. The Seventh Circuit stated that nClosures had not entered into confidentiality agreements with other people who had accessed the designs of the cases, had not marked the design drawings as confidential or proprietary when they were transmitted to Block, and had not limited access to the designs (either electronically or by lock-and-key). Thus, even though nClosures claimed to have a general policy of confidentiality of the design information, it had not taken reasonable efforts to maintain its confidentiality, and its confidentiality agreement with Block was unenforceable.

nClosures provides a valuable reminder to trade secret owners that obtaining confidentiality agreements—while important—is not enough to protect the confidentiality of those trade secrets. Vigilance during the lifespan of a trade secret is needed, because even if lapses in trade secret protection are not directly related to a confidentiality agreement, the enforceability of that agreement can be lost.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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