Mindful of Confidentiality Practices? Companies Must Be When Seeking to Enforce Confidentiality Agreements
Posted on: Tuesday, April 21st, 2015
In nClosures, Inc. v. Block & Co., 770 F.3d 598 (7th Cir. 2014), the United States Court of Appeals for the Seventh Circuit held that a party to a confidentiality agreement who fails to take reasonable steps to keep its proprietary information confidential could not seek to enforce the provisions of a confidentiality agreement. Companies must remain mindful and diligent in their practices as they seek to protect valuable, proprietary information.
nClosures is an industrial design firm developing metal cases for electronic tablets, such as iPads. While at a 2011 trade show, nClosures’ executives formed a business partnership with Block, a manufacturer moving into the tablet product line industry. The partnership concerned a metal enclosure for the tablet called the “Rhino.” The parties later signed a confidentiality agreement which provides,
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[.]
The “Objective” is defined as “a potential business relationship with respect to iPad Enclosures.” After executing the agreement, nClosures provided Block with design files for the Rhino product. Soon thereafter, Block developed its own design similar to the Rhino, called the “Atrio,” and ended its relationship with nClosures. nClosures filed suit seeking a preliminary injunction against Block, alleging, among other claims, breach of contract for violating the confidentiality agreement.
In ruling against nClosures, the Seventh Circuit held the company did not take reasonable steps to protect its confidential information, including failing to:
- Require individuals with access to Rhino design files to execute separate confidentiality agreements;
- Label Rhino drawings “confidential” or containing “proprietary information”;
- Keep drawings under “lock and key”; and,
- Store drawings in password-protected settings.
The Court ruled that nClosures “did not engage in reasonable steps to protect the confidentiality of its proprietary information, and therefore that the confidentiality agreement with Block is unenforceable.” Massachusetts state and federal courts have similarly recognized the importance of companies taking proper, reasonable steps to protect confidential information. See Optos, Inc. v. Topcon Med. Sys., 777 F.Supp.2d 217, 240 (D. Mass. 2011) (finding reasonable steps taken to protect confidential information where customer lists password protected, numerous confidentiality agreements executed, and information not readily ascertainable outside company); J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 736-38 (1970) (denying trade secret protection where company did nothing to safeguard the confidentiality of its manufacturing processes). While the nClosures decision rests in Illinois law, it reflects an important principle for companies nationwide seeking to enforce confidentiality agreements. Each company must treat the information as confidential and proprietary in its day-to-day business operations if it later seeks to protect the same from unwanted disclosure and appropriation.
The information contained in this Posting may be considered advertising by Rule 3:07 of the Supreme Judicial Court of Massachusetts. This Posting contains material intended for informational purposes only, and should not be considered as legal advice by Holtz & Reed LLP. Your use of this Posting does not create an attorney-client relationship. Please do not send or share with us any confidential information about you or any specific legal problem without the express authorization of an attorney at Holtz & Reed LLP.