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Jun 2014
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June 06, 2014

Non-Disclosure Agreements – More Complicated Than You Might Think


“Confidential information” is only confidential if it is actually treated as confidential. Pretty confusing, right?  Actually, it is a straightforward lesson that we are reminded of by the recent decision in nClosures Inc. v. Block and Company, Inc. 

In that case, a federal court in Illinois found that, despite having entered into a confidentiality and non-disclosure agreement with the defendant Block, nClosures was not protected when Block allegedly began using nClosures’ designs to produce a competing product.  After discussing a potential partnership to produce tablet enclosures, the parties signed a confidentiality and non-disclosure agreement. nClosures then shared its proprietary and confidential information regarding its tablet enclosures with Block, including its designs, market information, manufacturing processes, models, and drawings. 

When the proposed partnership fell through, Block began manufacturing its own competing tablet enclosures. nClosures sued Block claiming, among other things, that Block had misappropriated nClosures’ trade secrets and breached the agreement by using nClosures’ confidential information to produce a similar product.

Ultimately, the court ruled in favor of Block, finding that nClosures was unable, as a matter of law, to prove that Block had stolen any of its trade secrets. Specifically, the court found that the designs that nClosures claimed were trade secrets were not, in fact, trade secrets because nClosures had not taken “reasonable efforts” to keep the information secret or confidential, as it was required to do under state law. 

You might be scratching your head asking what else nClosures could have done beyond entering into the confidentiality and non-disclosure agreement before disclosing its designs to Block. The problem, however, was not the actions nClosures took with respect to Block. Rather, nClosures’ trade secret misappropriation claim against Block was defeated because of what nClosures failed to do with other parties. 

Even though nClosures had entered into the confidentiality and non-disclosure agreement with Block, it failed to enter into a similar agreement with its own product designer or manufacturer, which proved fatal to its misappropriation claim.

The court found nClosures’ contention that it operated based on its manufacturer’s policy and “industry practice that its confidential information would be maintained in confidence” and that it had never disclosed its design files “without the understanding that the files are to be maintained in confidence” unconvincing and insufficient to prove that the design files were the subject of reasonable efforts to protect it. Because the design files were not trade secrets, there was nothing for Block to misappropriate, and nClosures’ misappropriation claim failed.

Similarly, the court found that Block did not breach the confidentiality and non-disclosure agreement when it purportedly used nClosures’ designs, again relying on nClosures’ free disclosure of the design files to its designer and manufacturer without reasonable efforts to keep the information confidential.

The court explained that a confidentiality and non-disclosure agreement will not be enforced if the information intended to be protected is not actually confidential and not the subject of reasonable efforts to maintain its confidentiality. While the information need not be kept “under lock and key,” a party’s failure to expend enough effort to prevent its information from being misappropriated, the court explained, is evidence that it is not particularly valuable. 

The nClosures case serves as a valuable reminder that in today’s automotive industry, where innovation and the intellectual property that comes with it are critical to supplier success and often a supplier’s greatest asset, suppliers must be absolutely vigilant in protecting their confidential information. 

So, while you may believe that having a potential business partner sign a non-disclosure agreement before sharing your valuable and purportedly confidential information is adequate to protect your information and your business, if you have not been equally diligent in protecting this same information from disclosure by other parties, you may find that your non-disclosure agreement is worth little more than the paper on which it is written.

Patrick Gunton contributed to this article.

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