When Is Confidential Really Confidential?

March 11, 2015

A business’ confidential information is its life-blood. It is often the ingredients for a competitive economic advantage. But, if a business does not take steps to protect against use and dissemination of such information, the courts will not step in and provide a helping hand. In nClosures Inc. v. Block and Co, Inc., 770 F.3d 598 (7th Cir. 2014), the Seventh Circuit Court of Appeals sent a clear message – if a business wants to keep information confidential, it must take reasonable steps to restrict the dissemination of such material.

In nClosures Inc., nClosures and Block and Co. Inc. contemplated a business relationship for the purposes of designing and manufacturing electronic tablet enclosures. nClosures had previously brought to market the Rhino Elite, a metal tablet enclosure, and, thus, brought product designs to the equation. As a preliminary matter, the parties entered a confidentiality agreement: "[t]he 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...." However, nClosures: 1) did not require its employees or engineers to sign similar confidentiality agreements with respect to the Rhino and Rhino design files; 2) did not require the designer of the Rhino Elite product, an independent contractor, to sign a similar confidentiality agreement; 3) did not require the manufacturers that produced the Rhino Elite predecessors (the Lab Shield and Rhino) to sign a similar confidentiality agreement; 4) did not mark its product designs confidential; 5) did not keep its product designs under lock and key and 6) did not store its product designs on a computer with limited access. 

Although nClosures and Block and Co. Inc. failed to formalize an agreement to design and manufacture a new tablet device product line, nClosures engaged Block and Co. Inc. to manufacture the Rhino Elite. nClosures, thus, provided Block and Co. Inc. the design files for the Rhino product line. Eventually, however, Block and Co. Inc. developed its own tablet enclosure, the Atrio. In August 2012, nClosures sued Block & Co. Inc. for, among other things, breach of the Confidentiality Agreement.

On appeal, the Seventh Circuit Court of Appeals stated that in order to enforce a confidentiality agreement: 1) the covered information must "actually [be] confidential" and 2) the party seeking to enforce the confidentiality agreement must have undertaken "reasonable efforts ... to keep it confidential." Affirming the District Court's denial of nClosures' claim, the Seventh Circuit explained that nClosures did not require confidentiality agreements with respect to the design files for the Rhino product line. The Court, additionally, noted that the design drawings were not marked confidential, not kept under lock and key and not stored on a computer with limited access. According to the Court, nClosures "did not engage in reasonable steps to protect the confidentiality of its proprietary information" and, thus, "the confidentiality agreement with Block is unenforceable."

Key Takeaway

A business must treat confidential information as confidential. Moreover, signing a confidentiality agreement may not be enough if a business does not take additional steps to ensure that the information is protected from dissemination by employees, contractors, vendors and business partners that may have access to the information. 

Reasonable steps to consider are:

  1. Requiring contractors, vendors and business partners with access to confidential information to execute confidentiality agreements;
  2. Requiring employees to execute confidentiality agreements;
  3. Marking confidential information "confidential";
  4. Maintaining confidential information under lock and key; and
  5. Maintaining confidential information in computers with limited access.

 

Should you have any questions or need consultation regarding this or other related matters, you can contact Jason B. Hirsh at 312.476.7580.

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