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March 1, 2015

The courts continue to look past the language of confidentiality and non-solicitation and non-competition agreements and to focus on whether the employer has a “thing” worthy of protection and whether the employer has given the employee adequate, independent consideration to support the restrictive covenant.

In nClosures, Inc. v. Block and Company, Inc., October 2014, the 7th Circuit Court of Appeals (covering Illinois, Indiana, and Wisconsin) reminded businesses that their confidentiality agreements will not be enforceable unless the business takes reasonable steps to protect the alleged confidential information.  nClosures was an industrial design firm.  It hired an independent contractor to design metal enclosures for items like the iPad.  Block and Company manufactured the enclosures for nClosures.  Before the parties began doing business with each other, they signed a confidentiality agreement in anticipation of the potential business relationship.  The agreement stated that nClosures’ confidential information would be used solely for the purpose of engaging in discussions and evaluating a potential business relationship regarding Block’s manufacture of the enclosures.  Block subsequently started manufacturing the enclosures.  Shortly after nClosures’ product entered the market for sale, Block developed a competing design for its own tablet enclosure.  nClosures sued Block for breach of the confidentiality agreement.

The court granted Block’s motion for summary judgment, finding that nClosures did not take reasonable steps to keep its proprietary information confidential.  The court acknowledged the elements a party must show to bring a successful breach of contract claim, but stated that when assessing the enforceability of a confidentiality agreement, the agreement will be enforced only when the Ainformation sought to be protected is actually confidential and reasonable efforts were made [by the owner] to keep it confidential.@  The court noted the following concerning nClosures’ conduct:

  1. nClosures did not enter into a confidentiality agreement with the independent contractor who designed the enclosure.
  2. nClosures did not require Block’s engineers or other employees to sign confidentiality agreements before accessing the design information.
  3. The design drawings were not marked “confidential” or “contain proprietary information.”
  4. The design drawings were not kept under lock and key.
  5. The design drawings were not stored on a computer with limited access.

Takeaway: Companies should review all confidentiality agreements for content, should identify gaps in coverage, and should conduct themselves in accordance with the non-disclosure clause.