Think a Confidentiality Agreement is Enough to Protect Your Proprietary Information? Think Again

Note: This article appears in the February 2015 edition of Barnes & Thornburg LLP's Commercial Litigation Update e-newsletter.

Parties to business transactions routinely sign confidentiality agreements, thinking that will protect against misuse of proprietary information. As illustrated by a recent case, an agreement alone is not enough protection. In nClosures, Inc. v. Block and Co., Inc., 770 F.3d 598 (7th Cir. 2014), a party which allowed access to its confidential designs but took no action to protect them beyond signing a confidentiality agreement wound up on the losing end of a dispute.

nClosures, an industrial design firm, developed metal cases for iPads and other electronic tablets. An independent contractor designed a case, called the “Rhino Elite,” under a contract with nClosures. Block and Company manufactured metal devices such as cash drawers, and identified tablet enclosures as a possible new product line. Representatives of nClosures and Block met at a trade show, and began discussions about working together. The parties signed a confidentiality agreement which limited the use of information exchanged between the parties to “permitted purposes.” The agreement defined “the Objective” as “a potential business relationship with respect to iPad Enclosures.”

After signing the agreement, nClosures gave Block access to design files for the Rhino products. But nClosures did not require Block engineers to sign confidentiality agreements to access the design files. Indeed, nClosures had never entered into a confidentiality agreement with the contractor who created the Rhino Elite design or the companies which manufactured previous versions of the Rhino Elite. None of the drawings were marked as “confidential” or with words such as “contains proprietary information.” The drawings were not kept in a locked room or file drawer, and were available on a computer with essentially unlimited access.

After extensive negotiations the parties could not agree on the terms of a written contract, though they did reach an oral agreement under which, among other terms, Block would manufacture the Rhino Elite and sell it to nClosures for a specified price. Once the product entered the market, design problems became apparent. Block engineers helped with the re-design of a bracket, but Block also developed a design for the “Atrio,” its own enclosure. nClosures viewed the products as nearly identical, and filed suit against Block after the business relationship ended. A claim for breach of the confidentiality agreement failed because nClosures had not taken reasonable efforts to keep the proprietary information confidential. The court compared the fact of this case to others where 1) documents were kept in a vault with limited access, 2) engineers using the drawings were required to sign confidentiality agreements, 3) vendors given access to drawings were required to sign agreements, 4) drawings were marked “confidential” or with other words showing their proprietary nature.

The lesson of this case is clear for parties who grant others access to confidential documents. In addition to a confidentiality agreement, the parties must take steps to protect the confidential information. Care must be taken to limit access and contractually bind all users of information not to disseminate it to others or use the information for purposes not permitted.

Timothy J. Abeska, a member of the Firm’s Commercial Litigation Practice Group, is a partner in the South Bend office who is admitted to practice in Indiana and Michigan. Tim can be reached by telephone at (574) 237-1119 or by email at tim.abeska@btlaw.com.

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