nClosures Inc. v. Block and Company, Inc.

Applying Illinois law, the U.S. Court of Appeals for the Seventh Circuit reminded prospective business partners that non-disclosure agreements will not be effective by themselves to protect information a company regards as confidential and proprietary.  To be enforceable, the information itself must ostensibly be “confidential” and must also be subject to reasonable efforts on the part of the company to preserve its confidentiality.  nClosures Inc. v. Block and Company, Inc., No.13-3906 & 14-1097 (7th Cir., Oct. 22, 2014) (Flaum, J.)

Background

In 2011, Block approached nClosures about forming a partnership to develop and market enclosures for communication devices, such as iPads and other tablet products.  The parties entered into a confidentiality and non-disclosure covenant so that they could explore the potential partnership.  The non-disclosure agreement provided that “[t]he parties . . . agree that the Confidential Information received from the other Party shall be used solely for the purpose of engaging in the Discussions and evaluating the Objective. [] Except for such Permitted Purposes, such information shall not be used, either directly or indirectly, by the Receiving Party for any other purpose.”  Based on the non-disclosure agreement, nClosures provided Block with certain of its confidential and proprietary information, including product designs, market knowledge, manufacturing set-up, solid models and assembly drawings.

nClosures alleged that Block took nClosures’ confidential information and used it to create its own iPad tablet enclosure.  During the development of Block’s product, Block allegedly reiterated to nClosures that a partnership existed between the parties, although the parties ultimately never signed a final partnership agreement.  Block launched its own enclosure product in August 2012, and later that month indicated to nClosures that Block would no longer sell products by nClosures, effectively terminating the business relationship between the parties.

nClosures filed suit asserting claims for fraud, trade secret misappropriation, breach of fiduciary duty, breach of contract claim and unfair competition.  nClosures moved for a preliminary injunction based upon the breach of contract claim and Block’s alleged use of nClosures’ confidential designs and manufacturing knowledge.  The district court granted nClosures’ motion for a preliminary injunction and enjoined Block from using nClosures’ tablet enclosure designs, manufacturing know-how and market knowledge until the district court reached a final determination on the merits.  After the parties filed cross-motions for summary judgment, the district court granted summary judgment in favor of Block.  nClosures appealed.

In its appeal, nClosures challenged the district court’s decision regarding nClosures’ breach of contract and breach of fiduciary claims.

The Contract Is Not Always King

The Seventh Circuit affirmed the district court’s summary judgment in favor of Block on the breach of contract claim, citing Tax Track Sys. Corp. v. New Investor World, Inc.  The Court explained that under Illinois law, courts “will enforce confidentiality agreements only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.”  Thus, a non-disclosure agreement is of limited legal value unless, behind it, the evidence demonstrates that the information subject to the agreement is truly confidential and remains so by virtue of reasonable measures to preserve its confidentiality.

Although the Seventh Circuit acknowledged that nClosures and Block had signed a non-disclosure agreement at the outset of their business relationship, it pointed out that nClosures did not require confidentiality agreements from other companies or individuals who accessed the design files for its proprietary enclosure products, including an independent contractor who created the initial enclosure designs and a third-party company that initially manufactured the enclosure products.  It further noted that nClosures failed to mark its design drawings with designations such as “CONFIDENTIAL” or “CONTAINS PROPRIETARY INFORMATION.”  Nor did nClosures maintain the design files under lock and key or store them in a computer with restricted access.  Consequently, the Court concluded, “[t]hese facts show that nClosures did not engage in reasonable steps to protect the confidentiality of its proprietary information, and therefore the confidentiality agreement with Block is unenforceable.”

Partnership Requires Co-Ownership and Profit-Sharing

nClosures argued that Block violated its fiduciary duties by manufacturing and marketing its own iPad enclosures without providing any benefit to nClosures, its purported partner.  The district court concluded that because the parties were not, in fact, partners under the law, Block owed no fiduciary duties to nClosures and therefore no breach of those duties could have occurred.  The Seventh Circuit affirmed.

Ordinarily, partners owe fiduciary duties to fellow partners, including the sharing of benefits of a joint enterprise.  In upholding the district court’s determination that no partnership was formed between Block and nClosures, the Seventh Circuit, citing Illinois statutory law, explained that parties must be co-owners and share profits in order for a partnership to be recognized.  The Court explained that foremost among the considerations courts consider in determining if a partnership has formed is whether the parties have agreed to share profits and losses.

The Seventh Circuit concluded that no reasonable jury could find that nClosures and Block formed a partnership, and consequently, Block did not owe or violate any fiduciary duty to nClosures.

Practice Note: At least in the Seventh Circuit, non-disclosure agreements only go so far.  If a party fails to take reasonable steps to ensure its proprietary information remains confidential, a confidentiality agreement will not fill the gap, and neither will the courts.