In the last post, I wrote about the importance of ensuring that you take adequate measures to protect your valuable trade secrets.  I discussed a case where it appeared to the court that only minimal measures were taken and thus were not enough to warrant trade secret protection for the plaintiff.  This week, I write about another recent case that not only is instructive on this issue, but also shows how far-reaching the consequences can be for failing to adequately protect your proprietary information.  It has always been the case that contract law may provide an alternative or supplement trade secret protection.  But your failure to adequately guard your confidential information may affect the enforceability of your contract as well.

In nClosures v. Block and Co., 770 F.3d 598 (7th Cir. 2014), the Seventh Circuit determined that not only had a trade-secrets plaintiff failed to take reasonable measures to protect its claimed secret information, but also that the plaintiff’s confidentiality agreement was unenforceable as a result.  nClosures is an industrial design firm that developed metal cases for electronic tablets such as iPads.  nClosures was approached by Block and Company at a trade show where nClosures displayed its “Rhino” prototype about the possibility of the two companies forming a business relationship.  That led to a relationship where Block manufactured a metal case called the Rhino Elite for nClosures.  The parties signed a confidentiality agreement at the outset of their relationship.  After Block subsequently began to design and sell its own tablet enclosure, nClosures sued for fraud, trade-secret misappropriation, breach of fiduciary duty, and breach of contract.  Although the two parties had signed a confidentiality agreement at the outset of their relationship, the Court determined that nClosures had not taken reasonable steps to protect its information.

The Court noted that outside of the initial confidentiality agreement between the parties, nClosures did not require other Block employees or engineers to sign additional agreements in order to access nClosures design files.  Further, the Rhino and Rhino Elite design drawings were not marked as confidential and were not kept under lock and key or stored on a computer with limited access.  The court held that the parties’ confidentiality agreement was unenforceable as a result of nClosure’s failure to take reasonable steps to protect its information.

It is worth noting that nClosures’s co-founder had offered the court a declaration stating that it was nClosures’s policy to not share its designs, know-how, or market knowledge with other parties unless pursuant to a nondisclosure agreement and that nClosures had a policy of granting employees access to this information only on a need-to-know basis.  In response, the Court noted that nClosures did not enter into confidentiality agreements with the Rhino Elite designer, or with the manufacturers that produced Rhino Elite predecessors.  Thus, nClosure’s actions did not corroborate the declarant’s testimony—a lesson in making sure you practice what you preach when it comes to taking the proper steps to protect your information.