The Seventh Circuit reminded businesses in Illinois, Indiana and Wisconsin earlier this week that their confidentiality agreements will not be enforceable unless they take reasonable steps to protect their information. nClosures Inc. v. Block & Company, Inc., --- F.3d ----, 2014 WL 5359725 (7th Cir. Oct. 22, 2014). The opinion provides guidelines to businesses for ensuring that their confidentiality agreements are effective.
Block manufactured metal enclosures for iPads that nClosures designed. nClosures required Block to sign a confidentiality agreement before disclosing its designs. The confidentiality agreement permitted Block to use nClosures’ designs solely for the purpose of the parties’ “business relationship with respect to iPad Enclosures.” Block later developed its own competing enclosure. nClosures sued Block for breach of the confidentiality agreement and other claims.
The Trial Court
Block moved for summary judgment, arguing that the confidentiality agreement was unenforceable because nClosures failed to take reasonable steps to keep its designs confidential. The trial court agreed and granted Block’s motion for summary judgment. The Seventh Circuit reviewed the trial court’s decision de novo.
The Seventh Circuit
The Seventh Circuit reiterated that confidentiality agreements are only enforceable “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” Id. at *3 (quoting Tax Track Sys. Corp. v. New Investor World, Inc., 478 F.3d 783, 787 (7th Cir. 2007)). Companies cannot require some people to keep information confidential while sharing the same information with others without any restrictions. The Seventh Circuit thus essentially incorporates the statutory requirements of the Uniform Trade Secrets Act (secret must be “subject of efforts that are reasonable … to maintain its secrecy”) into analyses of claims for breach of confidentiality agreements.
The Seventh Circuit assessed whether nClosures took reasonable steps to protect the confidentiality of its designs along a spectrum developed in prior cases. On one end of the spectrum, the court found that a business had failed to take reasonable efforts to keep information confidential where it was distributed to hundreds of people, was not stamped “confidential,” and where many of the recipients had not signed confidentiality agreements. Id. (citing Tax Track Systems). On the other end of the spectrum, the court found that a business engaged in reasonable efforts to keep information confidential where the information was kept in a vault with limited access, the individuals who used the information were required to sign nondisclosure agreements, and the information was marked confidential. Id. (citing Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174, 177-80 (7th Cir. 1991)).
While nClosures required Block to sign a confidentiality agreement, that was not enough. nClosures did not require other individuals who accessed the designs at issue to sign confidentiality agreements. An independent contractor, who did not sign a confidentiality agreement, developed an earlier version of nClosures’ designs. nClosures also lacked confidentiality agreements with manufacturers of predecessor designs. In addition, the designs were not marked “confidential,” were not “kept under lock and key,” and were not stored on a computer with limited access. The Seventh Circuit placed nClosures’ efforts at the unenforceable end of the spectrum.
Businesses that rely on confidentiality and nondisclosure agreements to protect their information should view the Seventh Circuit’s decision in nClosures as a warning and seize the opportunity to review the sufficiency of their efforts to protect the confidentiality of sensitive information. The enforceability of a confidentiality clause will depend on how businesses behave before and after instituting the clause. Absent a comprehensive plan to protect information throughout all aspects of the business, the enforceability of key confidentiality agreements may be questionable.