Non-Disclosure & Confidentiality: A Cautionary Tale

By Richard Stobbe

A confidentiality agreement is signed. So… confidentiality is covered, right?

This 2014 case, nClosures Inc. v. Block and Company, Inc., No.13-3906 & 14-1097 (7th Cir., Oct. 22, 2014), shows that the answer is “not so fast”. In the nClosures case, two companies entered into a confidentiality agreement to explore a potential business deal to manufacture iPad cases based on nClosures’ so-called “Rhino” and “Rhino Elite” designs. However, the first confidentiality agreement was specifically directed to the purpose of initial discussions exploring the possibility of a deal. nClosures disclosed its confidential Rhino and Rhino Elite designs to Block.

However, in the following months, the parties circulated a draft manufacturing agreement but did not ultimately sign any written agreement, nor did they address confidentiality obligations that extended beyond those initial discussions. Eventually, the parties settled on a vague verbal arrangement to manufacture and sell iPad cases.

In this decision, the U.S. Seventh Circuit Court of Appeals provides us an important reminder. For confidentiality to apply, that first agreement is important, but remember:

1. As the business relationship expands beyond those initial discussions, additional confidentiality obligations should be imposed, to cover the new expanded purposes;

2. A non-disclosure or confidentiality agreement is not effective if the disclosing party does not make reasonable efforts to preserve confidentiality over its confidential information. In this case, the court found that nClosures had disclosed the same confidential design information to other contractors and designers without any confidentiality obligations.

In the words of the Court: “…no additional confidentiality agreements were required of individuals who accessed the design files for the Rhino or Rhino Elite devices. Additionally, neither the Rhino nor the Rhino Elite drawings were marked with words such as ‘confidential’ or ‘contains proprietary information’. Furthermore, the drawings were not kept under lock and key, nor were they stored on a computer with limited access.”

Lessons for business? A confidentiality agreement is an important first step, but it must be followed up with additional confidentiality agreements as the relationship evolves, and it must be backed-up with internal policies of proper marking, restricted access, and lock-and-key protections, in order to preserve confidentiality.

Calgary – 07:00 MT

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