Consider this very common tableau: Two companies want to discuss doing business together, as in manufacturing something or joint development of software. They sign a preliminary non-disclosure agreement that says that anything they give to each other in furtherance of the discussion must be kept confidential. Information is exchanged, manufacturing is commenced and several months later the manufacturing party stops manufacturing the product for the other party and starts selling their own competing product. Party 1 (the designing and disclosing party) has the other party dead to rights under the NDA, right? After all, Party 2 (the receiving and manufacturing party) is selling a product using information they received from Party 1. A federal court in Illinois says: "Not so fast, my friend". How can this happen?
nClosures designed a metal case for iPads. Block and nClosures entered into a non-disclosure agreement that had the following language:
"The Parties … agree that the Confidential Information received from the other Party shall be used solely for the purposes of engaging in the Discussions and evaluating the Objective (the “Permitted Purposes”). Except for such Permitted Purposes, such information shall not be used, either directly or indirectly, by the Receiving Party for any other purpose… ."
Block began production of the iPad cases as designed by nClosures. Several months later Block terminated its relationship with nClosure and began manufacturing iPad cases of its own design. Lawsuits ensued.
One of the counts raised by nClosure was for breach of the contract to keep its stuff confidential. A lower court granted a summary judgment for Block and the summary judgment was affirmed upon appeal.
The courts reasoned that even though Block had agreed to keep certain information confidential, the parties had never entered into a subsequent contract for the manufacture (even though several drafts were exchanged and an oral agreement as to price had been reached), nClosure had never required anyone else (Block employees, consultants, third party designers, previous manufacturers, etc.) to sign a confidentiality agreement, had not kept its design on secured computers or under lock and key and had therefore not taken reasonable steps to protect the information. Therefore, nClosure could not enforce the confidentiality agreement.
This case may be cited for the proposition that even though you have an original confidentiality agreement in place, at least in Illinois you had better take subsequent and further steps much like those required to protect trade secrets (see here, here and here) or the other party will not be required to keep stuff confidential even though they agreed to do so.
Alarming? A little bit. It seems to mean that confidentiality agreements in Illinois can only be used to protect information that qualifies as a trade secret. While that is a prime reason for the use of such agreements, I'm pretty sure most people thought that non-disclosure agreements had broader application than that.
Lessons learned? Follow up the initial (i.e. "dating") confidentiality agreement with a more comprehensive (i.e. "marriage" agreement ) and get similar non-disclosure and non-use agreements from everybody else that will see your crown jewels. Also, physically protect the information with locks, key cards, walls, safes, etc. and have a documented program in place that has all the elements for trade secret protection.
Remember this the next time somebody bitches about the over-lawyering surrounding confidentiality. Your business could be at stake.