Business Law

Think Twice Before Suing to Enforce a Confidentiality Agreement

This past October, in nClosures Inc. v. Block and Company, Inc., the 7th Circuit Court of Appeals ruled that under Illinois law, a confidentiality agreement is not enforceable in absence of proof that reasonable efforts were undertaken to maintain the confidentiality of information shared pursuant to the agreement.

A. Why is this ruling important?

Virtually every company uses confidentiality agreements. Many do so routinely — with the full expectation they will be enforced on the basis that the parties contractually agreed to treat all information shared as confidential.

The nClosures ruling turns that expectation on its head and indicates that confidentiality agreements are not automatically enforceable and are only enforceable when the shared information is actually confidential.

B. Case Facts

1. In the case, nClosures claimed Block breached a confidentiality agreement by using certain files for designs of enclosures.

2. In this case the Seventh Circuit found the agreement unenforceable because nClosures:

a) Did not require confidentiality agreements from other entities that created the designs, made products from the designs or were allowed to see the designs;

b) Failed to mark its design drawings as confidential; and

c) Did not restrict access to papers and files with the designs.

3. According to the court, Illinois law only enforces a confidentiality agreement “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.”

C. Take Away Points

What is critical here is the wording of the court’s decision. Instead of just ruling the information at issue was not confidential and therefore there was no breach of the agreement, the court took the extreme step of stating the contract was not enforceable. Such a ruling could have ramifications regarding other information shared by the parties or other terms of the agreement.

The other interesting point about this decision is that it purports to establish Illinois law. Whether Illinois state courts or the courts in other states will follow the ruling remains to be seen. The bottom line here is that companies can longer assume that confidentiality agreements will be automatically enforced.

D. Going forward, what should you do?

a. Keep using confidentiality agreements.

b. Do not assume that the agreement will prevent use of all information shared under the agreement.

c. Do not institute scorched-earth litigation for a breach of a confidentiality agreement unless you aretrying to protect information that was actually preserved by you as confidential.


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