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Rhino Boxed In by Poor Secrecy Pact

Industrial design firm nClosures, Inc. designed the Rhino and Rhino Elite, which are “point of sale” enclosures for computer tablets.  Before sharing its plans with manufacturer Block & Co., nClosures insisted on a confidentiality agreement, which Block signed.  The confidentiality agreement permitted Block to use nClosures’ designs solely for the parties “business relationship with respect to iPad Enclosures.”

The parties swapped three separate versions of a written production agreement, none of which were ever executed.  Nonetheless, for approximately a year, Block manufactured the designs under an oral agreement and paid nClosures $33.75 a unit.  Block then developed its own competing enclosure.

nClosures sued Block in the Northern District of Illinois alleging breach of contract and, based on an alleged partnership, breach of fiduciary duty.  Block moved for summary judgment, which the District Court granted.  nClosures appealed and the 7th Circuit affirmed.

Judge Flaum started by setting forth the elements of a typical breach of contract claim under Illinois law; i.e., “(1) the existence of a valid and enforceable contract; (2) substantial performance by the plaintiff; (3) a breach by the defendant; and (4) resultant damages.”  TAS Distribution v. Cummins Engine, 491 F.3d 625 (7th Cir. 2007).  The Court then examined the additional considerations that arise when enforcing a confidentiality agreement.  In particular, the Court cited to Tax Track v. New Investor World, 478 F.3d 783 (7th Cir. 2007).  In particular, a court “will enforce confidentiality agreements only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.”

While nClosures and Block did sign a confidentiality agreement at the outset of their business relationship, 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 as confidential or proprietary.  In addition, access to the drawings were not sufficiently controlled – they were not maintained under lock and key or kept on a computer with limited access.

Accordingly, the breach of contract claim failed as nClosures did not engage in reasonable steps to protect the confidentiality of its proprietary information.

With regards to the breach of fiduciary duty claim, the district court held that Block and nClosures did not share profits and did not form a partnership, and therefore, nClosure’s breach of fiduciary duty claim lacked merit.  The 7th Circuit agreed.

The Court started by noting that the Illinois Uniform Partnership Act defines a partnership as “the association of two or more persons to carry on as co-owners of a business for profit.”  805 Ill. Com. Stat. 206/202(a).  The intent of the parties and sharing of profits are both factors in determining the existence of a partnership.  In particular, Illinois law states that “a person who receives a share of the profits of a business is presumed to be a partner,” 805 Ill. Comp. Stat. 206/202 (c)(3), unless the individual received the profits as compensation as an independent contractor or an employee.

In this case, however, the relationship was one of manufacturer and marketer.  The Court cited to its previous decision in Autotech, where it also found no breach of fiduciary duty.  In Autotech, the agreement between the manufacturer and marketer specified that neither party had the right or responsibility to assume or to create any obligations or responsibilities expressed or implied on behalf of or in the name of the other or to bind the other party in any manner whatsoever.”  The unexecuted agreements between nClosures and Block were similar; while the agreements did not legally bind the parties, they did evidence the parties intentions.

Accordingly, even though nClosures argued that profit sharing took place based on their recovery of $33.75 per unit, the Court ruled against them.  In particular, the Court explained that even if the $33.75 payments did evidence profit sharing, this alone was not sufficient to establish a partnership.  Rather, the parties did not sign a partnership agreement, did not file joint tax returns, and did not hold themselves out to be partners in any way.

While the partnership / fiduciary duty decision was not extraordinary in any way, design houses need to pay heed to the confidentiality decision.  The enforceability of a confidentiality clause depend on how the parties behave before and after instituting the clause.  To be safe, the confidentiality agreement or an accompanying document should set forth a comprehensive plan as to how proprietary information is to be protected.  Without such steps, the confidentiality clause is literally worth less than the paper it is written on.

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