Posted by Sequel on April 4, 2014
Topic: blogs, Trade Secrets
Tags: NDA, Non-Disclosure Agreement, Trade Secret
Considering a Business Relationship? About to Divulge Trade Secrets? Be Very Careful Drafting Your NDA

Traditionally, when two companies enter into negotiations intended to produce a partnership or a joint venture relationship, both parties will require non-disclosure agreements to protect any trade secrets it may divulge during the course of the deal-making discussions.

But thanks to a ruling in an Illinois case late last year, the efficacy of the use of such agreements must be reassessed. It may be necessary to take other steps before and in conjunction with the NDA to ensure protection of confidential information.

The case is nClosures Inc. v. Block and Company Inc. (Case No. 1:2012cv09358 in the Illinois Northern District Court). nClosures had invented a product and Block and Co. was interested in a partnership surrounding that product and its manufacture and sale.

At the beginning of negotiations, the parties signed a mutual NDA, “relative to a potential business relationship…”, subsequent to which substantial disclosures were made by nClosures. Block and Co. began to manufacture its own version of the invention, asserting that a partnership had been entered into.

After the negotiations broke down without a business relationship emerging, nClosure sued to prohibit any use of its intellectual property but lost to a motion for summary judgment. The Court dismissed the case because it found, among other things:

  • Before the negotiations in question had even begun, Plaintiff had failed to take adequate steps to identify and protect its trade secrets, which it sought to prevent being used by the Defendant.
  • The Plaintiff/creator’s claim of a breach of fiduciary duty on the part of the Defendant failed because the essential nature of a partnership, the sharing of profits and losses, was not in place between the parties.
  • A claim of breach of contract failed because it would only apply to information that was confidential and the Court had already ruled there was no protectable property because of Plaintiff’s failure to protect its IP prior to the negotiations.

Perhaps the central lesson to be taken from nClosures v. Block and Co. is that a confidentiality and non-disclosure agreement that only references a “potential business relationship” may only apply to that specific course of negotiation and not to subsequent or seemingly related activities. This suggests that drafting such an agreement should involve the advice of competent counsel with experience in IP protection.

 

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