Negotiations between potential business partners are a complex matter. This is particularly the case when there is talk of developing a product and there is some sharing of information. Both in-house counsel and attorneys in law firms need to advise clients carefully throughout this thorny process.
An example was offered in a 2012 lawsuit brought against Block and Company in federal court in the Northern District of Illinois by nClosures. After reviewing the arguments, the court issued an opinion where the plaintiff lost the case by a summary judgment.
Here are some relevant details. nClosures said it invested more than $300,000 in the design and sale of tablet enclosures, including the Rhino iPad Enclosure. The two companies both agreed to a confidentiality and non-disclosure covenant so they could explore a potential partnership.
Then nClosures provided Block with some confidential information, such as “designs, market knowledge, manufacturing set-up, solid models, and assembly drawings,” according to the lawsuit.
But Block allegedly used nClosures’ information to come up with “its own iPad tablet enclosure,” which was later launched. It also told nClosures it would no longer sell products from nClosures, which ended the partnership, the judge said. In the meantime, Block did not share with nClosures any benefits Block got from the sale of its own enclosures. Block also sold Rhino Enclosures, which has led to “customer confusion regarding whether nClosures or Block is the source of such products,” the lawsuit adds.
nClosures claimed there was fraud, trade secret misappropriation, breach of fiduciary duty, breach of contract, and unfair competition. But U.S. District Court Judge Samuel Der-Yeghiayan issued a ruling in which he denied a motion for a finding of contempt.
In his analysis of the case, Brad Reid of Lipscomb University wrote in the Huffington Post that the case shows some important lessons. For instance, there has to be “confidential information or trade secrets in order to have a meaningful confidentiality and non-disclosure agreement.” That means the creator should at “every step from design to manufacture … obtain a series of confidentiality and non-disclosure agreements and constantly take visible steps to protect these trade secrets.”
Also, confidentiality and non-disclosure agreements that cover a "potential business relationship" apply to a “specific course of negotiation and not to subsequent activities.” The judge found that the confidentiality and non-disclosure agreement in this case was entered into "relative to a potential business relationship..." In addition, “conversations” regarding a partnership are not the same things as a “partnership.” Parties will not have a fiduciary duty between each other – without some kind of partnership. “Negotiators … have no special duties of ‘fairness’ or ‘good faith,’” Reid said, citing the judge’s ruling. Based on the ruling, Reid added that in this case the parties “did not jointly share profits and losses, a central requirement to have a partnership.”
In addition, this case reminds us that the plaintiff did not “take reasonable steps to maintain confidentiality,” nor “reasonable efforts to maintain the secrecy of its design files," Reid said based on the judge’s ruling.
And the case is a strong reminder how important it is to get the “active advice of an experienced attorney before disclosing intellectual property,” Reid said.
Because so many companies work on joint products, it becomes very important to ensure proper steps are taken at every step in the process so a business does not lose its confidential information to a possible competitor. So often, these joint initiatives involve companies which are possible competitors especially in the tech sector – which makes the precautionary steps even more important. Even before this case, InsideCounsel reported how joint ownership of intellectual property between alliance partners was a cause for concern – and it could be “fraught with unintended consequences.”
So be careful. Today’s possible partner could be tomorrow’s defendant in a lawsuit.