NDA Suits Require ʺReasonable Measuresʺ?

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NDA Suits Require ʺReasonable Measuresʺ?

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The owner of misappropriated confidential information often has two options when bringing suit: suing under a non-disclosure agreement (“NDA”) or suing under the trade secrets laws. In some courts, however, the requirements might be the same. For example, both types of claims might require that the plaintiff show “reasonable measures” were taken to protect the information’s secrecy.

Reasonable Measures Must Be Taken To Maintain Confidentiality

The leading case in the Seventh Circuit for this principle is Tax Track Systems Corp. v. New Investor World, Inc., 478 F.3d 783 (7th Cir. 2007). The Tax Track court held that because Illinois considers confidentiality agreements to be restrictive covenants, the agreements will only be enforced “when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential.” Id. at 787. The policy behind requiring a plaintiff to show reasonable efforts in a claim for breach of an NDA or confidentiality agreement is twofold.

First, the courts are concerned that an NDA or confidentiality agreement may be used to “dampen competition rather than to protect a legitimate interest.” Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947-48 (7th Cir. 1994). Because “restrictive covenants work in partial restraint of trade . . . courts must carefully asses their intent to insure that they are not used to prevent competition per se.” Garon Foods, Inc. v. Montieth, 2013 WL 3338292 *4 (S.D. Ill. July 2, 2013). Therefore, in order to show that the plaintiff has treated the confidential information as a legitimate and valuable interest, some courts have required the plaintiff to show that it has made reasonable efforts to keep the information confidential. Tax Track, 478 F.3d at 787.

Second, according to the Curtis court, if a party has not made reasonable efforts to keep information confidential, there is a good chance that the information is no longer in fact confidential, and thus the competition will be able to obtain it lawfully. In such a situation, the potential harm that the breach poses to the plaintiff is minimal and so a breach of contract claim raises “an inference of possible anticompetitive purposes.” Curtis, 24 F.3d at 948.

When Enforcing an NDA Or Confidentiality Agreement What Are Reasonable Measures?

Whether a party’s efforts to keep their confidential information confidential were “reasonable” is generally is a question of fact, and courts generally consider the same range of factors in both trade secrets and breach of contract cases when determining whether reasonable secrecy measures were undertaken. In Tax Track, the court found as a matter of law that the plaintiff did not make reasonable efforts to keep its information confidential. Although the information was kept on Plaintiff’s password protected computer, it was also distributed to between six-hundred to seven-hundred people. The sheer number of recipients of the information was not necessarily decisive, but in addition, many recipients did not sign a confidentiality agreement, and the document itself was not marked as confidential or proprietary. That the information was only distributed with a motive toward profit was insufficient in the eyes of the court, especially as the plaintiff could not even recall who had received the information. The widespread distribution and failure to indicate to recipients that the information was confidential indicates that the breach of contract claim may have been less of an attempt to keep information created by the plaintiff confidential, and more of an attempt to suppress competition. The information that plaintiff was seeking to protect was clearly already available to many, increasing the likelihood that a third party could have obtained it lawfully.

Often the presence or absence of confidentiality agreements themselves will effect the decision as to whether reasonable efforts were taken to maintain the secrecy or confidentiality of the information. In nClosures Inc. v. Block & Co., Inc., the failure of the plaintiff to require its own internal designers, as well as other third party manufacturers, to sign confidentiality agreements was detrimental to its cause of action for breach of contract. 2013 WL 6498528 *5 (N.D. Ill. Dec. 11, 2013). The Seventh Circuit, affirming the district court opinion, noted that in addition to not requiring confidentiality agreements or NDAs, the designs at issue were not marked as confidential or proprietary and were not stored in a secure fashion. nClosures, Inc. v. Block & Co., Inc., 770 F.3d 598, 602 (7th Cir. 2014).  

These requirements are consistent with trade secret cases where the existence of confidentiality agreements with employees and third parties is often determinative of whether a court will find that a party had made reasonable efforts. A 2010 statistical study found that these were the most significant determinant of whether a company had made reasonable efforts to protect their trade secrets, followed by restriction of access by physical or electronic means, as well as adoption of a “need-to-know” policy. D. Almeling, et al., A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonz. L. Rev. 57, 80-83 (2010).

The Reasonable Measures Requirement Is Not Limited To The Seventh Circuit

Illinois and the Seventh Circuit are not the only jurisdictions to require proof of reasonable efforts to enforce an NDA or confidentiality agreement. For instance, an Alabama district court, interpreting Arkansas law in a breach of contract claim regarding a confidentiality agreement, looked to a trade secrets case from the Arkansas Supreme Court to determine whether the confidentiality agreement would be enforceable. Unisource Worldwide, Inc. v. S. Cent. Alabama Supply, LLC, 199 F. Supp. 2d 1194, 1208 (M.D. Ala. 2001). The Unisource court focused on the Arkansas Supreme Court’s treatment of the confidentiality agreement in the trade secrets case, Cardinal Freight Carriers, Inc. v. J.B. Hunt Transp. Servs., Inc., 336 Ark. 143, 987 S.W.2d 642 (1999). One important element in its evaluation of whether the confidentiality agreement was enforceable was whether the plaintiff had made reasonable efforts to keep the information confidential. Unisource, 199 F. Supp.2d at 1208.

Other courts, without expressly finding that the enforcement of an NDA or confidentiality agreement requires proof of reasonable efforts to maintain confidentiality of information, simply conflate the breach of contract analysis with the misappropriation of trade secrets analysis. The Middle District of Florida, for example, held that because plaintiff had “demonstrated it takes extraordinary efforts to maintain the secrecy of its trade secrets and confidential and proprietary information . . . [plaintiff] has shown it has a substantial likelihood of success on its claims relating to breach of the confidential information and intellectual property restrictions.” Medi-Weightloss Franchising USA, LLC v. Sadek, 2010 WL 1837767, at *6 (M.D. Fla. Mar. 11, 2010).