Contracts between employers and employees concerning limitations on the employee’s actions after the end of employment are one of the most unsettled areas of the law. The two most litigated types of contracts are non-compete agreements and non-disclosure agreements. The enforceability of each is a constantly changing sea of rules. In this post, we will limit our attention to non-disclosure agreements.
The basics of non-disclosure agreements
A non-disclosure agreement is nothing more than a contract between an employer and an employee in which the employee agrees not to disclose any information described in the agreement after the term of employment ceases. The enforceability of such agreements depends upon the nature of the information which the agreement seeks to protect and on the employer’s efforts to protect the information from disclosure. In a recent decision, the Seventh Circuit Court of Appeals (which includes Illinois) clarified both requirements.
The parties to the case were interested in forming a partnership to manufacture and market protective cases for iPads and similar devices. Because each party had been active in this field before they signed the partnership agreement, they agreed to a confidentiality and non-disclosure covenant to protect their confidential information. The partnership never became operative, and both parties began to develop and market their own brands of protective covers. They also sued each other, alleging breach of contract and fiduciary duty.
The district court’s decision
The district court ruled that the partnership had never become effective and that neither party could recover under the terms of the nascent agreement. However, the court refused to grant summary judgment on the fiduciary duty claim. In denying the fiduciary duty claim, the court held that the plaintiff had failed to mark its design drawings with words such as “Confidential” or “Contains proprietary information.” Because the parties did not sign the partnership agreement, neither of them owed a fiduciary duty to the other. On the non-disclosure agreement, the court made the crucial finding that the party asserting the enforceability of the agreement had failed to take reasonable measures to maintain the confidentiality of its own information and therefore had no right to assert a claim of confidentiality against the other party.
If a party fails to take reasonable steps to ensure that its proprietary information remains confidential, the courts will not help by enforcing an obligation that the parties did not create. Anyone with questions about non-disclosure agreements may wish to talk to an experienced business attorney for an evaluation of the facts and an opinion of the agreement at issue.