Chicago Federal Case Underscores Importance of Confidentiality Agreements

Contributed by Jeff Glass

Many employers use confidentiality agreements with their employees or business partners.  Most have confidentiality clauses in their employee handbooks. Yet, when faced with unfair competition, companies often mistakenly think that, if they do not also have non-compete agreements, they cannot protect themselves. A recent federal court decision from Chicago highlights why this view is mistaken.  Nortek Products (Taicang) Ltd., et al. v. FNA Group, Inc., 2012 U.S. Dist. LEXIS 4943 (N.D. Ill. Jan. 17, 2012).

The plaintiff in Nortek was a manufacturer that contracted with the defendants to make pressure washers for distribution. The defendants failed to pay for $3 million of product. The plaintiff sued.  The defendants counterclaimed for breach of a confidentiality agreement. The agreement barred the plaintiff’s managing director from using “confidential information” for any purpose other than the joint venture. It applied to drawings, analyses, formulas, data, technology, “know-how,” and other information provided by the defendants.  The defendants claimed that the plaintiff previously knew nothing about pressure washers and that, after they provided information for the joint project, the plaintiff used the information to start a competing venture.  

The plaintiff moved to dismiss, arguing that the agreement was overbroad and failed to specify what information was “confidential.”  The court denied the motion. It reasoned that the agreement listed categories of information that are generally deemed proprietary, and that certain information was specifically identified as “confidential” at the time of disclosure.  The plaintiff’s managing director also agreed to the definition of “confidential information” when she signed the agreement.  The court held that, to prevail on the merits, the defendants would need to show that the information was in fact kept confidential.  The court noted, however, that they did not need to show that the information rose to the level of a “trade secret.” 

Nortek Products demonstrates the benefits of a well-drafted confidentiality agreement.  Although the case involved a motion to dismiss rather than a trial on the merits, often that is a distinction without a difference.  Discovery is expensive.  Litigants often come to the settlement table when faced with that cost, even if they think they could win at trial.