New Case Increases Role of Human Resources in Protecting Company Secrets

Human Resource professionals are known to wear many hats – counselor, recruiter, policy drafter, benefit administrator, compensation expert, risk manager, regulatory compliance officer, affirmative action coordinator, disciplinarian, FMLA administrator, safety manager, and trainer, among other duties, can all fall within their job description. A new 7th Circuit Court of Appeals decision, nClosures Inc. v. Block and Co, decided on October 14, 2014, places yet another burden on Human Resources offices – protection of the organization’s confidential and proprietary information. Many businesses may be at risk of losing the value of their intellectual property if they fail to comply with the requirements outlined in the nClosures case.

Facts of the Case

nClosures was an industrial design company which had designed protective enclosures for iPads and other electronic tablets. It considered its designs to be confidential and a valuable part of its intellectual property. nClosures sought a business partner to manufacture its designs, and ultimately entered into a contract with Block and Co. to produce the protective enclosures that nClosures had designed. Part of the agreement required Block to keep nClosures’ designs confidential.

So far, so good. At this point, Human Resources typically would not have been involved in the business relationship, the drafting of the contract or the enforcement of the confidentiality provision.

However, the deal between nClosures and Block went sour. Block began producing protective tablets on its own. nClosures sued Block, claiming that Block violated their contract by using nClosures’ confidential designs for its own protective tablets, and depriving nClosure of the profits from its design work.

In a significant blow to nClosures, the trial court dismissed the lawsuit before trial. The court declared that even if the contract between nClosures and Block was valid, and even if Block had violated the contract by using or disclosing the designs, the court would not enforce the contract because nClosures had not taken enough internal steps to protect its confidential information, including requiring its design employees to sign personal confidentiality agreements. nClosures appealed the decision, but the 7th circuit affirmed the dismissal. nClosures lost the potential profits from the designs it had created.

Significance of Case

There are many important lessons to be learned from the nClosures case -both from the operations side of the business and from the Human Resources side.

First, the case places a new emphasis on the need for internal protections, particularly employee confidentiality agreements, to support a business’s efforts to protect its proprietary and confidential information. The existence of a contract between two businesses to protect the intellectual property of each of them may be an entirely worthless document (which may come as a significant shock to sales and management staff) if the court refuses to enforce it due to the lack of employee confidentiality agreements.

Second, business and HR departments will need to work closer as a team - to keep each other informed of new business relationships or other situations where proprietary and confidential information may be shared, to discuss the options to protect intellectual property, and to delegate specific responsibilities for performing the necessary steps. For example, Human Resources will generally be involved in ensuring that those employees with access to the information have signed confidentiality agreements in order to support the enforcement of any non-disclosure agreement with an outside entity.

Third, HR will need to take a more prominent role in 1) ascertaining what information is considered to be confidential by the company, 2) identifying those individuals who have access to the information, 3) drafting legally enforceable employee confidentiality agreements, and 4) negotiating the execution of those agreements by the employees. These new obligations amount to a significant expansion of duties for some HR professionals.

Additional Considerations

There are a number of related considerations stemming from the nClosures decision:

In additional to the lack of employee confidentiality agreements, the court in nClosures also noted the absence of other internal safeguards for nClosures’ proprietary information. Such safeguards include, but are not limited to, identifying the information as “Confidential and Proprietary” on the face of the document or in mail or email transmissions, password protecting electronically stored information, storing hard copies of confidential information under “lock and key”, adopting personnel policies which emphasize the need to keep confidential information confidential, identifying categories of key confidential information, conducting employee training on confidentiality obligations, and similar steps. These safeguards should become a standard practice for businesses that maintain and rely on intellectual property.

After nClosures, some businesses might consider foregoing confidentiality agreements and rely instead (or in addition to contractual protections) on the protections provided by Trade Secrets laws. However, Trade Secrets laws also require the party attempting to enforce the law to demonstrate that they have taken reasonable precautions to protect their confidential information. The existence of employee confidentiality agreements is frequently cited as an example of such a reasonable internal precaution.

Drafting an enforceable employee confidentiality agreement is a complicated process and should always be done with the assistance of an attorney. Employee confidentiality agreements are subject to state restrictive covenant laws (in Wisconsin, section 103.465, Wis. Stats.) Those laws, and cases interpreting them, have very specific and rigid rules on what the agreements must contain and the steps needed to negotiate them with employees. As the implementation of employee confidentiality agreements becomes more vital to the protection of a company’s proprietary information, satisfying those statutory requirements will become even more critical.

Adopting a confidentiality policy in an Employee Handbook is helpful, but is not a substitute for an employee confidentiality agreement. The only remedy available for violating an employee handbook is discipline or termination. This remedy is of little help when an employee leaves and takes confidential information to a competitor. A valid employee confidentiality agreement is needed to pursue the employee (and possibly the new employer) for the lost profits associated with the disclosure of confidential information.

As courts become more reluctant to protect proprietary information under Trade Secret laws or through contractual clauses, more consideration should be given to trademark or patent protections. While those procedures can require additional steps, the legal protections, once secured, may be easier in some cases to enforce against encroaching competitors.

Conclusion

A company’s confidential and propriety information may be among its most valuable assets. As with any asset, it is critical that such information be protected from loss. In its recent decision in nClosures , our Seventh Circuit Court of Appeals emphasized that individual employee confidentiality agreements are a key requirement in the enforcement of commercial confidentiality agreements.

The nClosures decision places new emphasis on the role of Human Resources in the protection of intellectual property. HR professionals need to review this new decision with their sales and business teams and develop a comprehensive plan for protecting proprietary and confidential information. The drafting and implementation of employee confidentiality agreements will be a critical, although challenging, step in those plans.

Additional information on the nClosures decision and the requirements of employee confidentiality agreements can be obtained by contacting our Employment Law team.

Written By:
Law Firm of Conway, Olejniczak & Jerry, S.C.