One company used the trade secrets of another company, yet despite this fact the court didn’t stop them. This can happen to your company as well if you fail to properly protect your company secrets. Failing to implement non-disclosure agreements (“NDAs”) and take other minimal steps to formalize relationships discussed in this article can be costly to you and your business.
A recent case, Fail-Safe, LLC v. A.O. Smith Corporation (No. 11-1354 for those wanting to read the opinion), handed down by the United States Court of Appeals for the Seventh Circuit demonstrates the need for NDAs and other precautionary measures if you hope to protect your trade secrets. This is especially crucial in the early stages of business dealings, before any formal relationships are put into place.
In denying Fail-Safe’s claims, the Court focused much of its attention on Fail-Safe’s failure to protect its information, and specifically mentioned its failure to require the other party to sign an NDA. While A.O. Smith had Fail-Safe sign an NDA, Fail-Safe did not have A.O. Smith sign one in return. Further, as Fail-Safe continued to release information and correspond with A.O. Smith, not once did they mention confidentiality or ask that certain information remain confidential.
Despite the fact that Fail-Safe may have subjectively believed that they had entered a joint-venture type relationship with A.O. Smith (thus requiring confidentiality), the Court determined that because Fail-Safe did not act reasonably regarding the protection of their confidential information, that information was not entitled to protection. By not having an NDA in place, and by not marking any information with the word “confidential” Fail-Safe forfeited any protection it may have had to the trade secrets that it likely spent years and significant amounts of money developing. A.O. Smith was free to use that information for their own benefit, and not share any profits with Fail-Safe, the company that played a large role in developing the product.
The case dealt with two companies who entered discussions to develop a pump motor to prevent entrapment of swimmers by suction created by pool drains. Throughout the relationship, Fail-Safe sent information it apparently viewed as confidential to A.O. Smith, including testing details, test results, required components, and other information related to designing the pump, all without a formal relationship in place. The relationship soured when the companies began discussing a formal marketing agreement. When A.O. Smith eventually introduced and marketed pumps that incorporated Fail-Safe’s trade secrets, Fail-Safe sued for misappropriation of trade secrets and unjust enrichment.
To avoid your business falling into a similar predicament as Fail-Safe, it is important for you to protect all of your confidential information and trade secrets with “eternal vigilance”. For help drafting NDAs and other mechanisms for the protection of your company’s valuable information, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800.