Thursday, March 01, 2007, 3/01/2007 10:32:00 AM

Seventh Circuit Suggests "Confidential Information" Must Be Treated Similar to a "Trade Secret"

By Todd
As many of you know, federal courts are sometimes called upon to resolve disputes between parties located in different states. When they do so, they are often required to resolve issues of state law. One such issue that pops up every once in a while is - "what is the difference between "confidential information" as identified in a confidentiality or nondisclosure agreement and a "trade secret" as defined by that state's version of the Uniform Trade Secrets Act?" Asked another way - "are there any requirements that a company use reasonable efforts to keep "confidential information" truly "confidential" like there are for trade secrets?"

On February 27th, the Seventh Circuit indicated that, under Illinois law, a holder of "confidential information" DOES have affirmative obligations in treating that information in a confidential fashion. The case in which it so held, Tax Track Systems Corporation v. New Investor World, Incorporated, -- F.3d --, 2007 WL 582488 (February 27, 2007 7th Cir.), involved an appeal by one insurance brokerage that had sued another. Plaintiff/Appellant Tax Track had a product called "premium financed life insurance." This kind of life insurance is for very wealthy individuals prepared to pay high premiums. Tax Track put a unique spin on this insurance product and wrote up its spin in a memo called the "Gift Compression Techniques memo." Tax Track kept the memo exclusively on its password-protected computer BUT also gave copies of the memo to 600 or 700 potential customers over a five-year period. Only some of the 600 or 700 recipients of the memo signed confidentiality agreements with Tax Track and the memos were not marked "confidential." In fact, Tax Track could not identify all of the recipients of the memo.

New Investor World teamed up with Tax Track in 2000 to sell "premium financed life insurance." The parties signed a "confidentiality/nondisclosure agreement" between themselves. The agreement had a three-year tail that prohibited New Investor World from using or disclosing confidential information obtained in the relationship were the relationship to terminate. You know what happens next. New Investor World terminated the relationship after just three months - and it had the Tax Track memo. It apparently used that memo to write a memo of its own and called that the "Executive Summary." Tax Track didn't like that and sued. New Investor World obtained summary judgment on the "breach of confidentiality agreement" claim because the court was not convinced Tax Track had used reasonable steps to protect the Tax Track memo. Tax Track appealed.

The Seventh Circuit notes in its opinion that "confidentiality agreements like the one in this case are restrictive covenants and under Illinois law are reviewed with a suspicious eye." It goes on to note that "an Illinois court, in whose place we sit, will enforce such agreements only when the information sought to be protected is actually confidential and reasonable efforts were made to keep it confidential." The appellate court goes on to say "Tax Track need not show its information rises to the level of a trade secret, but it must nevertheless establish that it engaged in reasonable steps to keep the information confidential." It then notes that some disclosure is forseeable and understandable in order to "profitably exploit the information."

That said, the Seventh Circuit agreed with the trial court that "no reasonable jury could find Tax Track took reasonable efforts to keep its memo confidential so as to warrant protection under the restrictive covenant." It did so noting that Tax Track distributed the memo to 600-700 people and sought NDA agreements from only 190 of them at most, Tax Track could not even identify all of the recipients, and it wasn't marked "confidential." The distribution of the memo to the outsiders essentially undermined the retention of the memo on the password-protected computer. The summary judgment was affirmed.

It seems to this outsider that what Tax Track was really arguing for was a limited privilege to disclose "confidential information" to customers and potential customers in a for-profit enterprise without implicating a loss of the confidential status of the information. If that was their implied argument, it was expressly rejected. We often see the argument made that a company's "price list" constitutes "confidential information" of that company. Same thing with bid information. We think the Seventh Circuit has this correct - if a company wants to claim its business materials are "confidential" then they must use affirmative and rigorous means to keep that information confidential in its dissemination. The best way to do this is to bind the recipient to an NDA agreement. Failure to do so may certainly implicate the loss of the "confidential" status of that information vis-a-vis those ubiquitous employment agreements defining everything under the sun as "confidential" information of the company.

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